Implementing new software, any software, is challenging. No matter the quality of the platform nor the strength of the team responsible for standing it up, getting to go live is daunting.
Anyone who has worked this process knows how many issues arise when new systems are introduced and either integrated into existing workflows or used as the impetus for modernizing traditional business processes. It’s akin to asking your mechanic to work on your car while you’re driving it.
Fortunately, the days of overly-challenging implementations are, for the most part, behind us. There are now implementation teams in our industry that would make a space agency proud. Well-trained, experienced and efficient technology experts that know what it takes to get new software up and running quickly. I work with such a team.
The time frames for new technology implementation have shrunk as well. What would have taken a year or more just a few years ago can be done today in a matter of months or even weeks, in the case of LOS add-ons. New software architectures, a robust ecosystem of industry APIs, MISMO data standards, and systems built from the ground up for compatibility have streamlined this traditionally difficult work.
There are still many issues to work through. But, for the most part, adding new technology to a company’s tech stack no longer strikes fear into the heart of company management the way it once did. This is not a bad time to be working as an IT executive in the mortgage industry.
But that’s not to say that new technology comes without serious challenges. Beyond managing the switch to a new platform, there is another challenge that we see many lenders struggle with as they bring new technologies into their companies. It doesn’t manifest itself during implementation nor at go-live. It happens after that. I call it the second day dilemma.
What happens after you go live
The day the new software goes into production is a great day. Everyone on both the lender and the vendor side have been working very hard, preparing for every possible problem that may occur and configuring the system to operate optimally.
By this time, the staff has been trained on the new tools. The workflows have been adjusted to take advantage of the power the new platform offers. Additionally, management knows what metrics it expects to track that will demonstrate to all stakeholders that the new technology was worth the cost. The switch is flipped and the new technology lights up.
It’s a day for celebration
This is normally when we expect to read the line, “And they all lived happily ever after.” But they rarely do, at least that’s the way it often looks at first. It’s the day two dilemma: now that we have this great new tool, what steps do we take to maximize our investment in it?
There is an easy answer, of course: Do what you did before only better, cheaper or faster (or some combination of these). Yet this doesn’t always happen, and given mortgage performance trends of the past five years, appears to happen rarely.
High performance lending operations are built and maintained through constant attention to, and manipulation of, three key variables: people, process and technology.
Technology gets the most attention lately; there’s never been so much of it focused on the mortgage industry, nor has its promise been so great.
Yet the industry faces a real conundrum: even with all the new technologies available, and the consumer adoption of digital mortgage at an all-time high, borrower satisfaction is low and declining. Please don’t misunderstand, new technologies are essential. They make dealing with the industry’s ever-growing complexity possible. Without them, a digital borrower experience would still be a myth and full compliance would approach the realm of impossibility.
But what this conundrum points out is the technology variable must be manipulated along with the people and process variables.
Day One work is and has to be heavily focused on technology. Day Two work, on the other hand, has to be heavily focused on people and process and can’t be ignored.
This is a lesson we’ve learned from high performance lenders in our annual, long-running benchmarking study.
Year after year, the nation’s best performing lenders find a way to make their technology investments pay large dividends. Given that before the system ever gets switched on, these lenders have gone to the trouble and expense of finding the right tool, vetting the vendor, negotiating the agreement, working with the installation team and managing the change internally, this is no small feat.
In my experience, there are three ways many lenders respond to the second day dilemma that can only be described as mistakes. There are also some things that the industry’s best performers do on the second day that can provide some guidance.
Three flawed decisions for the second day
The first flawed decision we see lenders make on the second day is to employ their new software platform to enable the same old workflow imposed by the limitations of their old platform. This is the quickest way to throw better, cheaper and faster right out the window.
You invested in the new software to enable better execution, leading to higher productivity, which is the key to higher profitability. Why, then, would you not task your new technology with taking your production to a higher level?
The biggest reason this happens is humans. Staff will continue to operate exactly as they have operated in the past unless they are both trained and managed through the change. Training on the new system is not enough on its own. We used to call this problem lack of adoption.
Today, we call it a significant waste of new technology spend.
The second flawed decision we often see is ignoring new functionality offered by the new platform because the staff has never used it before or because someone in legal wonders what might happen if something goes wrong. Fear can be a major demotivator, and when it comes to new automation that has not previously been tested by the company, it can lead to functionality being switched off permanently.
What a waste! While we must concede that the uncertainty in the legal department is very real as they truly have no experience with the proposed workflows, it takes collaboration between business and legal to optimize workflows while mitigating risk so that efficiency is optimized. Once the functionality that management determined was necessary to reach company goals has been successfully installed, it falls to operations to make it work, but the foundation for that work is laid through collaboration with professional risk mitigation experts before the technology is ever chosen.
The third, and by far the most flawed decision lenders make on the second day is going back to market for new functionality that they don’t know is already built into the powerful new platform they just switched on.
It seems like this would never happen, but it’s happening all the time.
One of the biggest reasons for this is the influx of new fintech companies entering the space. They have a Silicon Valley flair for marketing and package their tech tools like the next shiny object the lender must have if they hope to get the attention of the consumer. Given the success of their efforts to distract millions of consumers with simple apps involving flapping birds and crushable candies, it’s easy to see why some lenders fall under their spell.
