It may seem incredible that the average mortgage originator is spending about $3 million more each year than top performing lenders to originate the same loan products.
I know this to be true because for the last six years I’ve been running our Mortgage Cadence performance benchmarking study. I’ve stopped apologizing for my love of data. Instead, I’ve embraced it by digging into what the best lenders are doing right. As a class, they are reducing their cost to close. They accomplish this by optimizing the other four key performance indicators. These metrics are the easiest way to spot a high-performance lender.
The key to high-performance lending
What the best lenders are doing is reducing their cost to close by millions each year. Then, they are reinvesting that money in growing their businesses. You may have heard me speak about high-performance lending at this year’s Ascent Mortgage Cadence users conference.
They are accomplishing this by optimizing the performance equation. They are combining the right people, process and technology for optimal lending performance. Meanwhile, everyone else is struggling through a market so competitive that experts are predicting that some mortgage banking firms just won’t make it.
Our study focused on credit unions and community banks, where every dollar counts. If you work in one of these institutions, you can probably imagine what you could do with that kind of money. But becoming a high-performance lender can save even more money for the nation’s largest banks.
The MBA’s survey on origination costs saw a new high earlier this year when it reported that the cost to originate a mortgage had risen to $8,475 in March. Then, in June, it rose even higher with the survey respondents reporting a cost to close of $8,887 per loan!
Meanwhile, the trade group reported at its recent Secondary Market conference in New York that lenders’ first quarter income will dip into negative numbers for the first time since the first quarter of 2014. This is a vicious cycle lenders have been caught in for more than eight years.
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Finding your $3 million
Becoming a high-performance lender will reduce the cost to close. Our data shows the average lender will save $3 million per year. It will also provide the cash cushion required to insulate lenders from the twin terrors of extremely high cost to originate and persistent low profitability. Lenders have been trapped between them for years.
In this series, we are exploring what it takes to be a high performing lender. Stay with us and we’ll shine a bright light on what the nation’s best lenders are doing right. Then, you can start thinking about what you’ll do with your extra $3 million per year.
Operational efficiency means that your business runs the way it was meant to run. It means that the firm accomplishes what management has set out to do, and it doesn’t waste resources along the way. In the mortgage industry, this results in satisfied customers, more closed loans, higher profitability, and regulatory compliance.
The two best metrics for measuring operational efficiency are Velocity and Productivity.
In a recent article entitled, The Key to Increasing Your Lending Team’s Productivity. we looked at how knowing their productivity rate helps lenders assess the effectiveness of their people and process. How many loans is your team closing each month? The higher the ratio of closed loans to staff members, the more productive your origination business is.
Two keys to productivity that we looked at were maintaining low labor costs and cross-training employees. But productivity alone does not guarantee operational efficiency.
A team can be highly productive, but if they can't close loans quickly they won't be closing as many loans as they could. They will often lose out to lenders who have higher loan velocity.
In another recent article, 5 Ways High Performing Lenders Set Themselves Apart, we examined the necessity of innovation and teamwork. These are essential if loan velocity is to be both achieved and consistently maintained. It takes good people and the right technology to close loans quickly.
The Key to Operational Efficiency
So, what is the key to achieving and maintaining efficiency in the lending business? Productivity depends upon having good people and velocity is often a factor of the right technology. But without a solid, thoughtfully designed process in place, neither productivity nor velocity, on their own, will guarantee efficiency.
Process is the key to operational efficiency.
Find out more by participating in our annual benchmarking study. Call us today to find out more.
Mortgage Cadence to provide Minnesota-based credit union with a comprehensive platform to enable increased growth
DENVER; Oct. 9, 2018 – TopLine Federal Credit Union (TopLine) selected Mortgage Cadence, an Accenture (NYSE: ACN) company, to modernize its mortgage operations using Mortgage Cadence’s full product suite.
TopLine has replaced all legacy systems with Mortgage Cadence’s Loan Fulfillment Center, Borrower Center, Document Center, Imaging Center, and Collaboration Center, paving the way for increased lending profitability and a better borrower experience.
