Res­o­lu­tion Time

Costs are up. Vol­umes aren’t. Five strate­gies lenders are us­ing to trim and tone their oper­a­tions

National Mortgage News - - Contents - by bon­nie sin­nock

The sea­son­ally weak first quar­ter is here, adding to the ex­tra­or­di­nary num­ber of cost chal­lenges fac­ing mort­gage lenders fol­low­ing a year of lower vol­umes and higher rates. Lenders pro­duced $1.7 tril­lion in home loans in 2017, fol­low­ing a year when vol­ume was over $2 tril­lion, ac­cord­ing to the Mort­gage Bankers As­so­ci­a­tion. Pur­chase loans ac­counted for more than 60% of vol­ume through­out 2017, fol­low­ing sev­eral years when re­fi­nanc­ing dom­i­nated. And that pickup in pur­chase mort­gages, which cost more to orig­i­nate, poses unique chal­lenges for lenders try­ing to re­duce over­head.

For the first time since 2014, the av­er­age in­ter­est on a 30-year fixe­drate mort­gage hov­ered above 4% more of­ten than it was be­low that mark, ac­cord­ing to Fred­die Mac.

Mean­while, hous­ing in­ven­tory con­straints are mak­ing it dif­fi­cult for home buy­ers to close deals on af­ford­able prop­er­ties. Yet lenders con­tinue to see their head­counts rise, par­tic­u­larly among the ranks of non­de­pos­i­tory mort­gage bankers.

Just a few years ago, it cost lenders about $5,000 to pro­duce a sin­gle mort­gage. Now, per­son­nel costs alone ac­count for nearly $5,300 of the more than $8,000 in lenders’ per-loan pro­duc­tion ex­penses, ac­cord­ing to Mort­gage Bankers As­so­ci­a­tion data for the third quar­ter of 2017. Oth­ers, like in­dus­try ac­count­ing firm Richey May, put per-loan com­pen­sa­tion ex­penses for the past year even higher.

Lenders are con­cerned that costs are spi­ral­ing out of con­trol, and many are pur­su­ing ag­gres­sive strate­gies to bet­ter man­age the sit­u­a­tion. But that’s easier said than done. Amid fierce com­pe­ti­tion for both vol­ume and ta­lent, mort­gage com­pa­nies can’t af­ford to not to in­vest in the strong­est loan of­fi­cers and back of­fice ca­pa­bil­i­ties avail­able. That means lenders can’t just make cuts across the board. In­stead, lenders are re­duc­ing ex­penses, as well as mak­ing in­vest­ments in tools and pro­cesses that im­prove ef­fi­ciency across ev­ery facet of their or­ga­ni­za­tion.

Un­der­ly­ing each of these strate­gies are new ap­proaches to an­a­lyz­ing a va­ri­ety of per­for­mance met­rics and us­ing that data to im­prove ef­fi­ciency, of­ten by in­tro­duc­ing new tech­nol­ogy or find­ing new uses for ex­ist­ing sys­tems.

The most im­por­tant area of fo­cus is com­pen­sa­tion, which rep­re­sents the lion’s share of ex­pen­di­tures. But lenders are also scour­ing other line items on the bud­get, in­clud­ing mar­ket­ing; fa­cil­i­ties and equip­ment; cost of funds; and yes, even com­pli­ance, to stream­line oper­a­tions and stay com­pet­i­tive.


Fierce com­pe­ti­tion for sales ta­lent makes com­pen­sa­tion tough to cut. Com­pen­sa­tion makes up al­most 80% of the $8,354 that mort­gage bankers spend on av­er­age to pro­duce a loan, split about evenly be­tween front of­fice and back of­fice per­son­nel, ac­cord­ing to Richey May.

“It just seems to take more hands to get loans funded and closed,” said Tyler House, man­ager of ad­vi­sory ser­vices at Richey May.

Un­for­tu­nately, there aren’t a lot of ways to make cuts with­out hurt­ing sales.

“Most of the cost frankly is in the early stages of the loan, which is what hap­pens up to and in­clud­ing get­ting the ap­pli­ca­tion orig­i­nated. So it’s go­ing to be very dif­fi­cult to wring a lot of costs out with­out fo­cus­ing on sales and mar­ket­ing,” said Garth Gra­ham, a se­nior part­ner at Strat­mor Group.