But when the functionality promised by these firms is already built into the platform the lender has already invested in, it becomes wasteful -- both in terms of time and money -- to go back to market for more. These decisions are where profits are won and lost for the lender.
A better strategy for the second day
It’s natural to ask the question that leads to the second day dilemma. Every lender should work to get every bit of power out of the technology tools in which they invest. In our study of the best performers in the industry, we found that the nation’s top lenders respond to this question in three primary ways.
First, they work with their vendors, their internal management teams and even outside consultants to redesign their workflows to get the most benefit out of the new technologies. Of the three keys to high performance lending -- people, process and technology -- process is likely the most important. It can make good people great and make powerful technology sing.
Second, they work with their vendor to get the training they need to get their staff on board with the new functionality and up to speed on all of its capabilities so they can make the most use of them. Then, once the training has been delivered (and made available to employees for reinforcement), management actively manages through the change, ensuring a very high rate of adoption.
Finally, they measure the benefits they are receiving from the new technology by tracking the five critical KPIs that every mortgage loan originator should be tracking (Velocity, Borrower Share, Pull-Through, Productivity and Cost-to-Close).
Making the wrong decisions on the second day will cause the lender to leave money -- and productivity -- on the table. By working to get the most out of the powerful new platform the lender has already invested in is a much better strategy for getting the most long-term value out of the firm’s investment and for becoming one of the industry’s top performing lenders.
The metrics that reveals high performance lending & overall profitability in the mortgage industry.
Traditionally, summer is the peak of the new home buying season, but currently the industry is struggling. While the MBA has not revised its most recent annual loan volume prediction downward, competition for overall profitability through new mortgage business comes down to high performance lending.
This shouldn’t surprise anyone, as the Mortgage Bankers Association (MBA) told us in October, 2018 that this would be a tougher year for lenders. Overall, MBA now expects mortgage business to decline 3 percent from last year to about $1.6 trillion in 2018. The refinance share will fall off dramatically but purchase money business is expected to increase to about $1.2 trillion this year. MBA said earlier this year that it expects to see rates rise another four times this year. Since then, the Fed has already raised rates once. There’s an upside to rising rates, however. They spark FOMO (fear of missing out); buyers don’t want to miss their chance at a low rate.
This means that all lenders must target purchase money business to at least hold on to their historic volume numbers. This will be increasingly difficult, as Freddie Mac increased its expectation for mortgage interest rates in February, moving the dial on the 30-year-fixed rate mortgage to 4.6 percent, on average, for 2018.
The need to compete
The need to be competitive in the mortgage lending business has never been greater. Fortunately, depository lenders have an advantage in this area as their existing customer base is a ready-made prospect database for mortgage lending, if they can tap it. Historically, this has been very difficult to do.
Six years ago, we began performing an annual study to determine exactly what impact technology could have on a lender’s ability to be a high performance lender, not just from existing customers, but from the greater community the institution serves. In the process, we learned a great deal about how lenders define their success and how, as a segment of the overall mortgage lending industry, these firms performed competitively.
In all, we found five critical measurements, five key performance indicators (KPIs), that when taken together tell us – and lenders – exactly how any lender is performing. Even better, we aggregated the data from a number of institutions, all using the same technology in their lending departments, to arrive at a set of benchmarking data that, once understood, places lenders on the path to high performance lending. This research is now known as the Mortgage Cadence Benchmarking Study.
Why use benchmark assessments?
Knowing where you stand in regard to the five KPIs we are about to define in any given year is very important. It is a good management tool that informs decision making and reveals the institution’s progress on its mission and objectives.
Understanding performance over a period of years is even more valuable. It shows how management and staff react to market forces, and how well the institution is able to adapt its business to those changing forces and continue down the path of high performance lending.
But without benchmarking data to compare the institution’s performance to the broader set of competitors, it only reveals part of the story. There are many good reasons every institution should be benchmarking their lending performance against a larger industry dataset. And that’s what our study does: if understanding your own performance over a period of time is valuable, then comparing your performance to that of your peers over the same period of time is invaluable. This is especially true in a year when we know competition for a limited number of new purchase money mortgage transactions will be fierce.
Leveling the playing field.
The battle for this business will not be a one-year phenomenon. Market forecasts through 2020 predict that 75 percent of all mortgages through that time will be for the purchase of a home. This marks the beginning of a new mortgage lending era, foreshadowing an end to the historic boom-bust refinance cycles that dictated strategy and tactics for more than 30 years.
Unfortunately, benchmarking data is difficult to come by. Studies comparing and contrasting lender-to-lender performance are challenging because gathering data from a homogeneous set of lenders is difficult, both in terms of finding such a set and in getting those firms to give up the required information. While there are some excellent studies performed by national trade associations, they often compare very different institutions, rendering their results less useful.
Our study addresses this by focusing on a homogeneous set of lending institutions that all submit data to a regulator that makes that information public. In addition, we went back to the lenders in our study and asked for additional information to complete our data set. Since there were only a few data points required to complete our analysis, we enjoyed a high degree of participation from the lenders.
