Like many people my age who were raised in the Upper Midwest “Rust Belt” I began wrenching on all sorts of mechanical things at a tender age. You learn a lot — about a lot — when you are half submerged under the hood of a car, covered in grease. The most important lesson, by far, from my gearhead upbringing was that nothing beats having the right tool for the job. Things go faster; quality is higher; the experience for you, the car and its owner is better; and maybe, just maybe, there will be fewer parts left over at the end.
Like most people from that era, I no longer repair cars. The basic components with which I am familiar are still under the hood somewhere, though fixing them is best left to professionals who have — you guessed it —the right tools.
Having the right tools for the job is essential when it comes to anything mechanical; it’s also true when it comes to mortgage lending. While I was busting my knuckles on rusty bolts in the Sixties, mortgage lenders used the best tools then available: Paper, typewriters, adding machines, interest rate and payment tables, maybe even slide rules. All are viewable in today’s museums and roadside antique stands, though it is still possible to find the odd IBM Selectric in daily mortgage lending use.
Paper, both the backbone and bane of this industry’s existence, is far too much in evidence everywhere. How will we know when the right tools are being used? When the entire mortgage process is entirely paperless, and when the cost of production begins to decrease.
Here’s a hypothesis. The same lenders who believe their current tools are totally state of the art are the same mortgagors who complain about today’s high cost of manufacturing loans. The cost of lending is indeed high. It is also on a steep, uphill trajectory. A story appearing in MBA NewsLink on March 27 of this year reported cost-to-close had increased to $6,959 per loan in the fourth quarter of 2013, up from $6,368 the quarter before. On June 24 the MBA issued a press release revealing costs went significantly higher in the first quarter of 2014 growing a whopping $1,066 to $8,025 from the fourth quarter number. Second quarter 2014 results are unlikely to be encouraging.
What these news releases do not talk about is tool cost. Digging into the MBA performance studies provides some insight. Between 2% and 3% of total production costs is technology related, our industry’s version of tools. What these news releases do call out is the labor component of total production expenses. At over 60% of the total cost, staffing is the single largest variable in the cost-to-close equation.
There are two ways to manage the cost-of-labor variable. The first is the old standby: Reducing headcount, which the industry has been doing over the course of this year. In theory, this should lower the cost to close, yet it does not appear to be working. This is financially counterintuitive, and also presents a major problem. Reducing headcount puts lenders in a precarious position, as cutting too far has the potential for eliminating vital expertise. Every lender must maintain minimum staffing levels to cover these functions. This is one of the reasons the cost to close loans continues to rise even though staffing levels are down.
The second way to manage the cost of labor is to increase staff productivity. The way to do this is with new tools – meaning new technology. We have been working with a group of lenders, all of whom are users of our products, on a benchmarking study. Their total loan production expense composition is very different from that reported in the MBA Studies. The labor variable for this group averages about 47% of the total cost to close a loan. Technology costs are slightly higher at between 5% and 7% of the total. These facts are meaningless without this next bit of information: These lenders, on average, produce more loans per mortgage employee than those participating in the MBA Study. Fourth quarter MBA productivity was 2.0 loans per employee per month, but 2013 productivity for our group of lenders averaged 4.4 loans per employee per month.
This is crucially important since productivity has an inverse relationship to total loan production costs. Increase productivity, decrease cost-to-close. When the opposite happens, costs will rise and they will do so at an increasing rate.
What accounts for this productivity difference? It starts with tools. These lenders have better tools for the job of manufacturing mortgage loans. Among them you’ll find a paucity of paper. In place of paper are highly automated electronic processes that rely on comprehensive systems employing automated workflows. The best, most efficient among the benchmarked lenders are fully electronic all the way through closing, funding and delivery.
The benefits from the right tools, in addition to higher productivity, are numerous. Take borrower experience. This group’s borrowers have online, real-time access to their loan throughout the origination lifecycle. This makes for a happier customer and also results in higher productivity. Production staff is nowhere near as likely to be interrupted by phone calls as they were before these new tools were put in place.
These borrowers increasingly self-serve from beginning to end, leaving the mortgage teams free to produce loans. Compliance, or the persistent, nagging fear of non-compliance, is also tool-managed. Regulations are rules. Technology is great at following rules. Unlike human beings, technology will do the same thing the same way every time without making an error. Fewer mistakes equal greater productivity and less worry.
If tools are the answer – and I firmly believe they are — why aren’t all lenders in a mad scramble to put new tools in place, especially while volumes are low and there is time to undertake the project? The usual answer is cost. Tools cost money. New tools cost more than the ones lying in the tool box. Spending even more money while costs are rising is counterintuitive, but it is the only option that really works.
Tools are the answer to the cost/productivity conundrum. Yet it takes more than just a wrench to loosen a bolt. People and process make the wrench work. All the grease monkey kids of my generation had to be taught to use the tools we had at our disposal. We also had to learn the processes necessary to get the car motoring again. So it is with mortgage tools. Buying new tools is the first step. Committing to refining processes and teaching your people to use their new tools are steps two and three. Using new tools the old way and without education will produce neither greater productivity nor lower loan production costs.
I was talking with a lender about this just the other day. This lender, a relatively new user of our technology and one of our benchmarking study participants, is doing fairly well after their first year with new tools in the box. After reviewing the study results he asked the perfect question: How do we increase our productivity to the levels of best-in-class users?
We have mentioned relentless attention to process improvement and ongoing staff education. The third element is time. Mastering any tool takes time and practice. The results, however, are worth the effort. Best-in-class users consistently achieve productivity levels in the range of five to six closed loans per employee per month. Their cost of production is impressively low, too. I shared one last thought with this lender: None of the high performance lenders in our study are satisfied with their results. That’s another characteristic of high-performance lenders. They always expect more.
My son-ln-law, a new homeowner, and I were talking about tools just the other day. He became the lord of his modest suburban manor with nothing but the most basic discount store tools. Fortunately I have my own extensive collection -— as well as a good portion of my father’s — plus access to an entire farm’s worth of implements, from the most basic hammer to the most single-purpose implement imaginable.
My son-in-law, as an Eighties kid, is all about automation. For example, when he uses a new high-power staple gun and not the old-fashioned hand-powered version, he sees that new tools help him finish projects quicker and with better quality. The powered version of the tool costs at least 5 times more than the old-fashioned kind. It gets the job done in a fraction of the time, however, which is what matters to him. It is the same way with new versus old mortgage technology, especially when there is really no choice but to get more done with less.
About The Author
As Executive Vice President, Operations for Mortgage Cadence, Dan Green works with the team to create greater efficiencies in all areas and coordinating efforts that enhance service quality and teamwork. Formerly, Green served as Chief Operating Officer/Chief Marketing Officer of Prime Alliance Solutions followed by Marketing Lead for Mortgage Cadence. Prior to that, he had an eight-year career with CUNA Mutual Mortgage where he was responsible for origination, servicing, lending technologies, process reengineering and education. With over 30 years of financial services and mortgage experience, he’s keenly interested in lending performance and performance benchmarking that helps lenders constantly increase efficiencies while enhancing the financing experience for borrowers.