Heading into Q2 2022, lenders across the country are grappling with turmoil in the market and adjusting their strategies to a new normal. Lower revenues and higher production costs continue to put pressure on margins, with historically low housing inventory and global unrest adding unpredictability to the mix. Indeed, the MBA’s newly released Quarterly Mortgage Bankers Performance Report for Q4 2021 reveals sobering (if not terribly surprising) data on the reality lenders are facing: Respondents saw an average net gain of $1,099 per loan originated, its lowest level in three years.
“The average cost to originate a mortgage has now risen for six quarters in a row, reaching a study-high of almost $9,500 per loan by the end of 2021,” commented Marina Walsh, CMB, MBA Vice President of Industry Analysis. “With revenue tightening and volume slowing, it is becoming increasingly important for companies to adjust costs as the lending landscape moves from a rate-term refinancing market to a purchase and cash-out refinancing market.”
While profitability is certainly more challenging now than in the past few years, 2022’s market also provides opportunity. Specifically, the current conditions are a forcing function for lenders to scrutinize their businesses, go back to basics, and revamp their current systems into a well-oiled machine that thrives no matter the market cycle. Here, a vital consideration is pipeline management, where lenders can unearth efficiencies, cost savings, and improvements that directly augment their bottom lines.
To understand actions lenders can take to hone their loan pipelines, we recently hosted “Actionable Ways to Combat Shrinking Margins in 2022″—a webinar featuring panelists Bob Groody, Maxwell SVP of Mortgage Operations; Anthony Ianni, Maxwell Solutions Director, and Suzy Lindblom, COO of First Guaranty Mortgage Corporation. Here’s what we learned.
Go back to basics with your operations
When volume is high and business is booming such as in 2020 and 2021, it’s easy to let processes and procedures fall by the wayside. Your staff is too busy keeping up with demand to worry about the how. Profitability is simple, and there’s no reason to scrutinize what’s working well enough.
As the market inevitably turns, though, inefficiencies and bottlenecks are quickly revealed and can drag down already-thin margins. In times like these, it’s vital to return to the basic elements your lending business was originally built on: systems that reliably and efficiently move loans through the pipeline while creating a top-notch experience for borrowers.
While the list of areas to audit will vary on your business, you’ll want to dig into your process with questions such as:
- Am I reliably collecting up-front fees?
- Are bottlenecks impacting our speed of delivery?
- Are my processors on top of customer follow-up?
- If we’re missing something from a loan file, is it escalated quickly enough to avoid delays?
In other words, now is the time to study each step, action, and handoff to find areas where your operations could be strengthened.
“Right now, you need to make sure your systems are tightened up as much as they can be,” says Bob. “In a rising rate environment, even small inefficiencies can kill you.”
Gather granular data on your loan pipeline
To find enough cumulative cost savings that add up to meaningful improvement, it’s not enough to take a 30,000-foot view. Instead, take the time to dig into your pipeline on a by-loan basis. Look at individual loan statuses to form a strategy for moving bottlenecked files along. Then, take the time to run a comprehensive stagnation report to understand patterns in inefficiency that can be solved by system improvements.
Through this exercise, you’ll want to generally understand:
- How long loans sit in processing, underwriting, closing, and post-closing
- The time it takes loans to pass through these steps by employee, by branch, and by channel
- Where major issues tend to bubble up in the process
Then, based on this insight, you can create an appropriate action plan. This may involve employee re-training, system updates, or better communication with borrowers. Regardless, take the time to address issues on an individual level to reap sizable pipeline improvements.
“You need to look at your process because three days in processing, two days in underwriting, one day in closing—if you’re selling loans on a best efforts basis, that’s the difference between locking in for 45 days to 30 days,” says Anthony. “If you look at the spreads today, there’s some money you’re leaving on the table just by being inefficient.”
Embrace a partnership approach
While adding efficiency into your processes is an analytical, detail-oriented project, human aspects such as service and support are equally vital to a well-run lending business. Your processing team, for instance, should take on a borrower-centric role, working as a partner to the LO to move the customer through the process seamlessly. This mentality creates a faster, more informed process that’s not only more efficient, but produces a happier borrower.
“If a consumer can clearly see their loan moving forward and has that continuous conversation with their lender, things move much more quickly,” says Suzy. “We’ve gotten away from that partnership approach. Now, we email instead of picking up the phone—but by adding a transparent, human-first approach back into the process, we’ll get loans done faster and create better outcomes for borrowers.”
Don’t forget post-closing
Many lenders work hard to create an efficient loan pipeline, but ignore their post-closing function. Having an efficient post-closing process, though, is vital for strong loan economics. Here, you want seamless procedures, with the ability to deliver loans to multiple outlets as efficiently as possible.
Especially as lenders consider non-QM and other higher-margin loan products in today’s environment, they need to consider whether they have multiple outlets for those products. Doing so will help mitigate risk and improve the upside of product diversification.