We know that there are three factors that influence the performance of a lending institution: their people, their process and their technology. The way the lender combines these three critical elements will determine their performance lift. Getting them right results in high performance lending. The benchmarks are guideposts that help the leader move along the path to this goal.
Our study isolates the technology variable to further expose the correlation between performance and the other two factors, over which the institution has complete control. Our study, therefore, used a large pool of data from a set of lenders all operating under the same business model and using the exact same technology. We believe there is no better apples-to-apples performance comparison available anywhere in the industry.
Given the commonalities of lenders in our study, one would expect every lender in the study to achieve a similar level of performance. While we might expect some slight variation between institutions, perhaps based on customer size or geographic location, we might expect overall performance to fall fairly close to a common baseline. Instead, we found that differences in the way these institutions organized their staff and their process workflows led to a wide variance in performance levels between institutions.
In fact, after performing the study for 6 years, we found that some lenders are surpassing their peers in high performance lending, even when competitors are operating under the same business model and using the same technology. We needed to find out why.
What benchmark data should my institution measure?
After analyzing the data, we found a number of metrics that were indicative of the performance of an institution, but five stood out as the best predictors of the institution’s ability to continue down the path of high performance lending. We now believe that these five key performance indicators are of critical importance to management and so for the last six years we have been collecting benchmarking data to help lenders understand how well they are performing relative to their peers.
In this section, we define each of these critical KPIs.
Stated simply, this is a measure of the time to close, from the moment the application is received until the loan is signed at the closing table. To be clear, this is not the only time that speed matters. Our Borrower Survey, for instance, revealed that the amount of time it takes for a loan officer to return a call to a prospective borrower who has not yet completed a loan application was a critical measure of the borrower’s willingness to follow through on the loan app. However, for this study, the amount of time the loan was “in process” was found to be a critical performance indicator.
As mentioned earlier, borrower share, or the ratio of applications taken to total customer base in the same calendar year, is an indication of how well the lender is doing serving the prospective borrowers who are already customers of the institution. This is a largely untapped resource for most lenders and holds the key to uncommon success in a highly competitive environment, such as these firms are lending in today.
This is the ratio of closed loans to applications taken and is a key driver of the institution’s profit. Lenders will tell you more than half of the total cost to close has been spent by the firm by the time the application is taken. That represents the money lenders must spend on advertising, marketing, public relations and sales staff to prospect, sell and close a full application for a new loan. If that loan is not closed, those funds are lost and the cost to close ratio increases for all other loans in the pipeline. On the other hand, the more loans the lender can pull through to close, the lower the cost to close and the higher the profitability.
Calculated simply, productivity is the measure of closed loans per mortgage production employee per month and it is the primary profit driver for every lending operation we studied. In fact, we now believe that productivity is the single most important metric in any mortgage lending operation and it is the primary driver of profit. Get this one right and cost to close falls in line and declines.
This was borne out in our discussions with lending executives, where we found productivity to be the KPI most indicative of profitability. If we know a lender’s productivity we have a very good idea of how profitable the institution is. According to our most recent study, the average productivity for lenders in our study in 2017 was 3.34 loans per employee.
Cost to Close
Cost to Close is the total cost of manufacturing a single mortgage loan. While the Mortgage Bankers Association put the total cost to originate for mortgage banks at nearly $8,000 per loan in 2017, our study revealed that our lenders, on average, experience a cost-to-close of $5,291 per loan in 2017. Better, but there is still a ways to go.
Arguably, these five metrics are macro-level measures that are really designed to offer two advantages to management. First, four of the five are quick and easy to calculate, offering a swift measure of the health of the institution. Some will argue, perhaps persuasively, that cost to close is more difficult to calculate. While true, if a good measure for the productivity KPI is available, cost to close becomes much easier to estimate accurately. We have the tools to do so. Once productivity is known, cost to close is easily and accurately estimated.
Second, the results institutions find by measuring these metrics will always lead to important questions, or at least they should. These KPIs are macro-diagnostic in nature, revealing areas where management must continue down the micro-diagnostic path to configure their companies for high performance lending.
What our 6th annual benchmarking study data told us was that a set of high performing lenders were consistently outperforming their competitors on every metric we tracked, despite competing for the same basic client base, offering the same basic loan products and using exactly the same technology.
In every business there are key performance indicators (KPIs) that matter. These are the ones that guide decisions and help measure success. Without them a business is like a boat without a rudder, just drifting and bobbing – at the mercy of the tide.
We know that profitable mortgage lending happens when you track 5 key metrics consistently.
In today's 10-minute episode of LendTech Briefing, EVP of Operations for Mortgage Cadence, Dan Green, lends his decades long experience in mortgage lending and shares the only metrics that matter for profitability in lending.
By: Dan Green, "Mortgage Rates: Time to Panic?," for Tomorrow's Mortgage Executive
Let’s admit it. Mortgage rates in the three and low four percent range were very cool to experience, and not just for mortgage nerds and econ geeks. Yes, this period of uber-low rates pulled the US housing market out of a deep, dark recession. At the same time, these rates changed the nature of housing: Owners with low interest rate mortgages are loath to give them up since they can’t be replaced, so they will likely stay in their homes much longer than they used to. Low rates were good. Now they are gone, and everyone is worried. Is it time to panic?