The in­dus­try con­sult­ing firm’s data shows the top 40% of mort­gage sales staffs are re­spon­si­ble for the ma­jor­ity of pro­duc­tion vol­ume, sug­gest­ing lenders could cut as much as 60% of their loan of­fi­cers with­out hurt­ing vol­ume. But do­ing so puts lenders at risk of be­ing un­der­staffed in times of in­creased de­mand or when a top per­former is poached by a ri­val lender.

Al­ter­na­tives in­clude strain­ing the ca­pac­ity of ex­ist­ing re­sources, but that reaches a point where it has di­min­ish­ing pro­duc­tiv­ity re­turns. It also can drive top pro­duc­ers to com­peti­tors if the work­ing con­di­tions are bet­ter. New trainees help, but re­quire time and money.

What lenders re­ally want is a strat­egy that al­lows them to down­size oper­a­tions with­out hurt­ing sales.

Move­ment Mort­gage in­ad­ver­tently found one.

The idea orig­i­nated with Ge­off Brown, a loan of­fi­cer who made an off-hand re­mark at a hol­i­day party a cou­ple years ago about how he no longer knew the mem­bers of the oper­a­tions cen­ter sup­port staff he worked with as well as he used to be­cause there were so many.

Ex­ec­u­tive Vice Pres­i­dent Toby Har­ris took note, and charged Chief Oper­a­tions Of­fi­cer John Third with re­or­ga­niz­ing the few hun­dred peo­ple in each of the com­pany’s three large oper­a­tions cen­ters into smaller teams to of­fer ded­i­cated sales sup­port in dif­fer­ent re­gions.

While the move wasn’t orig­i­nally de­signed to re­duce staff, the re­or­ga­ni­za­tion made it easier to track per­for­mance, of­fer sup­ple­men­tal train­ing to un­der­per­form­ers and make cuts if the train­ing failed.

And af­ter an­a­lyz­ing the out­come over time, the com­pany re­cently found that it did re­sult in a re­duc­tion in its head­count. The first full year the com­pany had the strat­egy in place, it was able to orig­i­nate $1 bil­lion more with a sup­port staff that was 10% smaller, pri­mar­ily due to at­tri­tion.

“It re­ally had an im­me­di­ate im­pact on im­prov­ing the re­la­tion­ships be­tween ops and sales, and a side ef­fect it had was to im­prove pro­duc­tiv­ity, there­fore re­duc­ing some of the costs per loan,” said Third.


The cost-con­trol strat­egy that gets the most buzz today in­volves pairing au­to­ma­tion aimed at im­prov­ing the on­line cus­tomer ex­pe­ri­ence with lower-paid call cen­ter orig­i­na­tions, but there’s a trick to it.

Call cen­ter staff get paid less, but also don’t usu­ally gen­er­ate leads to loans the way tra­di­tional loan of­fi­cers do, par­tic­u­larly when it comes to pur­chase mort­gages lead­ing the mar­ket.

That means lenders need to add leads or other mar­ket­ing ex­penses to the cost of op­er­at­ing a con­sumer-di­rect call cen­ter be­fore cal­cu­lat­ing any sav­ings from it.

Lead costs are no­to­ri­ously vari­able and tough to con­trol, rang­ing from $800 to $1,200 per loan, ac­cord­ing to Richey May. The cost sav­ings of a con­sumer-di­rect chan­nel over a dis­trib­uted re­tail chan­nel can be “al­most negated fully by the mar­ket­ing costs that the call cen­ter has to go through,” said House.

“That lead cost will eat you alive,” added Gra­ham.

A con­sumer-di­rect strat­egy can pro­duce cost sav­ings in the pur­chase mar­ket, but the mar­gins may be thin­ner be­cause the prod­uct type re­quires ded­i­cated loan of­fi­cers to be ef­fec­tive, Gra­ham said.

Pairing con­sumer-di­rect strate­gies with a ser­vic­ing port­fo­lio or other in­ter­nal mar­ket­ing can help lenders keep mar­ket­ing costs un­der con­trol, said Dan Cu­taia, an in­dus­try vet­eran who is sell­ing an ex­per­i­men­tal on­line lend­ing plat­form called BeLoanReady.

“The call cen­ter is more cost ef­fec­tive clearly if you have a ser­vic­ing port­fo­lio and are not pay­ing these third party lead ag­gre­ga­tors or ad­ver­tis­ers,” said Cu­taia.

