It is said that every hero needs a villain. As a lender it is very easy to identify the villain in today’s mortgage market—declining profitability due to the rising cost to originate a loan leading to margin compression.
As reported by Kelsey Ramierez, reporter for Housing Wire, “The Cost to Originate a Mortgage Just Got Ridiculous-Again.” She goes on to state, “The cost of originating a mortgage hit all-time highs back in 2013 and 2014, but now, those costs are up once again and much like before, hitting all-new highs.
Lenders continue to struggle in the rising mortgage rate environment, reporting negative profits for the first time since Dodd-Frank compliance brought down profits in 2014.
Back at the Mortgage Bankers Association’s National Secondary conference in New York City, MBA Chief Economist Mike Fratantoni predicted loan loan officers would report negative profits in the first quarter of 2018.
His prediction was correct.
Independent mortgage banks and mortgage subsidiaries of chartered banks reported a net loss of $118 per loan originated in the first quarter of 2018, according to the MBA’s Quarterly Mortgage Bankers Performance report. This is down from a gain of $237 per loan in the fourth quarter of 2017.
“In the first quarter of 2018, falling volume drove net production profitability into the red for only the second time since the inception of our report in the third quarter of 2008,” said Marina Walsh, MBA vice president of industry analysis. “While production revenues per loan actually increased in the first quarter, we also reached a study-high for total production expenses at $8,957 per loan, as volume dropped.”
In this unfortunate story for lenders, while it is easy to identify the villain, who the hero in this story will be is still up for debate. We can agree that necessity is the mother of invention and if margins were wonderful, we wouldn’t need to rethink how we originate. But that’s not today’s reality, so we are forced to ask the tough questions in hopes of finding our hero.
>>How do we reduce costs without the standard seasonal downsizing?
>>How do we increase origination numbers without blindly hiring more LO’s?
>>Is there a better and more efficient way to originate loans?
>>Can we afford to continue doing business as usual?
In starting to ask these tough questions we must first identify costs to see where the actual numbers are coming from.
>>Are your numbers off and contributing to your rising costs?
>>How many loans does the average LO close a month in your organization?
>>Of those loans, how well are your LO’s growing the referral business?
>>How many loans can a processor per day, month, and year handle in your organization?
>>Ask the same question about your Underwriters? Closers? Funders? Etc.?
>>While you may have these numbers at your disposal, when was the last time you truly checked to see how accurate they are in today’s market?
>>How paperless is your organization really? How much is that costing you?
>>Why is it that the average Underwriter could handle a pipeline of 100 loans pre-crash but can’t handle much more than 30 today?
In reviewing your numbers one thing should be very clear— the villain in this story in the rising cost to originate. So as a lender we must shift our focus to the potential hero in this story if we are going to survive let alone thrive in today’s mortgage market. The hero is improving your operational efficiency. The challenge is how we put this into action.
When lenders originate it is typically done from a very loan centric perspective. The average mortgage company does everything from their LOS and prioritizes their loans by status/milestone/pipeline. Don’t blame the LOS, but instead consider this:
>>Is there a better way to prioritize the steps to originate a loan?
>>How can you empower LO’s to do more without them having to spend more time on tedious follow-ups?
A fresh look at the “flow of work” and not just the traditional workflow of origination to underwriting to funding is required.
The devil is in the details. It is critical that if we are going to defeat the villain, we must take the time to not only understand how much we are spending on each task to originate but also truly understand how we can become more efficient.
Lenders are notorious for running tons and tons of reports. Unfortunately, reports become stale the minute you print them, so you forward thinking lenders have moved to real-time dashboards. While that is a step in the right direction, that’s only half the battle. The real key is— what do you do with that data?
It is one thing to understand the data, but if you want to truly gain operational efficiency and be the hero, what you do with the data is so much more important. Is the data telling you where the bottlenecks exist in your origination workflow? Those bottlenecks/inefficiencies are costing you money and contributing to your rising costs. Once you identify the bottlenecks how can you eliminate these bottlenecks through workflow automation to create consistent processes that streamline and reduce costs?