Collaboration Center — Mortgage Cadence’s newest offering — is a secure, private network that connects the people, data and systems involved in the loan origination process. It includes automatic document comparison and secure real-time messaging that provides easy access to title agents and other third parties. By eliminating tedious, labor-intensive tasks to simplify the mortgage process, Collaboration Center helps to increase efficiency through a streamlined workflow.
“We selected Mortgage Cadence as our comprehensive mortgage solutions partner knowing they are committed to innovation and are dedicated to providing superior service to help us get the most out of our technology,” said Tom Smith, president and CEO of TopLine Federal Credit Union. “We are excited to launch our new highly automated digital platform to provide our members an entirely paperless and seamless experience – from application through closing.”
Paul Wetzel, executive vice president and managing director of product management at Mortgage Cadence, said, “We’re thrilled to have TopLine as an early adopter of Collaboration Center, our newest offering that helps to improve productivity and minimizes time to close, two of the critical lending KPIs that drive profitability. We look forward to an enduring, collaborative relationship that benefits the credit union and its members through the most innovative services and best possible loan experience.”
About Mortgage Cadence
Since 1999, Mortgage Cadence has been providing the best people, process, and technology for enterprise and mid-market lenders who desire to deliver an exceptional borrower experience. From point-of-sale through post-closing, Mortgage Cadence offers reliable software and dedicated people, supporting lenders every step of the way.
About TopLine Federal Credit Union
TopLine Federal Credit Union is Minnesota’s 13th largest credit union with assets of more than $450 million. Established in 1935, the not-for-profit cooperative offers a complete line of financial services, including mortgage, investment advisory and insurance agency services from its five Twin Cities metropolitan area branch locations —as well as by phone, mobile app and online. To learn more, visit http://www.TopLinecu.com.
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.
Denver, CO; Jan. 24, 2017 − Citizens Community Federal Bank (CCFBank) announced its selection of Mortgage Cadence, an Accenture Company (NYSE: ACN), to streamline its loan origination processes, as well as drive borrower engagement. CCFBank will utilize the Loan Fulfillment Center, a robust loan origination system that offers end-to-end loan processing functionality, including compliance-related functionality and many third-party service providers.
CCFBank is a federally chartered national bank that provides deposit and loan products to communities in Wisconsin, Michigan, and Minnesota. After recently achieving the largest mortgage closing volumes in CCFBank's history, it was looking to capitalize on this growth with a new loan origination platform that enabled increased digital engagement with its customers.
The Loan Fulfillment Center’s accompanying product suite also solidified the bank’s decision to use Mortgage Cadence’s software and services. The Borrower Center, Document Center, and Imaging Center product add-ons, in addition to an available integration with DocuSign, differentiated Mortgage Cadence from the competition as a truly comprehensive product suite.
Nizar Hashlamon, EVP of Sales and Client Relations at Mortgage Cadence, said: “Mortgage Cadence is proud to be selected by CCFBank. With the Borrower Center for Loan Fulfillment Center, its customers will experience a swift and straightforward loan origination process, and the efficiencies don’t end there. Because Borrower Center for Loan Fulfillment Center is fully embedded, the single system of record helps the residential mortgage process continue seamlessly. As a valued community bank recognized for their leadership in the industry, we look forward to fostering another long-term relationship with CCFBank and are excited to contribute to the accelerated growth of the organization.”
About Mortgage Cadence
Mortgage Cadence, a wholly owned subsidiary of Accenture, has been working with lenders since 1999, offering mortgage technology solutions designed for point-of-sale through post-closing. In a time when efficiency, speed and the customer experience are paramount to the success of lenders, Mortgage Cadence offers reliable software and dedicated people, supporting lenders every step of the way. Visit www.mortgagecadence.com for more information.