Tra­di­tional mar­ket­ing costs for a lender are more man­age­able when a com­pany doesn’t need to pur­chase on­line leads that av­er­age $349.

Other ways com­pa­nies are look­ing to con­trol mar­ket­ing costs and en­sure loan of­fi­cers use mar­ket­ing tools is to have them pitch in fi­nan­cially.

Churchill Mort­gage, which is look­ing to cut loan costs 15% in the com­ing year, of­fers some cus­tomer re­la­tion­ship man­age­ment tools to its staff with­out obli­ga­tion. But the lender will ask loan of­fi­cers to pay for a real es­tate in­for­ma­tion sys­tem that helps them mar­ket to home­own­ers if they’re not us­ing it.

The com­pany an­a­lyzes per-loan mar­ket­ing costs care­fully and has found Google’s pay-per-click ad­ver­tis­ing is among the most ef­fec­tive sources of leads. How­ever, this type of mar­ket­ing re­quires a keen un­der­stand­ing of how search en­gines work.

Ad­di­tion­ally, Churchill works to make sure mar­ket­ing is cost ef­fec­tive by max­i­miz­ing the use of any lead as a source of fu­ture busi­ness not just from the bor­rower but the real es­tate agent or other re­fer­ral source the bor­rower works with.

“You ought to par­lay ev­ery lead into broader re­fer­rals with all the par­ties in­volved,” said Matt Clarke, Churchill’s chief fi­nan­cial of­fi­cer and chief oper­a­tions of­fi­cer.


Lenders do not only use their strate­gic knowl­edge of gov­ern­ment pro­grams, real es­tate and fi­nance to sell home loans; they also use it to get the most out of fa­cil­i­ties and equip­ment costs.

Move­ment Mort­gage, for ex­am­ple, got a $660,000 grant from Vir­ginia’s Eco­nomic De­vel­op­ment Part­ner­ship to sup­port its ef­fort to lease and ren­o­vate space in a for­mer J.C. Pen­ney store­front for its oper­a­tions. And Em­brace Home Loans got a $330,000 state grant in Rhode Is­land to par­tially pay for the $1 mil­lion in­stal­la­tion of rooftop so­lar pan­els that will pro­vide en­ergy cost sav­ings over time.

Em­brace also has ex­per­i­mented with the use of re­mote un­der­writ­ers us­ing what Pres­i­dent Kurt Noyce calls “the vir­tual of­fice con­cept,” which can re­duce the need for fa­cil­i­ties and as­so­ci­ated costs.

“I know plenty of lenders who will hire re­mote un­der­writ­ers all day long,” said Gra­ham. “Not ev­ery lender is com­fort­able with that, but it does change how much is spent on fix­tures, fur­ni­ture and equip­ment.”

With a grow­ing amount of com­mon off-the-shelf lender tech­nolo­gies like loan orig­i­na­tion sys­tems and cus­tomer re­la­tion­ship man­age­ment plat­forms de­liv­ered via soft­ware-as-aser­vice, many lenders are al­ready op­er­at­ing in smaller spa­ces as well as al­low­ing some re­mote work to be done.

The typ­i­cal lender spends hun­dreds of dol­lars per loan on tech­nol­ogy, fa­cil­i­ties and equip­ment, com­pared to the thou­sands per loan spent on com­pen­sa­tion. Tech bud­gets might only be more siz­able among very large lenders, par­tic­u­larly if they de­velop and main­tain pro­pri­etary sys­tems.

“We’re not spend­ing a lot on tech­nol­ogy, even with all the dig­i­tal so­lu­tions com­ing,” said Gra­ham. Roughly 30% of lenders have some form of dig­i­tal point of sale tech­nol­ogy in pro­duc­tion and another 30% have some form of it in pro­duc­tion, but the re­main­ing 40% of the in­dus­try doesn’t, he added.

Part of the prob­lem is that tech­nol­ogy sav­ings can be so mea­ger, given the up­front in­vest­ment.

Em­brace’s so­lar pan­els won’t pro­duce true sav­ings for sev­eral years, and Third cau­tions not to over­es­ti­mate the im­me­di­ate ef­fi­cien­cies from a new dig­i­tal point of sale sys­tem, not­ing that the re­or­ga­ni­za­tion of its sup­port staff had a more im­me­di­ate im­pact.

