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
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:
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.