Expert AnalysisMarch/April 2024 Issue

Reducing The Cost Of Origination From $12,500 To $6,300.  Impossible?

Changing the rapid increase in loan origination costs may seem impossible.  After all, costs have been escalating at a 25% annual rate since 2019.  However, what if there were a way to achieve the seemingly impossible?

Enter “Scenario Magic Wanding” – a technique that challenges conventional thinking and opens the door to innovative solutions.  Imagine wielding a magic wand with three wishes, capable of instantly granting your desires without cost.

How would you use these wishes? This exercise, termed Magic Wanding, breaks down mental barriers and liberates the mind from practical constraints. For instance, one might wish to halve the cost of loan origination. While the feasibility of such a wish may seem uncertain, envisioning the outcome sparks creativity and exploration of potential avenues to achieve it.

Magic Wanding fosters the development of scenarios where significant cost reductions are possible through innovation and disciplined processes. By envisioning an ideal future state – such as being twice as cost-effective as competitors – businesses can reverse-engineer strategies to realize these goals.

Beginning with the End in Mind

Renowned author Stephen Covey’s principle of “Begin with the End in Mind” serves as a guiding light in this endeavor. By defining the desired outcome – in this case, a substantial reduction in origination costs – businesses can align their efforts and strategies accordingly. Just as President John F. Kennedy set a bold vision of landing a man on the moon within a decade, ambitious goals serve to galvanize efforts and drive innovation.

Kennedy’s Vision: Landing a Man on the Moon

In his iconic 1962 speech at Rice University, Kennedy outlined an audacious goal:

Land a man on the moon and safely returning him to Earth by the end of the decade.

Kennedy  acknowledged the immense challenges and technological hurdles but emphasized the importance of boldness and determination in the face of adversity. Kennedy’s speech serves as a testament to the power of visionary leadership and the ability to achieve the seemingly impossible through perseverance and innovation.

Kennedy continued in his speech:

But why, some say, the moon? Why choose this as our goal? And they may well ask why climb the highest mountain? Why, 35 years ago, fly the Atlantic? Why does Rice play Texas? We choose to go to the moon. We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win.

But if I were to say, my fellow citizens, that we shall send to the moon, 240,000 miles away from the control station in Houston, a giant rocket more than 300 feet tall, the length of this football field, made of new metal alloys, some of which have not yet been invented, capable of standing heat and stresses several times more than have ever been experienced, fitted together with a precision better than the finest watch, carrying all the equipment needed for propulsion, guidance, control, communications, food and survival, on an untried mission, to an unknown celestial body, and then return it safely to earth, re-entering the atmosphere at speeds of over 25,000 miles per hour, causing heat about half that of the temperature of the sun—almost as hot as it is here today—and do all this, and do it right, and do it first before this decade is out—then we must be bold. “

Small Steps Toward Giant Leaps

Against the backdrop of historic achievements like the Apollo moon landing, the challenge of reducing origination costs may pale in comparison. But it is indeed possible. 

The key lies in breaking down the process into manageable steps and relentlessly pursuing improvements. Teraverde uses a process adapted from Beginning with the End in Mind in a very intentional manner. 

Enter the IEAOO process:  Innovate, Eliminate, Automate, Outsource, and Optimize.

The IEAOO Process in Action

The residential real estate transaction activity is labor intensive, making it well suited to the IEAOO methodology for reducing the cost stack. In essence, the IEAOO process involves evaluating the entire business process from the end (beginning with the end in mind) to the beginning.

Documenting the process by breaking it into milestones and tasks allows for a thorough evaluation. Each milestone and task are then scrutinized for opportunities to:

  • Innovate: Open your mind to innovation and possibilities. Consider new approaches and technologies.
  • Eliminate: Consider how tasks can be eliminated or consolidated into others to streamline the process.
  • Automate: Internally automate tasks using robotics process automation or workflow management tools.
  • Outsource: Consider external outsourcing options, whether onshore or offshore, for tasks that cannot be automated internally.
  • Optimize: Find the most efficient and cost-effective methods to accomplish tasks.

By iteratively applying the IEAOO regimen to the entire process, businesses can uncover inefficiencies and drive transformative change. It’s an intentional process that requires dedication and persistence, but the results can be remarkable.

Achieving the Impossible

While the journey to reducing origination costs may seem daunting, it is far from impossible. Through strategic vision, innovative thinking, and disciplined execution, businesses can defy conventional wisdom and achieve remarkable results. By embracing techniques like Magic Wanding and the IEAOO process, organizations can pave the way for disruptive innovation and lasting success.

The path to reducing origination costs is not a sprint but a strategic journey fueled by imagination, determination, and a willingness to challenge the status quo. With the right mindset and methodologies, businesses can turn the seemingly impossible into reality. As an example, we recently helped a lender take 42% of the labor cost out of the origination process.

Reach out for a confidential discussion if you’d like to substantially reduce your cost to originate while maintaining quality and customer experience.