Move­ment uti­lizes a self-ser­vice point of sale sys­tem from tech­nol­ogy de­vel­oper Blend Labs along­side its LOS from PCLen­der, a ven­dor that was re­cently ac­quired by Fis­erv.

The Blend tech­nol­ogy of­fered sav­ings be­cause it helped Move­ment col­lect more data, avoid pa­per and ver­ify in­for­ma­tion faster. So far, the tech­nol­ogy has helped cut about half a day from loan pro­cess­ing times.

“But we’ve only been us­ing it for a year,” Third said. “I think you still have cus­tomers out there who are wary about how they pro­vide their data. We’re ex­pect­ing to see ad­di­tional gains as the con­sumer be­comes more com­fort­able with how they pro­vide data for a mort­gage ap­pli­ca­tion.”

There may be ad­di­tional sav­ings from the gov­ern­ment-spon­sored en­ter­prises’ rep­re­sen­ta­tion and war­ranty re­lief ef­forts for loan in­for­ma­tion that can be val­i­dated with au­to­mated ser­vices avail­able from Fan­nie Mae, Fred­die Mac and their ap­proved ven­dors. But Move­ment isn’t far enough along in im­ple­men­ta­tion to see any ef­fi­ciency gains yet, Third said.

While dig­i­tal plat­forms are a long-term need, the first pri­or­ity for lenders is to en­sure they have au­to­ma­tion that ex­am­ines their own fi­nances on a con­tin­u­ous, real-time ba­sis and cou­ple it with peer group met­rics of­fered by trade groups and in­dus­try co­op­er­a­tives.

Ac­count­ing au­to­ma­tion is pro­vid­ing more de­tailed, real-time anal­y­sis of com­pen­sa­tion, which rep­re­sents a huge chunk of loan costs, but is be­com­ing more com­plex as lenders com­pete through the use of dif­fer­ent over­ride and com­mis­sion struc­tures, said Ad­van­tage Sys­tems Pres­i­dent Brian Lynch.

“You are able to do im­por­ta­tion of what would be very vo­lu­mi­nous jour­nal en­tries, so that helps to keep costs down,” said Bill Napier, chief fi­nan­cial of­fi­cer at Home­spire Mort­gage. “The over­all crit­i­cal con­trol fea­ture is for man­age­ment and the fi­nance depart­ment to just be able keep a con­stant eye on the bud­get, know­ing they should have the abil­ity to fore­cast and have read­ily avail­able plans to im­ple­ment in the event of what­ever sce­nario is play­ing out.”


Ware­house line of credit ex­penses av­er­age $515 per loan. And with short-term rates ris­ing, it’s a cost not likely to abate any time soon.

Even with short-term rates re­main­ing rel­a­tively sta­ble in pre­vi­ous years, ware­house line costs have risen since the end of 2013, when they av­er­aged $495 per loan. Costs got as low as $442 per loan at the end of 2014, but started ris­ing again, to $473 in 2015 and $506 in 2016.

The po­ten­tial for sav­ings now is not huge, but “there are nick­els and dimes to be earned if you are more ef­fec­tively man­ag­ing your ware­house lines,” said House. “We tell peo­ple just be sure you’re us­ing your most cost-ef­fec­tive ware­house lines first, fill­ing those up to ca­pac­ity be­fore you use your oth­ers.”

Another po­ten­tial area for sav­ings is elec­tronic notes, said Joe Lathrop, a se­nior vice pres­i­dent at who works in Flagstar Bank’s ware­house lend­ing unit.

A ware­house line can turn faster if a mort­gage lender is will­ing to use e-notes, and that could help lenders con­trol cap­i­tal costs as vol­umes shrink.

The more a lender keeps out­stand­ing on a ware­house line, the more cap­i­tal the line calls for. So if a lender can re­duce the amount out­stand­ing by pay­ing off a line more quickly with e-notes, less cap­i­tal is re­quired.

“If you don’t need as large of a line, you don’t need as much cap­i­tal in the com­pany to make sure you meet the min­i­mum re­quire­ments nec­es­sary,” said Lathrop.

Lenders do have to in­vest in e-note tech­nol­ogy, so “each com­pany has to look at their own cost struc­ture to de­ter­mine the kind of sav­ings that they are go­ing to re­ceive,” Lathrop said.

