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March 25, 2019

Taking the Guesswork Out of Lending Performance

"It also offers evidence of the high cost of complying with the numerous complex regulations our industry is subject to today."

"Guessing is more fun than knowing."

W.H. Auden, in his poem Archeology

While guessing may well be more fun than knowing, companies that want to succeed in the mortgage lending business don’t have that luxury. In today’s highly competitive market, only high performance lenders will achieve profitability. And high performance lending comes from knowing, not guessing.

What we know at the macro level is the cost of making a mortgage has never been higher, having more than doubled over the last ten years. At the same time, productivity, the closest performance indicator cousin to cost-to-close, has never been lower.

While it’s not necessary to agree on the actual cost or productivity numbers, we must acknowledge their decade-long steeply upward trajectory and the unsustainable condition in which the industry now finds itself. Mortgage lending is, after all, a business line that should be one of the most profitable for lenders. Truth is, it’s not. Nothing warrants proactive change more than stagnant profitability.

There is another casualty in our current situation: mortgage rates. This may strike you as odd, as in the past few years rates hit their lowest levels since 1946. And they remain historically low, considering the last time a 5% 30-year fixed rate loan was common was when Harry Truman was the president of the United States and gasoline was $0.26 per gallon.

With where rates are and where rates have been, how can rates be a casualty of the high cost of lending?

Simple. Every lender knows the cost of production is one of the largest variables in their daily pricing exercise. As the cost-to-close increases, mortgage rates rise because these costs have nowhere else to go, and nowhere else to hide. Why has no one noticed? Simple. Rates are historically low. But how much lower could mortgage rates be if the cost to produce was lower?

Every $1,000 saved in production costs could be used to decrease rates by as much as 10 basis points. This constitutes a fantastic competitive advantage to the lender who understands how to achieve a low cost-to-close.

When it comes to the high performance lending equation, we’ve done the math and we have the data. We know what the industry’s current problem is, and we know there’s a solution.

We even know where to begin.

Uncovering the High Performance Lending Equation

At about the same time the cost to produce a loan began increasing industrywide, Mortgage Cadence began its long-running research study into high performance lending.

Our original thesis was to gauge technology’s impact on the overall mortgage process and its role in the people, process, technology equation. Our First Benchmark Study was published in 2012 with encouraging results; technology was indeed helpful.

As a leading technology provider in the mortgage realm, this was the information we were hoping to find. It gave us objective proof that the technology employed by lenders to originate mortgage loans mattered. But that’s not all we found.

Our study also provided baseline lending performance results at an inflection point in mortgage lending history. While no one could have known for sure at the time, 2012 was the beginning of the end of the refinance era. The refi-boom lasted one more year and then abruptly came to an end in 2014.

Seven years later and our ongoing study goes well beyond illustrating technology’s role in mortgage lending. It sheds light on the impacts of people and process in the lending equation. It clearly illuminates the ongoing impact of the shift from refinance to purchase money business. It also offers evidence of the high cost of complying with the numerous complex regulations our industry is subject to today.

Ultimately, our data revealed that five Key Performance Indicators (KPIs) are crucial to unlocking high performance lending. The proper management of these KPIs will allow any lender to achieve uncommon success.

To see the results of our 2018 Mortgage Cadence Benchmark Study, download the paper today.