By: Dan Green, "Seeds of Digital Change in the Real Estate Market," for Progress in Lending
Remember the days when stacks of paper, numerous phone calls, and “snail mail” made up the heart of the mortgage process? Yes, we are referring to those days in the not-so-distant past before the technology revolution made the all-digital mortgage a possibility. As we’ve seen, this technology revolution took the mortgage industry by storm, drastically improving day-to-day operations and increasing efficiency. A similar technological future awaits the home seeking process. As this future reveals itself, it is in our best interest as lenders to remain up to date with these changes to foster collaboration with real estate agents. Advanced planning and networking now will lead to a natural pipeline of referrals, allowing our future origination business to grow in unprecedented ways.
The initial stages of searching for a home have become almost exclusively digital, activating yet another technological revolution. Logically, the initial home buying effort begins with a simple online search to gauge market availability and pricing while also honing in on certain types of homes or neighborhoods. According to a recent report, about 90% of prospective home buyers use some type of online search in their home buying process. As millennials continue to make up more and more of the first time home buying population, the use of internet throughout the process will only increase.
As a result of this increase, home buying technology must continue to improve as well. Outside of current online listings and search functionality, there is limited digital capability to make an offer on – and ultimately purchase – a home online. Fortunately, seeds of change are already being planted through a few digital real estate companies that offer the capability to search, list, sell, and buy properties completely online. Similar to the all-digital mortgage where lenders and borrowers are notified of status updates through loan origination software, so too will home buyers and sellers make and receive offers and updates simultaneously. At first glance, it may seem like these digital changes eliminate the need for real estate agents altogether. Quite the contrary. Traditionally, the agent has handled the networking, contracts, and negotiation that are involved in the home buying process. Although many of these components will likely be handled digitally in the future, it is in the best interest of lenders, and borrowers, to continue partnering with real estate agents for a couple of reasons.
Networking Requires People. First, very few, if any, prospective home buyers want to buy a house sight unseen, so the agent becomes an important local resource in setting up showings. In addition to traditional showings, agents may also have the networking connections to point interested buyers in the direction of properties that would otherwise not be considered. Next, community appeal is a vital factor. Conversations with real estate agents can shed light on the unique local flair of an area, and help match the desires of the borrower with a fitting community. Realtors® may also use their local connections to recommend good inspectors, contractors, and other key individuals involved in the purchase of a home.
Digital Savviness Isn’t for Everyone. Additionally, depending on how comfortable the buyer/seller are with the online tools, the agent may be called upon to use their knowledge and expertise to perform the online negotiations and contractual components on their client’s behalf. Ultimately, this makes the process easier for both buyers and sellers, as well as ensures compliance from a legal standpoint. Thus, just as the role of the loan officer progressed with the all-digital mortgage, so too will the role of the real estate agent transform according to shifting digital demands. The future belongs to agents who are willing to adapt to these demands and take on more of a specialized, hybrid role within the industry.
What does all of this mean for lenders? Having a strong network of real estate agents will always be a sure way to increase origination business. Despite changes in the home buying process, agents will still spend more time with the home buyer than any other party. If you have the trust of the real estate agent, you’re more likely to win the trust (and business) of the home buyer.
As the real estate market begins to perfect and streamline this new process of buying a home, the logical next step is to integrate the mortgage process with the digital purchase of the home. Think of the visibility and brand awareness that would come along with having your institution’s loan products displayed alongside a listing of the buyers’ dream home. Whether this be in the form of a partnership or direct integration with the real estate websites, there’s no doubt it would be advantageous to all parties involved. No matter what changes are thrown our way within the housing industry, there’s no doubt proper preparation and innovation are key to remaining ahead of the digital curve.
By: Dan Green, "Ten Thousand Hours - The Mortgage Process," for Tomorrow's Mortgage Executive
We’re already about a quarter of the way through 2016. TRID is already in rearview. While hardly a distant memory – it may never be a distant memory for mortgage professionals – the biggest regulatory change in mortgage history is becoming de rigueur. And it is almost Spring; that magical time of year when hearts and minds of all ages turn their attention to home buying. Or at least those of us in the mortgage business hope they do.
By: Dan Green for CUInsight
My wife and I recently closed on our eighth (and hopefully last) home purchase. This purchase, combined with the places we’ve rented, brings our total address count to about fourteen in just thirty years. That’s more than enough for a lifetime!
While this may be our last home, it is probably not our final mortgage. Who knows, maybe rates will go silly low again, or maybe there is a reverse mortgage in our future. What I do know is getting a mortgage on our new home was far easier than securing financing on our first home. Far faster, too.
The media constantly talks about how arduous the process is, how much documentation is required, and how much time it will take. The first two are certainly true. Mortgages still require a lot of paperwork. No surprise there, good mortgages always have. The difference today? Most of the paperwork is virtual; neither borrower nor lender have to physically schlep piles of paper to properly document the debt. Sure, all the old documentation is still required, plus some new, but it is mostly all available electronically. Click a button here, virtually sign there, and voila. All required documents land in the lender’s lap electronically. Almost magic, and super quick.