Let’s take a step back and look at history. When Henry Ford implemented the assembly line, they saw a dramatic increase in productivity, here’s why:
>>Work was prioritized, pushed to the right person at the right time
>>Ford created sub-assemblies to maximize output
>>Technology then automated the items that a system could handle, but people still do a majority of the work today. It’s more of the right person, at the right time, and at the best price.
The good news is that you don’t have to try and figure all of this out by yourself. Help is on the way. We know the mortgage process. A team of lenders and mortgage technologists created Lodasoft. We’ve been on your side of the fence—struggling with the day-to-day challenges of the constantly shifting mortgage process and rising cost to originate. Based on that experience, we strive to make lenders more efficient, scalable and profitable.
We can help you maximize your team by looking at things from a different perspective. Lodasoft is a Digital Mortgage Platform focused on task and workflow automation. Designed by mortgage veterans, our strength is in maximizing productivity and quality while providing structure and guidance for all members of the process.
Consider this:you’ve been successful thus far. You’re closing loans, and you might be somewhere in the middle when it comes to profitability. Now, if you could only get the most out of every motion in that process.
The first thing we can help you do is Identify. Zooming out of the day-to-day can work wonders, especially when done by a fresh set of eyes. Here’s an example of questions you might ask in identifying key areas for improvement.
>>What is our process for gathering borrower conditions?
>>How do we actually Track, Approve, and Reject documents?
>>How much of this is done via email?
>>Do all interested parties of the transaction have a Real-time Status into each one of these conditions?
For example, say we’re waiting on an item from a third-party. Do we know how long we’ve been waiting for that particular item? Is it stopping someone else from performing an unrelated function? What does the follow-up process look like? Are we just emailing for updates?
Once we’ve identified the key areas for improvement, you’ll have a better understanding of how you might transfer responsibilities from one employee to another. Think of it like this, a high-cost resource should almost NEVER perform a low-cost function. If it can be handled through automation, even better!
The next thing to identify is Communication. So much gets lost due to a lack of transparency. Systems were designed so that multiple users can’t have edit rights to the same areas. It makes sense. If someone is reviewing income and someone goes in and changes the income… well…
Think about it. We all have some reporting mechanism we rely on. As mentioned earlier, some work from system pipelines, some from live dashboards. Some (maybe a majority) still use spreadsheets.
For one, spreadsheets can be manipulated very easily. Make a few updates, attach it to an email, and send to management. Communication is key. People need updates so that they can offer guidance and delegate loans. However, this is where things start to really fall apart.
>>What if the key person on a file is out of the office?
>>Could that lock extension have been avoided?
As you identify these key areas that need to be communicated to multiple people, you will begin to uncover missteps that create vicious cycles of he-said/she-said. A flurry of CC and BCC emails ensue and this leads to, well…a lot of bad.
We can help you go from “CC and BCC everyone just in case” to pointed communication at the right time to the right person. This way, your team is being communicated to/with on a “need to know” basis.
These are just a couple of examples of things we do every day that happen because they’ve always been done that way. We can change together.
You no longer have to be a victim to the rising cost of originating loans. Allow Lodasoft to help you rethink how you are originating so that you can streamline your processes while reducing the cost to originate. Let operational efficiency become the hero in your organization.
About The Author
Adam Batayeh is President of Lodasoft, the mortgage industry’s leading solution to help lenders eliminate complexity and automate the manual workflow involved in the everyday loan process. With more than a decade of experience in the mortgage industry, Batayeh has held executive sales, marketing, product and strategic partnership positions with key mortgage technology providers. He is responsible for overseeing the daily operations, growth of organization, strategic partnerships and long-term strategic vision of Lodasoft. You can contact Adam at firstname.lastname@example.org or to find out more about Lodasoft visit website www.lodasoft.com