Rising Costs to Originate Spur Innovation
Feel like your costs to write loans are going up? It’s not your imagination. In 2008, the average cost to write a new loan was $4,500, but in Q4 2015 that average cost increased to over $7,700, according to Mortgage Bankers Association Chief Economist Mike Fratantoni.
And that can take a bite out of any company’s budget.
Why the Escalation?
Point to increased regulations for most of the cost increase, Fratantoni says, citing TRID, Dodd-Frank, the ability to repay and qualified mortgage standards — all of which require a marked focus on quality control.
Due to the changes in regulatory requirements, mortgage providers have had to increase their back office personnel, from risk managers to additional quality control (“QC”) and quality assurance (“QA”) specialists.
This increase in personnel, which typically adds to fixed costs for salaried employees, can greatly increase the cost per loan. In contrast, costs involving the sales force more typically increase or decrease commensurate with loan volume since they are paid on commission.
“There has been a flip since the pre-crisis days, when most personnel expense came from the sales force, and now the majority is in back office staff as more resources are applied to regulatory compliance,” Fratantoni says. “There are tighter controls across the board and mortgage providers want to make sure their QC process lines up with the new requirements.”
“Fifty percent of my job is now spent on compliance and quality control, where it used to be 20 percent,” says Philip DeFronzo, president of Norcom Mortgage, a New England-based company that is licensed in all states east of the Mississippi. “Our goal right now is to identify efficiencies to improve the cost of origination, while meeting our focus on 100 percent compliance.”
Cost Increase Spurs M&A Activity
Companies with higher fixed costs need higher volume to spread them out, which is driving consolidation and mergers & acquisitions (M&A) activity. Fratantoni says that there has been a sharp decline in loan originations by depositories as community banks back away from mortgage lending.
The downside he sees is that many of these community lenders are focused in certain niches. “Something is lost when we lose small lenders,” he says. The hope is that they maintain their market presence even after M&A activity, but he concedes it’s natural for larger lenders to focus on larger markets, which may create losses in underserved markets.
Costs Stabilize as Implementation is Complete
Aside from seeking economies of scale through M&A, mortgage shops are actively searching for ways to manage their expenses. Some are finding that cost reductions are occurring naturally as the implementation phase for regulatory mandates is completed.
The data supports this. Preliminary numbers from 2016 show that costs have leveled out as lenders become accustomed to working in the new TRID processes.
DeFronzo attributes some of his recent rise in fixed costs to the significant amount of training Norcom has offered to its partners to prepare for the new disclosures required by TRID.
“We felt we could play an important role, so we created educational guides and held multiple lunch-and-learns for settlement agents, real estate agents, and internal staff,” he says.
Investing in Process
Norcom has also seen its information technology (IT) costs rise as it invests heavily in automation and systems as well as IT staff to support it. “We’re spending money now, but there’s no question the investment in IT will pay off in the long run,” DeFronzo says.
One relatively simple enhancement that will increase efficiency and decrease costs is a new compliance tool embedded in Norcom’s loan origination system. The all-in-one system helps to process loans faster and more accurately.
For example, the system will not issue closing documents if outside of the three-day tolerance, which will eliminate errors down the road. Norcom’s previous, separate tool would not recognize or stop those inefficiencies. Norcom’s all-in-one system also cross checks loan officers’ names to ensure they are approved.
Norcom has implemented a quality success team that reviews files before they go into underwriting and closing to catch errors, which is a process they are always looking to streamline.
Finally, Norcom has converted to 100 percent paperless files, which has resulted in significant savings from not only the cost of paper, toner, and storage, but in productivity gains. It’s easier for teams to collaborate and for staffers working from home to pull the relevant files.
“Our goal is to continue to reengineer and address efficiency issues, while maintaining the highest levels of quality control,” DeFronzo says.