Technology has absolutely made loan origination far easier and more accurate. I cannot say I miss filling out a paper 1003. Both time consuming and tedious, all those little boxes make IRS forms seem almost spacious and simple. We originated this latest loan online while we made dinner. The next morning, our loan officer emailed to let us know what documentation they would need. Our disclosures arrived via email that morning as well, ready for our electronic signatures. I tended to sign on my laptop. My wife preferred her iPad. We even signed a set of documents while out for dinner via our smartphones.
The change between the first time we took out a home loan and this most recent experience is dramatic. We used lots of REAL ink and postage stamps back then. Enough to make almost anyone gasp by today’s standards. The process has greatly simplified over time, though there is still room for improvement.
The closing took place on the exact date we chose. Unfortunately, it was not electronic. Real paper, real pens, and in a real closing office. Absolutely no different than 25 years ago. The fact is that lenders, settlement agents, notaries and borrowers all have access to eSign/eClose tools. Many are simply not leveraging the widely available technology just yet, though there are a few hearty lenders that regularly close electronically. However, they are few and far between.
It’s time to make the last act of the mortgage process as easy as the first. Closing our mortgage the way we opened it – over dinner using our smartphones – would have been the ideal way to potentially end our homebuying career. Looking to differentiate your mortgage offering? Give borrowers the option to eSign and eClose. It’s the next step in making the mortgage process even easier.
By: Dan Green for CBInsight
There was good news a few weeks ago for mortgage lenders. In late August 2015, the Mortgage Bankers Association reported that the all-in cost-to-close for mortgage loans decreased from $7,195 to $6,984, a total savings of $211. Two hundred bucks might not seem like a big deal, but it is, for several reasons.
According to the Mortgage Bankers Association, mortgage production costs have been consistently on the rise since 2009. The MBA publishes its Mortgage Performance Report annually, with quarterly installments throughout the year. This is a must-read for every mortgage lender with an eye on manufacturing costs, productivity and industry trends.
The decline to $6,984 in the second quarter of this year is – hopefully – the beginning of a long-awaited trend toward more reasonable mortgage manufacturing expenses. Up to now, costs have been rising as lenders face an increasingly complex regulatory and investor environment.
Purchase-money lending plays a role in costs, as well. Compared to refinancing loans, loans for the purchase of a home take longer, involve more people, require more documentation and, overall, have more moving parts. The switch to purchase lending is a positive and expected dynamic, but it is yet another component for lenders to address while keeping expenses in check.
Whether this quarter’s cost-to-close decrease is truly indicative of a new pattern within the industry won’t be confirmed until fourth quarter numbers become available in early 2016. Know Before You Owe, the new mortgage disclosure rule, becomes effective October 3. The common wisdom among mortgage lenders is that this will likely affect lending costs, at least in the short term.
When it comes to fielding a competitive mortgage program, nothing is more important than cost-to-close. This quarter’s $200 per loan savings can be seen either as extra revenue or as a slight improvement in the mortgage rate borrowers pay, or perhaps as both. Offering the lowest rate isn’t everything in mortgage lending, despite the use of interest rates as a standard basis of comparison for the average borrower.
Controlling cost-to-close — or at least understanding it — is easy. This week’s MBA announcement provides insight. Productivity, the ratio of closed loans to mortgage employees, increased in the second quarter from 2.4 loans per employee per month to 2.8. The seemingly insignificant move of just .4 is actually incredibly important. Productivity and cost-to-close have a tight inverse relationship. Increase productivity and cost-to-close will predictably – and reliably – decrease.
This is true because of the make-up of cost-to-close. About 50% of the cost to manufacture a loan is labor. Labor — as represented by the number of employees — is the denominator in the productivity equation, hence the intimate relationship between these two metrics.
Two variables affect productivity. Labor is one; the number of closed loans is the other. By making more mortgage loans, banks have an opportunity to extend and accelerate the decreasing cost trend that the MBA reported. This may seem like an overly simplistic analysis of a complex problem, but it isn’t. Organizations that make more loans, increase productivity with existing staff, decrease the cost-to-close, and offer a more competitive and profitable mortgage program will produce even more loans. This is a great example of a feedback loop, and the best thing about it is how well it works.
We study, talk about, publish and offer insight on mortgage lending performance, an obsession of ours for more than a decade. Interested in knowing more? Read our latest thoughts on cost-to-close and productivity in our High Performance Lending Report.
By: Dan Green for CBInsight
Community bank mortgage lending takes on many shapes. Every community bank has a unique set of processes, products and supporting technology, so what are the unifying factors that all mortgage lenders should watch to determine their performance?
Last month we talked about mortgage customer share and mortgage employees per 1,000 closed loans. Among a dedicated group of bank mortgage lenders we surveyed, the former is down — an indicator of opportunity — and the latter is up. Because mortgage lending is changing in ways we still do not fully understand, it is too soon to know what the increasing number of employees per 1,000 closed loans means. While the original mortgage performance indicators remain valid, their new levels are currently unknowable.
