Rising Costs to Originate Mortgages Spurring Innovation
By Cathie Ericson | July 5, 2016
Feel like your costs to write loans are going up? It’s not your imagination. In 2008, the average cost of writing a new loan was $4,500, but in the fourth quarter of 2015 that cost increased to more than $7,700, according to Mike Fratantoni, chief economist at the Mortgage Bankers Association.
Hikes like that can take a bite out of any company’s budget.
Why the Escalation?
Fratantoni points to increased regulation for most of the cost increase. He cites TRID, Dodd-Frank, the ability to repay, and qualified mortgage standards – all of which require a marked focus on quality control.
Due to changing regulatory requirements, mortgage providers have had to increase their back-office personnel – including risk managers and additional quality control (QC) and quality assurance (QA) specialists.
Just paying the fixed salaries of these new hires can greatly increase the cost per loan. In contrast, costs involving the sales force more typically increase or decrease along with loan volume because these workers are paid on commission.
“There has been a flip since the pre-crisis days, when most personnel expense came from the sales force. 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. It used to be 20 percent,” says Philip DeFronzo, president of Norcom Mortgage, a New England-based company that is licensed in all of the 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.”
Higher Fixed Costs Spur Mergers and Acquisitions
Companies with higher fixed costs need higher volume to spread them out, which is driving consolidation and mergers and acquisitions (M&A). Fratantoni says that loan originations by depositories have been declining sharply as community banks back away from mortgage lending.
The downside he sees is that many of these community lenders have focused on certain niches. “Something is lost when we lose small lenders,” he says. The hope is that they will 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 adversely affect underserved markets.
Costs Eventually Level Off
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 they complete the implementation phase for regulatory mandates.
The data support 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 the recent rise in Norcom’s fixed costs to the significant amount of training it has offered its partners in preparation for the new disclosures TRID requires.
“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 support staff. “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 outside of the three-day tolerance, which will eliminate errors down the road. Norcom previously used a tool that didn’t recognize or stop those inefficiencies. The company’s new 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. This 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.
Cathie Ericson is a freelance writer for online and print publications – such as The Oregonian, Learnvest.com, and Forbes.com – and has been writing for Housing Industry Forum since its launch.