CCFBank®, Citizens Community Federal, N.A. is a federally chartered national bank based in Altoona, Wisconsin. With over $550 million in assets, the bank is a full‐service financial institution providing deposit and loan products to our customers from multiple branch locations in Wisconsin, Minnesota, and Michigan.
By: Matt Hydrew and Amanda Phillips, "Compliance Can Be Easy," for Tomorrow's Mortgage Executive
We’ve entered a new paradigm in mortgage lending. Unlike the historical risks to lending like rate fluctuation or other market changes, lenders today know the greatest risk to their business is compliance. Those market-based storms of yester-year were weathered by the most prepared lenders in the space. Now, the compliance-based storms of today bring new risks, which must be properly prepared for in order to stay successful. Fortunately, this seemingly uphill battle is not yours to fight alone. The fast approaching Home Mortgage Disclosure Act (HMDA) Regulation C changes to the Loan Application Report (LAR) bring with it over 30 new data points to collect and report on, and staying compliant can seem hard, but it doesn’t have to be. With proper preparation and technology, even the most complex regulations can become more approachable – almost, dare we say, easy.
DENVER, CO; Nov. 3, 2016 – Mortgage Cadence, an Accenture Company (NYSE: ACN), announces an important enhancement to its Partner Ecosystem designed to bring industry-leading mortgage technology together with top-tier third-party service providers and consulting firms.
Businesses that are part of the Partner Ecosystem provide services that complement the implementation process, assist with go-live schedules, and ensure customers take full advantage of Mortgage Cadence’s suite of offerings. PricewaterhouseCoopers (PwC) joined the Ecosystem in September, offering Mortgage Cadence clients requirements gathering and other implementation-related services. The network of businesses that constitute the Partner Ecosystem helps to elevate the Mortgage Cadence software offering and implementation capabilities to levels that seek to surpass client expectations.
The Partner Ecosystem brings together recognized leaders in their field who have undergone rigorous vetting as well as yearly training and certification for cohesive alignment with client goals. Mortgage Cadence’s relationship with PwC gives Enterprise Lending Center clients a head-start on platform implementation by proactively gathering and understanding the client’s operational processes and requirements.
Following the PwC launch, Mortgage Cadence will expand the Partner Ecosystem to provide additional services including, but not limited to:
• Custom configuration
• Custom development through our Software Development Kit (SDK)
• Post-production support/enhancements
• Creation and execution of testing plans and methodologies
• Training document execution and creation
“We are pleased to announce this expansion of our Partner Ecosystem,” said Trevor Gauthier, president of Mortgage Cadence. “Implementing our technology with the additional support and guidance of partners like PwC offers our clients a competitive leap forward to more quickly realize gains in efficiency, ultimately helping to exceed borrower expectations. This program is a giant step forward as we look to continue to provide world-class technology and support to our clients while providing them with multiple high-caliber options to help them best achieve their goals."
About Mortgage Cadence
Mortgage Cadence has been working with lenders since 1999, offering the industry’s only true one-stop-shop mortgage technology solutions designed for point-of-sale through post-closing. In a time when efficiency, speed and the customer experience are paramount to the success of lenders, Mortgage Cadence offers reliable software and dedicated people, supporting lenders every step of the way. Visit www.mortgagecadence.com for more information.
By: Jacob Petersen for Tomorrow's Mortgage Executive, talking on the importance of customer service in the mortgage industry.
How often does a piece of technology break only to realize you now have to make the dreaded phone call to the 1-800 support number on the back of the device? For most, this is met with a monotone voice reading an infuriating script. Do they think we didn’t try to restart the device? Of course we did. Yes, the router was unplugged and reset, too. In today’s world, consumers expect a higher level of customer service. Whether they need to set up a new account, need help understanding the paperwork in front of them, or need help troubleshooting an issue, support must be seen as a trusted advisor.
As organizations grow, the idea of a customer ecosystem is essential to ensure the longevity and scalability of the company. This customer ecosystem requires that the entire organization work closely to provide only the highest levels of support. What steps are you taking to ensure your customer-facing teams emerge on top of today’s demanding industry landscape?
