While a mortgage business’ battle against margin compression is seemingly endless, that fight is less noticeable in times of surging revenue. This year, thus far, has been anything but that. The decline in mortgage volume, along with increasing rates and uncertainty about the months ahead, have amounted to a scramble for revenue and a continual push to reduce expenses.
For most businesses, the focus on cutting costs has centered around a few main areas. Staffing and service levels have been the most obvious casualty, as layoffs and job cuts have become prevalent. Mortgage firms have also focused on becoming more efficient and reducing other types of overhead, including fixed costs, like office space, and travel budgets or similar items.
Automation is not the only answer
In a break with traditional behaviors during down cycles, many mortgage businesses have continued their drive toward automation, albeit selectively, and perhaps slowly. However, it still appears that lenders are focusing their technology investments on the point of sale.
This comes as no surprise. There is ample data to suggest that consumers want speed and convenience in the origination process. A 2020 ICE Mortgage Technology survey confirmed this, reporting that 58% of borrowers were affected in their decision making by the presence (or lack thereof) of an online application.
In addition, 55% of homeowners reported that a “simpler application” process was greatly appreciated. That same survey found that 99% of lenders believe technology can improve the application process, and 74% believe tech could simplify the entire mortgage process.
Lenders are increasingly seeing a transformed “big picture.” But it still appears that the emphasis is on the big systems — with the focus on Point-of-Sale (POS) and Loan Origination System (LOS) technology especially. And yet, there are numerous smaller things in the established mortgage production process that add up to a huge opportunity to speed the transaction and reduce costs.
The refinance wave of 2020 and 2021 made clear that the various leaks and clogs in the operational process can grease the skids toward leaving money on the table. This happens by and large when multiple 3rd party vendors become involved or when the process is managed (or handed off) manually.
In slow or even healthy purchase markets, these points can put a lender at a competitive disadvantage and constrict margins unnecessarily.
The little things that can mean a lot
In the typical mortgage workflow, there are multiple points where more lenders could redirect their focus for greater efficiency — and that efficiency need not come from technology investment alone. In fact, if a system doesn’t fit a workflow properly or delivers redundant or unnecessary features, technology can even further burden the operation.
However, whether it be through improved QC; a reshuffling of staffing; use of a more efficient third party provider; better operating policies or training; or, yes, the use of proper technology, too many lenders and mortgage-related businesses have yet to address and receive the full benefit of improving a number of “little things” in their operations.
These points of focus include data collection and entry at any stage of the process. They could also include improving the post-closing process. Customer service and communications between partners, vendors and clients could also be brought forward light years through any number of means.
Vendor management, be it in the valuation, title insurance or closing process, offers a number of opportunities for increased efficiency and decreased cost. And don’t forget TRID-related procedures — many of which were cobbled together on the fly during the chaos following a short implementation period mandated by regulation.
By the numbers: How much the little things can cost
A case study of TRID-related processes can demonstrate how much fat remains to be cut in the name of improved margins and increased efficiencies. And, in particular, closing fees.
Many lenders and originators spend little, if any, time thinking about how they gather accurate closing fee data, such as transfer taxes or recording fees, even though these vary from state to state, county to county and even city to city. And yet, numbers quoted inaccurately on the LE could lead to curative penalties.
These can, and do, add up.
While this industry has a significant dearth of accurate and deep data — at least at the public level — the Federal Reserve’s Consumer Compliance Outlook found in 2020 that inaccurate closing cost details and cash to close calculations were one of most common lender TRID violations.
Even the Consumer Finance Protection Bureau (CFPB) has acknowledged that TRID adversely impacts the operational costs of lenders.
While the TRID data available to the public is almost non-existent, some estimates suggest that as much as 90% of the mortgage loans produced have some form of TRID violation. And let’s not forget that TRID violations — apart from curative fees for mistakes or inaccuracy — can range from fines of $5,000 to $1,000,000 per day in extreme cases.
Setting those penalties aside, we wanted to know how much lenders paid in curative fees as a cost for their operational inaccuracy or inefficiency. To find out, we polled dozens of mortgage lenders in 2022 and compiled the results.
We were surprised to learn that the average cures per file for those who manually researched and updated their fee data was $40 to $80 per file. After installing improved processes to address their closing cost quotes, the same lenders reported improvement, with the averages dropping to $20–$40 per file.
We also determined that lenders using effective closing fee technology averaged one inaccuracy requiring a cure out of every 22,000 fee estimates or quotes.
Finally, we know that the average time to close remains above 50 days. This also represents costs ripe for improvement across the board. Much of that delay starts with the little things: the time between voicemails between a loan processor and title agent; the time it takes for an appraisal report to be produced; the time (and possibility of error or inaccuracy) it takes to find an order that’s been emailed and type it into the production system. And yes, the time and cost associated with manually determined closing fees.
Now, more than ever, the little things are adding up for lenders. But they also provide an incredible opportunity to improve the way the industry does business going forward.
Jim Paolino is the CEO & Co-Founder of LodeStar Software Solutions, HousingWire Tech 100 company.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story: Jim Paolino at [email protected]
To contact the editor of this story: Sarah Wheeler at [email protected]