“They would have to con­tact a ven­dor and do their due dili­gence on the ven­dor to make sure that they can han­dle e-notes suc­cess­fully and make sure that they have the plat­form nec­es­sary,” he said.

How many ware­house lenders will be ac­cept­ing e-notes also re­mains to be seen. Flagstar’s ware­house unit re­cently started to ac­cept e-notes and is still un­sure how many lenders will re­spond to the of­fer.

“We want to make sure our cus­tomers have it avail­able so that when they de­cide to use e-notes, they will see we are a ware­house lender they can turn to,” Lathrop said.


There are many costs as­so­ci­ated with reg­u­la­tory com­pli­ance and re­lated li­a­bil­i­ties in the mort­gage busi­ness, and while there are signs this could change, how and when re­mains un­cer­tain.

Un­til it is clear how or whether the GSEs’ rep and war­rant re­lief af­fects in­sur­ance needs, or how any pro­posed changes to fed­eral tax rules or at­tempts to roll­back Con­sumer Fi­nan­cial Pro­tec­tion Bureau reg­u­la­tion will play out, lenders will have to make plans based on ex­ist­ing com­pli­ance costs.

Li­cens­ing, taxes, in­sur­ance and le­gal, along with other pro­fes­sional ser­vices fees as­so­ci­ated with com­pli­ance, cur­rently cost the av­er­age lender $591 per loan, up from $533 in 2013, ac­cord­ing to Richey May.

One way to save money on com­pli­ance ser­vices is to seek out dis­counts for bulk pur­chases of train­ing and con­tin­u­ing ed­u­ca­tion.

“There are com­pa­nies that will pro­vide con­sis­tent on­line train­ing and in­clude both the sales and tech­ni­cal-ori­ented part. The more you do, the more you ought to be able to get the cost down,” said Gra­ham.

Lenders like En­voy Mort­gage, for ex­am­ple, shop for bulk rates for con­tin­u­ing ed­u­ca­tion that loan of­fi­cers must take to stay li­censed.

Smaller mort­gage lenders or loan bro­kers also can ac­cess bulk rate dis­counts through co­op­er­a­tives or other larger busi­ness part­ners.

United Whole­sale Mort­gage of­fers a con­tin­u­ing ed­u­ca­tion dis­count that 2,000 of its mort­gage bro­kers use, ac­cord­ing to Brad Pet­ti­ford, a spokesman for the com­pany. The dis­count saves bro­kers more than $100 per month.

“It’s a huge cost sav­ings,” said Lynda Danna, pres­i­dent of mort­gage bro­ker 1st Res­i­den­tial Fund­ing Inc.

Another strat­egy for lenders are au­to­mated change man­age­ment sys­tems that help com­pa­nies stay up­dated on shifts in in­dus­try rules by iden­ti­fy­ing and an­a­lyz­ing new reg­u­la­tions while fil­ter­ing out in­for­ma­tion that doesn’t ap­ply to a lender’s prod­ucts.

Water­stone Mort­gage, which re­cently switched from spread­sheet-based tech­nol­ogy to Con­ti­nu­ity’s change man­age­ment sys­tem, hasn’t had it long enough to see what the re­turn on in­vest­ment will be like.

But the com­pany al­ready finds track­ing rel­e­vant state and fed­eral rules less “la­bor in­ten­sive” than its pre­vi­ous spread­sheet-based sys­tem, said Chris Hat­ton, Water­stone’s com­pli­ance man­ager.

The Con­ti­nu­ity sys­tem on av­er­age takes about 90 to 120 days to pro­vide a re­turn on in­vest­ment and within a year usu­ally saves each com­pany the equiv­a­lent of one part­time em­ployee’s salary, ac­cord­ing to Pam Per­due, ex­ec­u­tive vice pres­i­dent and chief reg­u­la­tory of­fi­cer.

Com­pli­ance will no longer be lenders’ pri­mary cost con­cern in 2018, but it will re­main a key con­sid­er­a­tion as they broaden their search for ef­fi­ciency to en­com­pass the full scope of their oper­a­tions.

Lenders must broaden their cost-ben­e­fit analy­ses to the full scope of their oper­a­tions to fully right-size their com­pa­nies and ad­just to new mar­ket needs.

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