It is no secret that the industry is transitioning from a refinance-driven market to a more purchase-driven market, so it is critical that lenders focus on reducing the funding cycle timeline to combat excessive origination costs and improve per loan profitability. Research shows that seven out of 10 loans are unlikely to refinance – proving the market’s increasing dependency on purchase loans. Currently, the average time for refinance is about 55 days and the average time for a purchase transaction is about 40 days, creating a disconnect in process efficiency and room for improvement.
One reason for the longer closing times today is that mortgages are much more complex than they were a few years ago. Mortgages are no longer vanilla – lenders are underwriting higher risk loans, so naturally the underwriting process takes much longer. Each day that lenders add to the funding cycle timeline adds $30 to $40 per loan, and lenders have less flexibility in being late when underwriting purchase loans.
Longer closing times not only affect the institutions’ revenue, but they can significantly harm the institutions’ relationship with the borrower. Timing is the biggest concern for borrowers, and they demand a quick, seamless closing coupled with excellent customer service. Loan delays are an inconvenience, and if a borrowers’ financing falls through entirely due to prolonged timing, then they can no longer get the home they wanted – eliminating any chance of a positive relationship with that borrower. However, if everything runs smoothly, then that borrower is more likely to consider opening other products with the institution – creating an opportunity to establish a life-long relationship with that client.
In short, the industry needs to return to an origination-to-funding cycle timeline of 30 days or less, but how do we get there? The market is always going to be unpredictable and inconsistent, so lenders must find the most effective way to ride out the waves and remain profitable. One proven method is dissecting information from milestone to milestone, allowing lenders to identify specific gaps and therefore more cost-effectively support the shifting market.
Embracing Analysis and Disruptive Innovation
Lenders must be able to identify specific gaps in the origination process by each milestone to discover the root cause of any issues. Lenders never want to return to day one because of a simple issue that could have been fixed early on in the process – the goal is to get things right on day one of the 30-day lifecycle. Getting to this point can be achieved two ways: improving the human element and implementing new technologies that automate the origination process further, utilize source data and streamline loans through the system.
The key to improving lenders’ manual processes is through Six Sigma. The goal of Six Sigma is to develop a nearly error-free process, and fewer errors equal less touches. To do this, every component of the mortgage process is analyzed from the more complex (like credit analysis) to administrative functions such as mailroom and phone work. Achieving a 30-day lifecycle is only possible if the process continually moves forward—any misstep can move the transaction back (sometimes to Day 1), virtually eliminating any chance of a rapid settlement. Processes that have not undergone a thorough Six Sigma review destine the applicant to a real-life game of Chutes and Ladders. Only the lucky will glide through the process without issue, while the majority find themselves slipping backwards at some point, thereby restarting the clock. Six Sigma ensures there are only ladders, and minimizes/eliminates the impact of the occasional chute.
The next step to shortening the closing timeline is leveraging disruptive innovations. As previously mentioned, underwriting higher-risk loans is a complex process, but leveraging a loan origination system (LOS) that automatically assesses the basic attributes of the loan to place it in the right “swim lane” eliminates lenders from having to complete this time consuming task.
Lenders should consider a hybrid onshore/offshore LOS delivery model. This model works around the clock, so the offshore components can be working on those checkpoints while the onshore components are sleeping – giving lenders the biggest bang for their buck. The focus of the loan originators should be to sell loans, and with this model, individuals conducting those checkpoints can contact the borrower directly if changes need to be made rather than the loan originator.
Furthermore, this type of artificial intelligence helps lenders determine which loans have the best chance of closing within the ideal 30-day timeline. Lenders do not control every aspect of the mortgage, but they will instantly know whether uncontrollable external variables such as title or appraisal issue will lengthen the closing time. With the appropriate workflow systems in place, lenders will know when it is time to follow up on title or appraisal – an important piece to keep things moving.
Additionally, lenders should consider leveraging an automated self-assessment tool that carefully evaluates their policies and procedures to bring out any compliance-related issues prior to a regulatory review. The cost of maintaining regulatory compliance will continue to have a significant impact on lenders, and failure to comply with the CFPB’s new rules will lead to severe penalties and costly fines. Leveraging a risk evaluation tool helps lenders stay on top of the CFPB’s rules without exhausting resources.
By implementing these disciplines, app-to-close cycle times can improve by as much as 43 percent. In fact, a large financial institution is now closing 74 percent of their deals within 45 days and 32 percent within 30 days. Additionally, in May 2014, a transaction closed within 15 days, demonstrating that a model emphasizing minimal touches and persistent customer contact can yield the ideal win-win scenario—quick revenue realization for lenders and a flawless closing experience for borrowers.
Implementing Six Sigma practices across the institution will drive quality and continual improvement, and when combined with innovative technology solutions, lenders will further automate the closing process to increase efficiency, profitability, overall customer satisfaction and most importantly, significantly shorten the length of the closing timeline.
About The Author
Ken Janik is the senior vice president of Client Delivery Services for ISGN, an end-to-end provider of mortgage technology solutions and services. For more information, visit www.isgn.com.