LenderLogix CEO Patrick O’Brien: Driving Down the Cost to Originate Requires Smarter Investments in Tech

Patrick O’Brien

Patrick O’Brien is a mortgage banker turned technologist at LenderLogix. He started his career as a loan officer and spent 15 years in mortgage banking before founding LenderLogix in 2016. Drawing on his experiences as a loan officer, Patrick and team have gone on to design best-in-class software centered around superior experiences for Loan Officers, Borrowers and Realtors. Patrick is a graduate of the University at Buffalo and is a member of the New York MBA Board of Directors and lives in Buffalo, N.Y., where LenderLogix is headquartered.

Imagine expecting your favorite college football team to win a national championship with a roster comprised of only 4% scholarship players and 96% walk-ons. The scholarship investment isn’t equal to the expected outcome. The same can be said for the mortgage industry’s attitude toward technology, especially when it comes to lowering the cost to originate.

There has been a growing buzz from lenders pushing back on technology’s impact on the cost to originate as that expense continues to rise. However, a cursory glance at lenders’ tech expenditures compared to the other components of the overall cost to originate may indicate that lenders are not making enough of an investment, much less in the right areas, to truly drive down origination expenses.

Show Me the Money

The Mortgage Bankers Association’s Quarterly Mortgage Bankers Performance Report found that total loan production expenses for independent mortgage banks (IMBs) – which includes commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – increased to a study-high of $13,171 per loan in the first quarter of 2023, up from $12,450 per loan in the prior quarter.

According to data from the MBA and STRATMOR Peer Group Roundtable program for 2022, which was released during the MBA’s Single Family Research and Economics Showcase 2023, technology represents, on average, between 5% and 8% of IMB’s overall cost to originate in the retail production channel. Thus, it would be logical to put per-loan total technology costs at roughly $650 to $1,110. However, this same report breaks down lenders’ tech spend into three key areas: corporate administration, servicing and production, with the latter comprising roughly 55% of total technology costs.

So, when examining what lenders are spending on origination-related technology, those figures look more like $350 to $600 per loan. While loan origination system (LOS) expenses can vary based on the provider and negotiated agreement, $100 to $200 per loan is a reasonable estimate for those using some of the industry’s more well-known platforms.

Based on findings from the MBA’s 2022 Technology Profile Survey, the other key areas of tech spend appear to be eSign, point of sale (POS) and eClosing-related platforms. 95% of lenders report having eSign technology for closing disclosures in production, with 43% using it for notes and 35% for deeds. On the eClosing front, 81% report having a hybrid eClosing platform and/or digital closing platform in production. In addition, lenders reported that 81% of their retail origination volume began with an online mortgage application, with high or above-average use of eSign and an internet-based POS from 90% of borrowers in the application process.

Thus, it would seem lenders have made most of their production tech investments at the beginning and conclusion of the origination process, which leaves a wide swath of the loan manufacturing process untouched by technology. Furthermore, fulfillment, which covers this portion of the process, represents roughly 25% of IMB’s cost to originate, the second-highest component behind sales.

Looking back at MBA’s data on production expenses from Q1 2018 to Q1 2023, it is unsurprising that as volumes increase, sales and fulfillment expenses follow suit. While technology investment increased starting in the “COVID quarters,” that growth was minuscule at best. What this illustrates is a point that is already well-known across the industry – when volumes rise, lenders staff up. This alone explains much of why the cost to originate continues to rise, but, as is often the case, there are other factors at play.

Help Me Help You

For starters, lenders simply aren’t investing enough in technology. The MBA and STRATMOR’s 2022 PGR report found that IMBs allocate between 5.6% and 12% of their budgets toward technology. Factoring in that only half of that spend goes towards origination technology, this amount simply isn’t enough to move the needle in a meaningful way.

Along with lack of proper investment, the other factor blunting technology’s effect on the cost to originate is where and how lenders are deploying technology in their process. For example, the MBA’s Technology Survey also measured mortgage applicant usage of data aggregation technology for verification of employment (VOE), verification of income (VOI) and verification of assets (VOA). Given that Fannie Mae and Freddie Mac both offer rep and warrant relief for verifications obtained via approved third-party platforms, adoption of these technologies should be at or near 100%. However, lenders reported high or above-average adoption of automated verification tools by less than half of mortgage applicants.