So what do we know? The two most important mortgage performance indicators, productivity and cost-to-close, worsened from 2013 to 2014. The tide has shifted from refinance to purchase, and we all know purchase loans take more effort. TILA-RESPA’s regulatory tidal change plays a part, too, as we mentioned in last month’s article. As a result, productivity decreased while the cost-to-close increased. These two indicators have a very strong inverse relationship; when one goes up, the other goes down.
In fact, the relationship is so strong that when productivity is known, cost-to-close is highly predictable. All that is needed is a large body of data covering several years, as well as some careful, thoughtful analysis. And productivity is easily knowable; it should be almost automatically quotable by every mortgage operations manager. The ratio of closed loans per mortgage employee per month is a powerful metric.
Cost-to-close is also a powerful metric, some would say the single most important piece of information every mortgage lender should have. This is so, the wisdom goes, because it is the only variable in the formula used to calculate the rate presented to the borrower that is in the lender’s control. Every other factor — such as servicing value, hedging cost, and servicing revenue — is established externally. Knowing cost-to-close opens the possibility of controlling both profitability and competitive positioning. Productivity is so important because it represents labor, the largest component of cost-to-close, which takes us right back to employees per thousand loans closed, the focus of last month’s article.
Labor makes up 45% to 65% of the cost of closing a mortgage. Highly productive lenders typically operate on the low end of that scale; lower productivity lenders can count on their labor component being much higher. We are asked all the time about ways to reduce the cost of mortgage manufacturing. The answer that delivers the biggest bang for your buck is to increase productivity. Direct and indirect costs, the other two main cost-to-close components, are much harder levers to pull. At some level, corporate overhead is what it is. Many direct costs are often hard to adjust, at least in the short term. Focus on closing as many loans as possible per mortgage employee and your costs will decrease.
If this sounds like we’re saying ‘cut your head count’, we are not. There are two variables in the productivity equation — mortgage employees and closed loans –which lead us to customer share, the other subject of last month’s article.
We simply do not know, given the evolutionary phase of the mortgage market, exactly what mortgage staffing levels optimally could or should be. Rather, what we are suggesting is focusing on customer share. We know it dropped 25% between 2013 and 2014. We also know community bank membership grew at a pace more rapid in 2014 than at any time since 1995. This spells opportunity. The way to increase productivity is to increase mortgage production.
Right now we have a purchase market overall with many geographies reporting strong, if not over-strong demand. Boomers are right-sizing as well as positioning themselves to age in place. Millennials are forming households with an eye towards first-time homeownership. Both segments need financing assistance, though Millennials represent the single biggest opportunity, in terms of size, that our industry has ever seen. Help a first-time buyer and create a borrower (and a customer) for life.
Productivity did indeed decline while cost-to-close increased. The former dropped 32% to 3.32 closed loans per employee per month while the latter increased almost 60% to $4,398. Substantial changes such as these are common when significant market shifts occur. This may not be ideal, but it is the reality of the situation.
Our take on this is that community bank are built for growth and are now in the perfect position to leverage their decade-long work of building mortgage infrastructure, expertise and the single best reputation for residential mortgage lending service in the industry. The way to increase productivity and decrease cost-to-close is to increase mortgage production and market share.
That leaves us with the unanswered question: what are the optimal levels for employees per thousand loans closed, customer share, productivity and cost-to-close? We will have a much better idea one year from now and, we think, a solid answer this time in 2017. In the meantime, concentrate on the remarkable opportunity this market represents!
By: Dan Green for Today's Lending Insights
A lender and I were talking the other day about fully paperless, completely electronic mortgage lending — what we now refer to as the digital mortgage. Digital mortgages live 100% in the virtual world. This is a big departure for our industry and from tradition: A mortgage is, or can be, a large collection of papers, often weighing three to five pounds, surrounded by a rather stiff cardboard carapace. Loans travel slowly and often chaotically through the mortgage manufacturing process with the help of any number of mortgage staffers. The goal is to go from application to closing as quickly as possible. Once closed, the loan is destined to spend eternity with other mortgage files in large, dark storage rooms where no one will ever pay attention to most of them again.
While many lenders are stuck sorting through paper, we’ve worked with one of the very first in the industry to make the move to digital lending. This lender’s willingness to trail blaze the digital mortgage process occurred for a host of practical reasons: efficiency, velocity, borrower communication, space.
None of this was easy. The transformation took about two years and was not without its difficulties. Not surprisingly, the hardest part of going digital is also the number one reason people don’t switch to e-readers: they do not want to abandon the paper experience.
If you’ve made the leap to an e-reader, this makes perfect sense. Books, like mortgage loans, are physical things. We interact with them in a particular way. How often, for example, do you flip back a few pages or a few chapters when reading a book to re-read a passage or an entire section? You know where in the book to look based on an approximate physical location in the book. Along the way you might stop and look at a few other things, too. This, at least in part, defines the paper experience.
So it is with mortgage loans. Files are constructed in certain ways. While a team member may have specific interest in the appraisal, he or she might take a look at the purchase agreement or the title report along the way, all to provide deeper context for the appraisal and the review. This is easy, because all of these items are in roughly the same place in every mortgage file.
