There are many ways to answer the question, “What does it cost to close a mortgage loan in 2014?”
The quick answer is, “A lot more than it once did.” Those of us who lent in the 90s through the early 2000s watched the cost of closing a mortgage drop for high performance lenders. They were among the first to take advantage of the Internet, employed technology at every possible turn and empowered their teams far beyond the traditional silos of processing, underwriting, funding and closing. Their innovative experiments delivered many positive benefits. Borrowers originated their own loans for the first time using the World Wide Web. Paper, plus the processes it required, slowly disappeared, giving way to (sometimes) fully electronic processing. Individual team members were able to handle increasing amounts of loans. Costs decreased.
Physics being what it is, what goes down doesn’t often go back up. However, physics knows little about costs, which have a tendency to rise, defying not only gravity, but the desire of business operators everywhere. Costs have indeed risen. A June 10, 2014 article published by the Mortgage Bankers Association had this to say:
“Total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – increased to $8,025 per loan in the first quarter, up from $6,959 in the fourth quarter of 2013. First quarter 2014 production expenses were the highest recorded in any quarter since the Performance Report was created in the third quarter of 2008…Productivity was 1.7 loans originated per production employee per month in the first quarter, down from 2 loans in the fourth quarter of 2013.”
High performance lenders fared better. In an ongoing study we are conducting, we have found the average cost of closing a mortgage to be $3,185. Productivity, the single most important mortgage lending metric, was 4.4 closed loans per employee per month. While lending costs may have risen during the first quarter and productivity may have slipped, it is safe to say high performance lenders generally remain ahead of the overall industry.
Managing the Cost
High performance lenders have high productivity in common. The number of loans closed per employee per month is the single largest determinant of every lender’s cost to close because labor is the largest component of the metric. Lenders achieve higher productivity three ways:
Focus. Do a few things and do them well. A lender we met with recently drove this point home repeatedly. The mortgage industry, like every other industry, offers many opportunities to wander. Wandering is expensive. Pick a niche, focus intently, lend efficiently.
Process. Making mortgage loans is a manufacturing operation. Efficiency and quality depend on rigorous adherence to well-defined processes. High performance lenders rigidly define these processes and watch them closely.
Technology. Comprehensive lending technologies that guide loans through the entire mortgage cycle from origination to delivery are essential in the battle for productivity. Another of the positive lessons from the early 2000s: leveraging automation pays off demonstrably in dollars and cents.
The Cost/Benefit Analysis
An early mentor taught us that it is possible — easy, in fact — to cost-account your way out of any business. He told a funny story about a small business owner who did exactly that. He saved a lot of money until he wasn’t making any at all. Mortgage lending still makes sense, even at today’s costs, when you consider how much income a mortgage loan produces. The net present value of the net interest cash flows during the first five years of a mortgage loan’s thirty year life is about $5,000, still a good ROI when stacked up against a $3,185 closing cost. Not so great, however, when the cost is over $8,000. Focus on productivity, drive lending costs down, make more loans and make them profitably.
About The Author
Dan Green is EVP, Marketing at Accenture Mortgage Cadence. With the objective of building a strong, cohesive and recognizable brand, Dan oversees all marketing and communications strategies through his work with customers, partners, industry organizations and the Mortgage Cadence team. Prior to joining Mortgage Cadence, Green served as Prime Alliance Solution’s Chief Operating Officer and Chief Marketing Officer following an eight-year career with CUNA Mutual Mortgage where he was responsible for origination, servicing, lending technologies, process reengineering and education.
Nizar Hashlamon is EVP, Client Relations at Accenture Mortgage Cadence. He is responsible for leading the company’s Client Relations team to ensure success of clients and maximize the return on their investment. Nizar has more than 19 years of experience within the mortgage lending industry with extensive knowledge in mortgage loan productions, servicing and secondary marketing. Prior to joining Mortgage Cadence, Nizar was responsible for the Secondary Marketing operations for the World Bank Credit Union in Washington DC. He has wide-ranging experience within the credit union industry and currently serves on the Credit Union Alternative Liquidity Taskforce as well as the Fannie Mae Credit Union Advisory Council and the Charlie Mac Advisory Board.