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: Sarah Volling for CBInsight
Mortgage lending productivity decreased in 2014. With refinance subsiding and purchase loans taking over, community banks are looking at ways to expand market share in order to see loan officer productivity (number of closed loans per employee) rise. This year we have provided a variety of tools including our Millennial Marketing Guide, ideas on reaching the investor market, and, this month, the results of our Realtor® survey. The real estate community is a fantastic catalyst as well as an essential market whenever purchase-lending dominates the market. They are every community banks’ secret weapon for increasing market share.
Some background. More than 1,099,102 individuals, the ranks of which have swelled by more than 10% since 2012, are now members of the National Association of Realtors® (NARs). While not a direct market for community banks, Realtors® can — and do — strengthen origination efforts. They are a catalyst, spending more time with homebuyers than any other party, they also have more influence on the entire real estate transaction than anyone else. Nurture relationships with real estate agents, and expect to see a steady supply of new loans rolling in. Sounds simple — most things do — though most things are often harder in practice. For a better understanding of what it takes to create relationships with real estate agents, we conducted a survey early this month. While responses are still coming in, the preliminary results are enlightening. Three themes are consistent in their responses:
Theme one – network. How community banks can establish or expand their Realtor® network is certainly up for debate. One fact, however, remains unwavering. Community banks must meet agents where they spend most of their time, and Realtors® must meet their potential homebuyers where they spend most of their time. We are in an all-digital age. Mortgages are trending to all-digital, and both Millennials and Baby Boomers are heading to the web daily. With 63% of real estate agents we surveyed using Facebook to connect with homebuyers and many expanding into other online outlets such as LinkedIn and Twitter, this is where community banks must also be. Connecting with Realtors® at the source is the first way to work with them to ‘catalyze’ originations.
Theme two – communicate. Real estate agents have the same goal as community banks — close the loan, and hand the customers the keys. This directly ties into the most profound reoccurring theme we saw in our survey. Across the board, communication ranked highest on why Realtors® would recommend a community bank to a customer and encourage them to keep coming back. While not always easy when times are stressful or a loan seems stuck in the origination cycle, the more proactive community banks are with their customers as the loan moves through the process, the better. Real estate agents also acknowledged that in this highly regulated industry, many factors can impact a loan’s ability to close on time. However, they want banks to be proactive with their communication as delays or red flags arise. For community banks, having systems in place that automatically notify customers as the loan moves through the process can save time across the board. By proactively sharing both good news and bad news, customers and Realtors® alike will feel at-ease.
Theme three – create loyalty. Once a community banks establishes their network of Realtors®, it’s important to maintain those relationships to keep agents coming back time and again. It’s worth noting that more than half of the Realtors® we surveyed said they’d recommended no more than one new community bank to their homebuyers in the past six months. Realtors® are loyal. Keep them happy, and they will keep coming back to you. As long as community banks stay proactive with their communication and treat Realtors® as peers, they will most certainly see their business flourish.
While there is no perfect formula for nurturing real estate agents, our survey does provide a glimpse into what makes them tick. By establishing a network of Realtors®, providing transparency and proactively communicating, the real estate community becomes an effective origination catalyst. The housing market is sure to get hotter; the absolute best way to increase productivity, reduce your cost-to-close, and build long-term, sustainable origination business is through relationships with those that influence the real estate financing decision. Not one has more influence than real estate agents. Start building those relationships today.
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!
We’re unabashed mortgage nerds. Our teams and our clients hear us say it all the time. We’ve been passionate about residential mortgage lending since the beginning. It’s a fascinating, ever-evolving, constantly challenging area of finance where the end result – putting people in homes – is infinitely satisfying. We’re fortunate to work with a fantastic group of people who feel exactly the same way.