The experience is different with a digital file, but only at first. Instead of flipping through pages, you click a few times, and you’re there. While this represents a change in the way people interact with the file, ultimately the experience proves to be more efficient.
Given the real and perceived complexities of transitioning your people from a paper-heavy process to a digital format, the question becomes, why go digital? As it turns out, borrowers like it. Loans can close more quickly than ever before, and borrowers appreciate getting their copy of the closing package electronically. Loan delivery takes place more quickly, too.
Then there’s the storage issue. No more paper means no more warehouses full of lonely, dusty mortgage files.
By the way, digital lending is nothing new for my lender friend. Her organization closed its first fully paperless, all-electronic mortgage in late 2008. Any lender with the right technology has the tools to make the switch to digital. The hardest part is giving up our love of paper. Once organizations go digital, however, they enjoy the benefits of a paperless environment. No one ever says, “Let’s go back to the way it used to be.”
By: Dan Green, "Coming of Age: The Digital Mortgage," for Today's Lending Insights
The digital mortgage is nothing new. Lenders began talking about the fully paperless, all-electronic loan at the dawn of online lending more than a decade ago. A few have made the leap; their borrowers self-originate, their teams ‘screen-process’ rather than folder process, and closing documents are delivered electronically in advance of closing. Closing takes place with the stroke of a digital pen or with a finger signature on a tablet computer, just like paying a barista for that morning latte. The resulting closed loan then takes a cyber-trip to its investor. All very neat, very clean and with nary a ream of paper disturbed.
The digital mortgage is now more hard fact than science fiction. We believe the digital mortgage will come of age in 2015 not merely because it is possible, but rather because three converging factors now make it necessary.
Factor 1: Today’s Borrower
Meet the Millennials: your newest borrower demographic and the largest group since the boomers. When economists talk about household formation, they are largely talking about this group of potential borrowers. Born in the early 80s to the early 2000s, its older members are beginning to look at homeownership in increasing numbers for some of the same reasons their parents did. With the added incentive of rapidly rising rental rates, Millennials are discovering it is cheaper to own rather than rent a home.
One of our Millennial teammates just bought her first home. She had a secondary goal in mind with this purchase: To learn as much about the financing process first-hand as possible. After all, she’s surrounded by mortgage nerds who talk about the most arcane aspects of real estate finance ad nauseam. In the interest of making an informed decision, our teammate submitted three separate applications to three different lenders, which resulted in three completely different experiences.
The lender that ultimately closed her loan offered the digital experience. Our borrower self-originated using the lender’s online portal. The application took about 20 minutes, after which she had a credit approval, a full disclosure package and a place to return for real-time updates on the loan’s progress.
Note the entire digital application took just 20 minutes. This was no ‘online 1003’. The online portal used in this example collected all the right information, though it did so in a much more borrower-friendly way. Lenders are used to the paper 1003. It’s an old friend and has been a useful tool for decades. From the perspective of the applicant, however, it’s intimidating.
One of the other lenders our teammate chose had their prospective borrowers download the traditional mortgage application, fill it out, and fax it back to them. Our Millennial, in the interest of research, did just that. Most of her cohorts probably won’t.
The lender that closed her loan was in contact within an hour of application. They talked about options, the entire mortgage process, and immediate next steps. This personal touch is an important aspect of the digital mortgage experience. Digital lending does not mean impersonal lending. Buying a home remains the largest financial transaction most consumers ever undertake. Digital or not, it is still a scary process. Technology makes personalization and service easy. Millennials are attached to the internet. Their lenders must be as well.
Today’s borrowers are ready for the digital mortgage. Millennials are a very important demographic that will drive the industry in this direction, but other borrowers, including boomers, are comfortable with digital processes. Let’s not forget that boomers created much of the technology that makes this all possible. They, too, are ready to abandon pen and ink.
Factor 2: Know Before You Owe – RESPA-TILA
The latest chapter of Know Before You Owe (KBYO) takes the form of the RESPA-TILA changes scheduled for August 1, 2015. Two new documents replace three well-known, well-worn disclosures familiar to every lender and every borrower who has been mortgage-active in the last four or so decades. Complying with the RESPA-TILA changes seems like an easy exercise: simply replace documents and keep lending. Yet there is much more to KBYO preparedness.
RESPA-TILA introduces a monumental process change: the Closing Disclosure must be delivered three days before the actual closing. This is big, especially in an industry that may just be the original just-in-time manufacturer. Mortgage lenders still deliver closing packages right before the closing itself, giving settlement agents, attorneys, closing agents and borrowers little time for review. A major impetus for this change is to give borrowers the opportunity to better understand what they are getting themselves into. ‘Hurry up and close’ is being replaced by ‘reflect before you close’. The hoped-for result is a more informed, more empowered homeowner.
Technology makes this aspect of the digital mortgage possible, too, especially when the process begins with an electronic, rather than a physical application. Being ready three days before the big event is made easier when the process is highly automated, which in turn is made even easier when the raw materials are delivered in electronic rather than physical form.
