Joe Camerieri of Mortgage Cadence: The High Cost of Loan Origination Inefficiency

Joe Camerieri is Executive Vice President and Client Account Management Executive at Mortgage Cadence. He can be reached at 267-216-1779.

Those who say that mortgage lenders don’t pay attention to their cost-to-close when times are good do not really understand our business. Of course lenders care about controlling costs when loan volumes are high. They just care about it more when loan volumes start to fall.

High loan volumes can make many problems more difficult to identify and seem less critical at the time. It’s when the business begins to contract that the issues begin to come to light and, consequently, become really important.

As you might expect, now that volumes are starting to fall, we’re having more conversations today with lenders about the importance of efficiency in their loan origination process.

Efficiency is the first key to cost cutting in any process. In our business, we also must consider staffing and streamlining the tech stack, but efficiency is always a top priority and what we’ll focus on in this article.

We’ve been talking to lenders about the critical nature of cost-to-close for some time now. It’s one of the five key success metrics for high performance lending we counsel every lender to track in the efficiency of their origination business, and arguably the one that has the most direct impact on their bottom line profitability.

Inefficiency costs lenders money, but those fixed costs are only one of the ways this problem hurts lenders. It can also make them less competitive in a purchase money market and have compliance implications that might get regulators’ attention. Taken together, the cost of inefficiency in the mortgage origination business is very high.

Time is money

The most obvious downside of inefficiency is that it just takes longer to get things done. As we move deeper into the purchase money mortgage market, this is becoming painfully obvious to some lenders.

For a variety of reasons (more partners involved, fewer agency appraisal waivers, less flexibility on closing date, longer incubation periods), purchase money mortgage origination takes a lot longer to complete than the refinance business that many lenders have been enjoying over the past few years.

The results can clearly be seen in the expense and revenue trends being tracked by the Mortgage Bankers Association and recently highlighted in the STRATMOR February Insights Report. From a high point of $1.4 trillion in loan originations in the 4th quarter 2020, volume had fallen to $954 billion by the third quarter 2021. Direct and indirect expenses per loan that were near $7,400 in the 2020 period had risen to over $8,500 per loan in 3Q2021.

Lenders were spreading their high fixed costs over a decreasing number of closed loans and the resulting cost-to-close was rising. Some of those costs were coming from bloated payrolls over the past two years in an attempt to increase capacity, while others may have been from technology investments intended to compete with Fintech competitors that were never fully adopted.

To reduce these costs, which is an imperative given the current trend of falling loan volumes, lenders must tighten up their process and close purchase money loans more efficiently.

But there are two other costs some lenders will pay should they fail to improve their process.

Competition is brutal

Unlike the refinance business, where the time-to-close fluctuates with the lender’s overall volume, the purchase money transaction takes place on a fixed timeline that is not set by the lender. In most cases, the timeline is set by the real estate agents in a manner designed to get a seller out of a home at roughly the same time that seller turned buyer takes possession of the new one.

If the loan can’t close on time, it will cause all kinds of problems for all of the parties involved. It won’t matter if the lender can point to the borrower as the ultimate cause of the delay, the agent will know who to blame. Given that real estate agents are critical business referral partners in a purchase money market, this cannot be allowed to happen.

This means that the lender must have a process optimized for the purchase money transaction and a team in place who are trained and ready to execute that process.

And, they will have to do it with fewer people. As rates rise and volumes fall, lenders will right-size their companies, leaving them with smaller staffs. They won’t be able to solve problems with brute force anymore.

Lenders who have been focused on the refinance transaction may find this challenging, but technology can offer some assistance. Modern loan origination systems offer optimized workflows that can help keep the lender’s team on track through the purchase money loan origination process.

Compliance is a killer

But there’s another reason efficiency matters, and more lenders are hearing about it from their secondary market investors. If the loan doesn’t meet all investor requirements, they have the right to force the lender to buy it back.

Every lender understands how disruptive the buyback request can be to their business. When I wrote about this last year, we were heading into the second year of crushingly high loan volumes and the fear was that overworked underwriters and processors would make mistakes that would lead to buyback requests.

The problem last year was very high volume. The problem today is the shift to purchase money origination we’ve been discussing. The challenge is that many lenders have a portion of their staff that were hired to play a non-technical role to support the refi volume.  Although less experienced, they are likely less expensive. Not having seasoned veterans managing purchase transactions will have a down-stream effect. This increases the risk that mistakes will be made.

This heightened risk from loan defects drives the lender to task quality assurance and quality control (QA/QC) resources on reworking impacted loan files to get them ready for sale into the secondary market. The risk is real, but as I have pointed out in the past, lenders are safer from buybacks today than they have ever been for several reasons.

Today’s environment is different than what we usually see driving investors’ buyback requests because lenders are still underwriting high quality loans and have access to the same regulatory technology (regtech) that their investors are currently using to assess the quality of the loans they purchase.

This is not the same as trying to sell low quality loans and hoping the investor doesn’t force the lender to buy them back, which is what we saw driving buyback requests prior to the credit crisis of 2009.

Today’s loan production technology is built on a solid foundation aimed at ensuring full compliance. The modern loan origination system has regtech integrated into the platform such that impacted loans will fall out of automation and come to the attention of QA/QC resources immediately.

The long-term solution to origination inefficiency will involve employing more and better loan origination technology and carefully working with your staff to adopt it. Systems that leverage AI, for example, can examine every document in every loan file and run quality control checks long before the loan gets to the investor. By letting the automation handle this important work, it keeps the process moving forward efficiently for the benefit of the borrower and agent.

Of course, great technology doesn’t remove the lender’s responsibility to take great care with every loan they originate. But it does mean they will have access to back-office technologies that will improve the experience for their processors and closers in order to ensure the production of the highest quality loans in the most efficient manner.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)