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Mortgage originators are facing a crisis. As rates rise and loan volumes decrease, they are losing hundreds, or even thousands of dollars on every loan.
To stay in business, financial services firms need to find ways to cut costs and improve efficiency. One of the most effective ways to do so is to automate your post-closing processes, either inhouse, or with the help of a managed services provider. This automation offers a number of additional benefits that can help you achieve greater profitability and meet growth targets.
For mortgage originators, something’s got to give.
According to the Mortgage BankersAssociation, lenders lost an average of $1,972 on each loan they originated in the first quarter of 2023. And that was actually an improvement over the $2,812 they lost per loan in the last quarter of 2022. By comparison, in the third quarter of 2020, independent mortgage banks were gaining $1,924 per loan origination.
For financial services executives, that drastic change in profitability can be shocking. But for anyone who has been following industry news, the numbers probably aren’t all that surprising.
During the pandemic, the average rate on a 30-year fixed mortgage dipped as low as2.65%, according to Freddie Mac. People rushed to buy houses or refinance their existing loans. The Consumer Financial Protection Bureau reported that loan originations climbed 65.2% in 2020 to reach 13.6 million. And in 2021, originations went up another 2.4% to reach 13.7 million.
But those boom times didn’t last.
In order to tamp down inflation, the Federal Reserve began raising interest rates in March of 2022. By the end of the year, mortgage rates on a 30-year fixed loan had climbed well above 6%, and even briefly topped 7%. As a result, originations fell sharply. In the fourth quarter of 2020, the average institution produced 2,947 loans. But in the first quarter of 2023, the average firm originated just 1,395 loans.
Fewer loans means fewer economies of scale, driving up the average costs. When times were good, mortgage originators increased their staffing to handle the influx of paperwork.
But as volumes declined, many financial services firms found they had more employees than they needed. Banks and other mortgage lenders laid off thousandsof workers, but it still wasn’t enough to offset the declining volumes.
Making matters worse for mortgage companies, personnel costs also rose during pandemic years. Unemployment remains low, forcing employers to increase salaries to attract and retain top talent.
And at the same time, regulatory compliance demands are increasing. Firms face an increasingly complex legal landscape that increases their overall expenses. And the costs of failing to comply or, even worse, failing to protect consumer data, is much higher.
In related news, some firms are also seeing increasing costs related to a loss of public trust. Recent failures of sizable financial institutions has lowered consumer confidence in the industry as a whole. Forrester analyst Alyson Clark notes, “Trust in financial services brands is surprisingly weak, and we’ve been seeing very few brands with strong levels of customer trust.” In fact, survey participants rated only 2% of US financial services brands as “strong,” while they considered 57% to be “weak.”
And of course, many economists are warning about a potential downturn or recession, which could have even more negative impacts on mortgage companies.
Given the current state of affairs, mortgage originators must do some things differently if they want to stay in business.
Many mortgage companies are responding to the current situation by looking for ways to increase their efficiency. And one of the prime targets for improving efficiency is the post-closing process.
While most firms have digitized some of their post-closing processes, much of the work remains manual and paperbased. Employees must review trailing documents to make sure that they have the appropriate signatures and have been completed appropriately. Auditors double-check to make sure that the loan complies with the most recent regulations, and they recalculate all the numbers to make sure that the mortgage is within underwriting guidelines. They pass on the documents to the appropriate parties, file paper and digital documents as necessary, and securely dispose of any paper documents that they no longer need.
In the past, digital systems could handle only a portion of these tasks, which is why they are still so manual. But the latest artificial intelligence (AI) and machine learning (ML) technology makes it possible to automate a much higher percentage of the tasks, limiting human intervention to a handful of exceptions.
Managed services providers have the tools and experience to deploy these automated solutions, while tailoring them to your firm’s unique requirements. That can result in at least six benefits for mortgage originators:
One of the biggest advantages of digital automation for the post-closing process is that it helps improve the average cost per loan. Post-closing automation can help you manage expenses in at least three different ways:
Maintain a steady headcount. With automation, you may no longer need to ramp up hiring when mortgage volumes increase, and lay people off when volumes decrease. That not only can improve morale within your organization, it can also reduce costs related to recruitment, hiring, and severance.
The employees that you have will be able to handle more loan originations than they would have been able to process manually. And they will need to give their attention only to the exceptions, which is the more interesting part of the job. Reducing the mundane tasks associated with post-closing processes can further improve morale and retention, driving down costs even further.
If you choose to pursue automation through a managed services partner, you can amplify these benefits even more, driving down costs further.
Reduce floor space. In the post-pandemic world, hybrid work has become the norm. Many organizations are looking for ways to reduce their overhead by reducing their real estate space.
But that can be difficult if you are still storing a lot of documents in old-fashioned filing cabinets. Paper documents take up 40 times (or more) as much space as storing the same number of documents digitally. By automating your post-closing processes, including digital storage of documents, you can reduce real estate costs, or reallocate existing space to more productive uses.
Convert capex to opex. If you choose to partner with a managed services provider to do your post-closing automation, you also have the advantage of transforming some capital expenditures into operating expenditures. Rather than paying infrastructure costs upfront and depreciating over time, you can have predictable monthly operating expenses that correlate directly to your loan volumes. This can help make your financials look more attractive to investors, and give your organization some stability in uncertain times.
Manual post-closing processes aren’t just expensive — they’re slow. Automating these processes can dramatically decrease the amount of time it takes for a loan to be fully approved and ready for sale.
In addition, digitized processes also lead to efficiencies throughout your organization. Automation technology can transform unstructured data into structured data with meaningful metadata tags that make it easier to find information. That reduces the amount of time workers waste looking for information. It also results in you having easy access to all the information you need to sell the loan on the secondary market.
With automation, you can sell the loans you originate more quickly. That reduces carrying costs and enables some more aggressive pricing options. In many ways, your loan process is like a factory. The faster you can get the raw materials (loan documents) through your loan approval factory, the faster you can get your goods to market. In an increasingly competitive marketplace, that gives you an advantage over your rivals.
In addition, quality automation can reduce your defect rate. According to Freddie Mac, the two most frequent contributors to load quality defects are missing documents and miscalculation of income. Human error can contribute to both of these issues. The average error rate for manual data entry is between 1% and 5% or higher for complex data. The error rate for automated processes is just 0.1%. By deploying automation, you’ll make your operations more efficient by reducing the need for rework — or in the worst-case scenario, the need to repurchase a loan — due to defects like these.
And when you use a managed services provider as you deploy automation, you have the added benefit of an independent reviewer doing your document audits. That further increases the likelihood of finding any defects, making your operations even more efficient.
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