What can be learned when the same group of lenders cooperate over the same time period to compare key metrics? Mortgage Cadence has worked with a group of customers for more than five years developing, refining, and presenting true peer-to-peer benchmarking results on five mortgage metrics we all agree are key to understanding lending performance. The task seems simple enough on the surface: Look at the metrics, see how they compare over time, draw some conclusions, present the results, and box the project up until next year. The thing is, though, that the five-year period from 2012 through 2016 was a period in mortgage history like no other. The data keeps raising interesting questions as well as yielding interesting results.
We have published on our approach in the past. We look at the macro-level with the intent of shining light on loan velocity, pull-through, customer share, productivity, and cost-to-close. These five metrics help our customers view their business in comparison with other lenders just like them. They often raise questions that lead to performance improvements going forward. That is reason and reward enough for the research effort, yet the Study yields much more.
The five year period ending in 2016 was one of the more interesting in the last 30 years of mortgage lending. After a more than 30-year period of sustained refinancing in a rate environment not seen since the early 1940s, the mortgage market began its long-term transition to purchase-money lending. Not that rates have risen dramatically; we all know that they have not. Almost everyone who could refinance or wanted to refinance did so and at a rate they are unlikely to give up unless forced to do so. With refinance demand at an all-time low, the switch to purchase is logical as well as economically more stimulating to the overall economy.
A long-term purchase market is good. It comes at a cost, however. One of the key findings from our Study is that purchase-lending has an adverse effect on productivity as well as cost-to-close. Cost-to-close and productivity are inversely related: One goes up, the other goes down. With purchase beginning to dominate the market, lenders can count on costs remaining higher than they otherwise would in refinance markets.
Major regulatory initiatives occupied a great deal of lender time during the five-year period covered by the Study. Performance on three of the five relevant metrics plummeted in 2014, the year the qualified mortgage and ability to repay rules took effect. Later that same year, the industry turned its attention to learning all it could about TRID, making plans for its implementation by the fall of 2015. Productivity, as well as pull-through, decreased to their lowest level in five years. Cost-to-close increased to its highest level over the same period. While this was not the mortgage industry’s worst period in modern memory, it was close.
It is only fair to mention that two other factors in addition to regulatory impact likely influenced 2014’s results. The first, purchase lending, was discussed previously. These loans are more complicated, take more time and cost more money to produce. As mentioned, however, purchase markets are good for the mortgage industry and the economy overall. The second factor is that mortgage volume decreased in 2014 from 2013. Volume dropped faster than staffing levels. This also adversely affects cost-to-close and productivity.
There is Still More
The stories from this year’s Study are still revealing themselves. The tide may be turning on the seemingly ever-increasing cost-to-close trend. For example, 2016 was better, by a small margin, than 2015, and it was far better than 2014. One year of slight improvement does not make for a trend, though it does create reason for hope. There are additional insights that we’ll share in the coming months as we continue to sift through the data and uncover other interesting items that, we hope, guide us all to better performance.