Factor 3 – Efficiency
The rising cost of lending has been nagging lenders for a number of years. The picture painted by the Mortgage Bankers Association’s quarterly cost study is discouraging. Origination was a losing proposition until recently. While per loan profitability has returned, the cost of origination remains very high, over $6,000 per loan. Productivity, the most telling indicator of the cost of making a mortgage loan, remains low.
Should the mortgage industry resign itself to high cost/low productivity lending? We don’t think so. Although it is unlikely lenders can, or will, return to the low-cost extremes of the early 2000s, it is not acceptable to capitulate. The industry’s historically cyclical volumes have made it difficult to achieve and maintain efficiencies. The steadier state volumes of the next several years ought to make it easier to build higher productivity loan manufacturing processes. Technology and the digital mortgage play a significant role in reducing costs since they enable easier, more predictable manufacturing, improved compliance and vastly better customer service opportunities. Scaling for growth becomes easier, too. The cost of lending can be made to trend lower, but only if we focus on it.
The digital mortgage yields other benefits, too. The typical paper mortgage might use as much as an entire ream of paper once all is said and done. Five pounds of paper per mortgage times more than the five million mortgage loans made annually equals 12,500 tons of mortgages per year!
Everyone thinks about losing weight in the New Year. Substituting electrons – which weigh very little – for paper can help mortgage lenders keep in fighting trim in 2015 and beyond.
By: Dan Green for Tomorrow's Mortgage Executive
The Consumer Financial Protection Bureau (CFPB) released “Leveraging Technology to Empower Consumers at Closing” on August 5, 2015. This is an eagerly anticipated report covering the eClosing Pilot project the CFPB conducted with a group of lenders and mortgage technologists during the first four months of this year. (Full disclosure: we participated in the pilot with BECU, our long-time partner and one of the most experienced users of our lending technologies.)
A little background: The CFPB issued a Request for Quotation last April from teams of lenders and technology partners to help them test several hypotheses concerning the paper-based mortgage closing process as it exists today versus the newer, still under-utilized eClosing processes successfully used by some lenders. The CFPB’s hypotheses — that consumers would favor eClosing over paper closing because it would give them a better understanding of the process and a feeling of empowerment, leading to greater satisfaction — all turned out to be true.
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:
- 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.
- 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.
- 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.
By: Dan Green for CBInsight
Last month we introduced part one of vintage strategies with the idea of providing mortgage lenders five ideas for a successful new year. Part one provided the first two strategies. Part two presents the remaining three.
In January’s article, we discussed the importance of recognizing market differences. There are many, and they are varied. From rising rates to complex regulatory oversight to increased purchase activity, one thing is clear: times have changed. When first-timers decide to purchase a home, they will think first about the lender who took the time to educate them about homeownership. This means that lenders need to implement strategies to foster those relationships now for continued success in the years ahead. This brought us to our second strategy: adapt to borrower behavior. If borrower allegiance was in question prior to 2007, no doubt today’s fickle borrower is likely to be even less. Thriving lenders will have to adapt, aggressively converting applications to closed loans at much higher rates through better borrower nurturing and increased transparency throughout the mortgage origination cycle.
This brings us up to date and to our third strategy. With regulatory complexity and borrower impatience, adopting a manufacturing mindset will lead to success. Think about a auto assembly line. While automated components speed up the more mundane processes and ensure compliance, employees are adding the final finishing touches. This is how a mortgage should be: efficient and compliant, while also allowing employees to add finishing touches.. Begin watching one metric: closed loans per employee. The higher it rises, the lower your costs will fall. Build efficiencies now that focus on objective and repeatable processes to help ensure compliance along the way. Find technology that supports these processes. Your success depends on it.
With the onslaught of regulations threatening to overwhelm your business and mortgage volumes projected to drop by one-third in 2014, it can seem as if compliance is a burden. However, this is your chance to see compliance as an opportunity. Non-Qualified Mortgages (QM) originated today range from a low of 25 percent to as much as 60 percent of the market. Even if your numbers are on the low end, non-QM lending could help offset market contraction. With these new regulations designed for increased transparency in the lending process, embrace them as an opportunity to proactively educate your borrowers. Strategically, it is worth looking at the Qualified Mortgage Rules a bit more closely. Unlike the Ability to Repay Rule, QM is optional; lenders are free to lend outside of them. There may be implications to doing so, but the reason to consider this move is opportunity.
No discussion on efficiency, compliance and manufacturing mortgages would be complete without mentioning the clear necessity and importance of embracing technology. Having the right tools for the job is crucial, and not all are created equal. Comprehensive mortgage lending platforms that guide the loan process from application through funding are no longer optional. The solution you choose must offer transparency and ensure data integrity throughout the mortgage cycle. Finding that all-in-one origination system is no longer a “nice to have” but a reality. Find yours, and see almost immediate efficiency gains. In addition, the new frontier for lending technologies will begin including systems that generate and manage leads. These soon-to-be indispensable tools will become standard for thriving mortgage lenders.
As previously mentioned these strategies are interrelated and provide keys to unlocking your success. Lenders that implement even just a few of these strategies will be better positioned to thrive in 2014 and beyond.