Somewhere in our travels we acquired a passion for espresso. At first, this particular obsession was a practicality: we were working for a start-up that, as all successful start-ups do, required constant, almost round the clock attention. Turns out, caffeine is pretty helpful when you have little idea of the time zone you are in or what time of the day or night it might be. Practicality turned to fascination; we are just that way when we’re keenly interested. We had to know more. We had to figure out how to make really good espresso at home.
It seems a simple thing, espresso. Two ingredients. Coffee beans. Water. How hard can it possibly be? Pretty hard as it turns out. Just like making mortgage loans, people, process and technology are required in abundance to efficiently and consistently produce a quality product. And similar to mortgage loans when the product is good it is very good. When it’s bad, it’s worse than bad.
Not long ago, we were out to dinner with our wives. Perfect evening, better company, really great meal. Coffee seemed like the right way to end the evening, so we ordered espresso, reasoning since the food was good and we knew where they got their coffee, that it should be as good as dinner. Logic did not prevail. The drip coffee from a can that my mom makes is quite a bit better. How could this be? Investigation was called for.
We knew the ingredients were high quality. We spied on their technology. Great equipment, equipment we wish we both had, and machines we’ve had terrific espresso from in many places around the country. What gives? Turns out, professional baristas say great espresso results from more than just beans and water. It also requires the right equipment and a trained barista. We surmised after our sleuthing that their barista probably needed more training and practice and that their equipment likely needed a tune-up.
We have been working on a performance benchmarking study with a segment of our customers since spring of this year. The results are fascinating as well as gratifying. We’re fortunate to work with some lenders who are defying the seemingly inexorable gravitational forces that are impacting industry productivity. The Mortgage Bankers Association published an article in June with the horrifying news that productivity had declined to less than two closed loans per employee per month. Our top producing lender is closing more than nine, with the overall average in the high fours.
Our lender group all use the same technology, yet their productivity results are not the same. Just like our restaurant espresso experience illustrates, their use of the technology probably needs a tune-up. The past several years of stupefying industry change likely means configurations are not what they could or should be to produce optimal results. Still, averaging almost five closed loans per month when the broader industry cannot get to two is something of which to be proud. Tune ups are easy, and once complete, call for additional staff training. Technology, when used correctly, produces great results, but users must be taught how to leverage it.
Many of those within the MBA lender group use disparate technologies. With performance at less than two loans per employee per month, the question becomes: overhaul or tuneup? Tune-ups will help in some cases for the same reasons mentioned above. Superior performance, approaching pre-recession levels of more than nine closed loans per employee per month, likely calls for a more drastic overhaul – an essential project if best-in-class performance is the desired outcome. And it has to be; higher productivity results in lower cost-to-close. Lowering the labor component of cost-to-close, the single largest variable and the only one over which lenders have almost complete control, is the only avenue to more competitive pricing.
Mortgage technology overhaul or tune-up? This is the question every lender should ask and answer after reviewing their productivity results. Many lenders are overhauling, and now is the perfect time to do so. In addition to greater productivity, new technologies are likely to put lenders in a better, more compliant position for next August’s upcoming RESPA/TILA changes.
We do make great espresso in our respective homes, by the way. It’s taken us a few years, and it has required technology upgrades. Not to mention tune-ups plus additional training, lots of practice, and a constant search for great ingredients. Yet anything worth doing is worth doing in the best possible way, be it espresso or mortgage loans.
By: Dan Green for CBInsight
Each year brings new opportunities for a fresh start. New resolutions. New goals. New tactics for success. Have you looked beyond your personal goals and thought about what new strategies you will establish this year to amplify your business objectives? With 2014’s shift to purchase lending, we are likely to see the start of an upward trending rate cycle, something not seen since the early 1950’s when the last great housing boom began. Rising rates are not the only reason to think and act differently about new market dynamics, though. Other factors, also previously unseen, will influence every borrowing and lending decision you make.
Knowing what to expect in the coming year helps you proactively prepare for the changes ahead. This article is the first in a series discussing five strategies for future success. Many of these strategies are vintage; there’s no magic success potion. These five are tried and true. Moreover, they work. It’s easy to lose sight of what works in today’s world of constant change, but taking a hint from what worked in the past will helps refine strategies and drive future success.
