Recovery Tips Column: Driving Down The Cost To Originate

Attend any mortgage industry event or trade show or read any of the industry publication, and you will hear people talk about the rising cost to originate, margin compression and declining profitability.

Lenders continue to struggle in an ever-changing mortgage rate environment, reporting negative profits for the first time since Dodd-Frank compliance brought down profits in 2014.

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.”

So how to we drive down the cost to originate and bring back profitability in 2019?  It starts with asking some tough questions and looking outside of the normal this is how we always do business answers, if we are going to come up with some sustainable answers.

Can we afford to continue doing business as usual?

Is there a better and more efficient way to originate loans?

How do we increase origination volumes without blindly hiring more LO’s?

How many loans does the average LO close a month in your organization?

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.?

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?

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 taking a hard look at the numbers, it is very clear that you can’t continue to do business as usual and expect to turn the tide against the rising cost to originate.  The key is improving operational efficiency. The challenge is how we put this into action.

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.

It is one thing to understand the data, but if you want to truly gain operational efficiency and drive down the cost to originate, 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.

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 you 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…

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.

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.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.