One explanation for this disconnect is where lenders are introducing these tools in the origination process. Yes, more than 80% of retail loan applications come through an online channel, which would indicate that borrowers are comfortable sharing personal information in a digital format. However, there is a big difference between borrowers inputting their information into an online form/portal and connecting with a third-party service to obtain their personal information.

Borrowers entering information into their lender’s online loan application have a high degree of confidence that they are interacting with a legitimate entity in large part because of branding. The site looks and feels like the organization they have interacted with thus far. Ergo, borrowers trust that the information they share is going where intended.

While some automated verification platforms on the market today may offer the ability to white-label these tools, subtle differences in the user interface or other details can sow doubt with borrowers as to whether these tools are indeed connected to their chosen lender. In addition, integrating these tools early into the application process makes sense from the lender perspective, but borrowers may not necessarily feel the same way, especially if they are not expecting to encounter these requests.

This is a prime example of technology failing to deliver not because it doesn’t provide utility or value but for simply being inserted in the wrong place at the wrong time. Despite the hype around borrowers wanting an “Amazon-like” mortgage experience, few truly desire a “robot mortgage.” A mortgage is a tremendous financial commitment fraught with complexity, and most borrowers are ill-equipped to knowledgeably navigate this process on their own. Loan officers play a critical role in guiding borrowers through the origination process, and technology must be thoughtfully and strategically deployed to support that function rather than subvert it.

Given that sales represents the largest component of the overall cost to originate, these high-dollar employees should not be spending their time tracking down and/or uploading paperwork. But, simply injecting the tools intended to free them from more task-driven activities into the process without considering the borrower’s perspective is a recipe for failure. A far more effective strategy would be to have the loan officer introduce these tools and explain their purpose and intent to build borrower trust in the tools, thus increasing the likelihood of adoption.

You Had Me at Hello

It is also important to note that not all origination “technology” is created equal. For example, a distinct difference exists between an “online” application and a “digital” application. Anyone that possesses basic web development skills can create an online form that mimics the Uniform Residential Loan Application. A truly digital application, on the other hand, should perform functions beyond simple information intake. If application data does not flow from the POS into the LOS seamlessly, that will create costly inefficiencies.

Furthermore, if the borrower’s experience with the POS is anything less than exceptional, that could be enough to change a borrower’s mind about moving forward with the loan application. And, if the lender has chosen to conduct their automated verification checks concurrent with the loan application, which often charge by the transaction, they may be paying for data for a loan application that does not convert.

The bottom line is implementing technology simply because it has become table stakes in today’s origination market will not have the same impact on origination costs as taking a more thoughtful, strategic approach to tech adoption and implementation. Furthermore, automating a poorly designed manual process does nothing to improve the process. It just makes a bad process easier to execute.

Per Freddie Mac’s November 2021 Cost to Originate Study, “…the top 25% of the most cost-effective lenders managed to achieve per-loan costs that were nearly $4,000 or ~45% less costly, on average. The top performers were also nearly three times more cost-effective than the bottom 25% of lenders in the same category.” This underscores that the lower costs and efficiencies achieved by the top performers were, in part, a product of effective tech strategies and greater adoption of digitization.

With strategic technology investments, lenders can deliver end-to-end technology solutions and double current operational efficiency. To address the high costs of origination, lenders need to review the efficiencies gained (or not gained) from their existing tech investments and the associated expenses. Where can minimal investments be made to automate “expensive” processes, improve the efficacy of existing personnel and enhance the scalability of operations? Strategically investing in technology can get lenders out of the historical hire-and-fire cycle. If lenders doubled their technology investment instead of hiring people in a frenzy in times of demand, the cost to originate would go up by a few hundred dollars versus thousands.

Coupled with the personalized and digital expectations borrowers have today, lenders need to shift their definitions of technology from a nice-to-have to a must-have. Borrowers want simple-to-use, mobile-friendly technology throughout the home-buying experience. Investing in tech that drives down costs AND improves borrower service doesn’t have to be a trade-off, especially given the amount of vendors in the market today.

Stop waiting for national championship-caliber technology to walk on to your business and get scouting. With the drop in mortgage demand and, therefore, tighter margins, lenders quite literally cannot afford to continue driving up origination costs. With strategic technology investments, lenders can improve borrower service, compete more effectively and drive down costs without inflating their tech spending to an unnecessary degree.

(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 NewsLink Editor Michael Tucker at mtucker@mba.org or Editorial Manager Anneliese Mahoney at amahoney@mba.org.)