The (high) cost of mortgage lending

By: Dan Green for CBInsight

There are many ways to answer the question, “What does it cost a credit union to close a mortgage loan in 2013?”

The quick answer is, “A lot more than it once did.” Those of us who lent in the 90s through the early 2000s watched the cost of closing a mortgage drop for high-performance mortgage lending credit unions. They were among the first to take advantage of the Internet, employed technology at every possible turn and empowered their teams far beyond the traditional silos of processing, underwriting, funding and closing. Their innovative experiments delivered many positive benefits. Members originated their own loans for the first time using the World Wide Web. Paper, plus the processes it required, slowly disappeared, giving way to (sometimes) fully electronic processing. Individual team members were able to handle increasing amounts of loans. Costs decreased.

Physics being what it is, what goes down doesn’t often go back up. However, physics knows little about costs, which have a tendency to rise, defying not only gravity but the desire of business operators everywhere. Costs have indeed risen. A June 10, 2014 article published by the Mortgage Bankers Association had this to say:

“Total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – increased to $8,025 per loan in the first quarter, up from $6,959 in the fourth quarter of 2013. First quarter 2014 production expenses were the highest recorded in any quarter since the Performance Report was created in the third quarter of 2008…Productivity was 1.7 loans originated per production employee per month in the first quarter, down from 2 loans in the fourth quarter of 2013.”

High performance credit union lenders fared better. In an ongoing study we are conducting, we have found the average cost of closing a credit union mortgage to be $3,185. Productivity, the single most important mortgage lending metric, was 4.4 closed loans per employee per month. While lending costs may have risen during the first quarter, and productivity may have slipped, it is safe to say high performance credit unions lenders generally remain ahead of the overall industry.

Managing the Cost

High performance credit union mortgage lenders have high productivity in common. The number of loans closed per employee per month is the single largest determinant of every lender’s cost to close because labor is the largest component of the metric. Lenders achieve higher productivity in three ways:

  1. Focus. Do a few things and do them well. A credit union lender we met with recently drove this point home repeatedly. The mortgage industry, like every other industry, offers many opportunities to wander. Wandering, it turns out, is expensive. Pick a niche, focus intently, lend efficiently.
  2. Process. Making mortgage loans is like a manufacturing operation. Efficiency and quality depend on rigorous adherence to well-defined processes. High performance lenders define these processes well and watch them closely.
  3. Technology. Comprehensive lending technologies that guide loans through the entire mortgage cycle from origination to delivery are essential in the battle for productivity. Another of the positive lessons from the early 2000s: leveraging automation pays off demonstrably in dollars and cents.

The Cost/Benefit Analysis

An early mentor taught us that it is possible – easy, in fact — to cost-account your way out of any business. He told a funny story about a small business owner who did exactly that. He saved a lot of money until he wasn’t making any at all. Mortgage lending still makes sense, even at today’s costs, when you consider how much income a mortgage loan produces. The net present value of the net interest cash flows during the first five years of its thirty year life is about $5,000, still a good ROI when stacked up against a $3,185 closing cost. Not so great, however, when the cost is over $8,000. Focus on productivity, drive lending costs down, make more loans and make them profitably.