The first strategy, recognize market differences, is more important this year than it has been in recent memory. Much has changed since 2007’s collapse. Real estate prices are rising, underwater homes are declining, and home sales are increasing according to the Joint Center for Housing Studies of Harvard University’s 2013 State of the Nation’s Housing Report. In the midst of their study, one statistic sums up the Center’s findings: the majority of consumers aged 45 and younger plan to own a home at some time in the future. The desire to become a homeowner remains strong despite the regulatory and economic climate. Motivation for your 2014 goals? You bet.
In addition, regulatory oversight and the volume and complexity of new regulations have never been greater. Lenders started complying with the Ability to Repay (ATR) Rules as of January 10, 2014 while concurrently determining how to work within the Qualified Mortgage (QM) Rules. As lenders were putting the finishing touches on ATR and QM, out came the Know Before You Owe (KBYO) Regulation on November 21, 2013. While KBYO’s effective date is not until August 1, 2015; its timing and the challenges it presents make the point: the shift to purchase lending has never occurred in as dynamic a regulatory environment.
Finally, purchase activity, as it grows, will be different than it was in the boom years of the early 20-oughts. Credit standards remain tight, which will keep many would-be homebuyers from qualifying for mortgages. Even still, first-time buyers who have been on the sidelines because of the recession will begin emerging. Here, too, the Study is helpful; pent-up demand as well as demographic shifts are expected to lead to annual household growth of 1.2 million per year for the remainder of the decade. While not all will purchase homes immediately, this is a market segment every lender must consider courting. When these first-timers decide to purchase a home, they will think first about the lender who took the time to educate them about homeownership. Foster those relationships now for continued success in the years ahead.
Every one of these market differences provides a natural introduction to the second strategy:adapt to borrower behavior. Borrowers are savvier than they were in the 20-oughts. Today’s would-be financers have a better idea of how to compare loans and lenders. Their expectations of the mortgage process are greater, too. All consumers, regardless of the good or service they are pursuing, want all possible information immediately, available wherever they happen to be on whatever device they have in their pocket, briefcase, backpack or purse. A home loan is no different. If borrower allegiance were in question prior to 2007, no doubt today’s fickle, emboldened borrower is likely to be even less loyal.
Keep in mind that borrowers are fickle. Their habit of changing lenders mid-stream is timeless. The reasons are simple. Mortgage lending is intensely competitive. Lenders go all out for every loan because more production is better. That’s what separates the winners from all others. Borrowers, for their part, are better prepared today, though still may not know how to compare one loan from the next. Switching in the middle of the mortgage process, therefore, is often due to perceived rather than real advantage.
Thriving lenders will adapt to borrower behavior, aggressively converting applications to closed loans at much higher than historical rates. How? Transparency throughout the entire mortgage process that provides regular pro-active borrower contact from origination through closing. If your mortgage offering is not online, it’s time to get there. A recent survey by Accenture reveals sales of mortgages via the internet increased 75% while sales at branches fell 16%. It’s clear: borrowers choose to meet their mortgages and their lenders in the digital rather than in the physical world.
While purchase activity will reign supreme, don’t overlook the number of households aged 65 and older, which has risen to the highest level on record, increasing by 9.8 million. Many will likely age in place. Savvy lenders will not discount this group, but will instead create attractive HELOC and second mortgage products, as well as reverse mortgage programs that allow seniors the financial flexibility to remain in their homes.
In light of these market forces, lenders must forge ahead with these strategies by thinking, acting and reacting differently. With any new opportunity comes with it a set of challenges. Over the coming months, we will guide you through a series of strategies. We kicked the series off with recognize market differences and adapt to borrower behavior. Stand by for the remaining three resolutions: adopt a manufacturing mindset, see compliance as an opportunity, and embrace technology. While interrelated, each of these strategies comes with its own set of challenges as well as keys to unlock your success.