PERSON OF THE WEEK: As the cost to originate loans continues to increase, mortgage lenders are struggling to turn a profit. According to the Mortgage Bankers Association, lenders saw an average net loss of about $200 per loan in the fourth quarter – however, they did manage to earn an average net gain of $285 per loan in the first quarter.
Rising production costs are mainly to blame. Total loan production expenses now average $9,299 per loan, according to the MBA, up from $8,611 in the fourth quarter.
Mortgage technology providers point to automation as a way for lenders to gain new efficiencies and cut costs. Although that is proving to be the case, mortgage lenders must nonetheless pay for their monthly software subscriptions, which means they now must closely scrutinize the potential return on investment (ROI) for every software purchase they make.
In other words, the software has proven its value in terms of improving processes, and the subscriptions have become a nice neat line item in a lender’s monthly operating budget – but technology investment has also become a bigger piece of the production cost vs. profit equation.
To learn more about how lenders can be assured of the ROI on their technology investments, as well as how this factors in with current market conditions, MortgageOrb recently interviewed Tedd Smith, CEO of FirstClose, a provider of property and borrower data intelligence and settlement services.
Q: How does the current market look for lenders?
Smith: The current situation for lenders presents some challenges, as well as some uncertainty. While unemployment may be at a new low, wage growth has stagnated.
Although interest rates have recently dropped, we are yet to see it translate into a significant boost for the housing market.
For now, people are choosing to stay in their homes and stick with their current interest rates. As a result, the average homeowner tenure rate has increased to between 12 and 13 years. This means less inventory and, as a result, fewer mortgage originations.
And with a scarcity of homes comes a scarcity of buyers, forcing lenders to compete for those few buyers that remain in the market.
But even in this challenging landscape, lenders still have opportunities for growth. Although there are not as many homes being sold, they still have an opportunity to offer equity loans and home equity lines of credit (HELOCs) to homeowners that are planning to stay put.
With a recent surge in home values nationwide, U.S. homeowners collectively have access to trillions of dollars in equity. Helping them to take advantage of the equity is what will help keep business flowing for lenders, even when home sales are slow.
Q: What can lenders do to combat these tough conditions?
Smith: Although the current market conditions present a series of challenges for lenders, there are also some unique opportunities.
Today, there is an increasing number of opportunities to leverage technology to increase efficiencies that can speed up turn-times and cut down on costs, particularly for those lenders interested in increasing their home equity lending business. Technology has the ability to streamline lenders’ workloads and speed up processes in ways that nothing else can.
Lately, electronic records are becoming more readily available. More and more counties are storing their property records digitally, which presents an opportunity for lenders to use technology to make the process of gathering these records even easier.
Being able to access these digital records instantly saves lenders time. Using technology, lenders can compile all the records they need in one report or use those records as data that fuels AI or other decisioning tools.
Using technology to automate this part – or any part – of the lending process will result in time saved, which is crucial for both the borrower and the lender.
Using technology to compile property or borrower data also leads to cost savings. Instead of lenders spending extra hours on gathering data from multiple sources and vendors, and completing their due diligence for each, lenders can use technology to bring all of the information they need together in one place, which means they do not need to spend extra time, energy and most importantly, money.
Currently, most lenders must get tax information from one source, title from another, flood zone status from somewhere else and on it goes. With technology, this process is not necessary, yet so many lenders still go about gathering their property and borrower data in antiquated and inefficient ways.
No lender should be investing in new technologies just for technology’s sake, but they should look at where they encounter challenges and seek out the best technology to suit their needs.
Technology is able to do more than just compile data, however. It can also use the data to fuel AI-based processes like automated underwriting. Lenders also have a unique opportunity to use technology to not just compile reports, but to take the information in the reports and use it to further simplify lenders’ workloads.
One example of this is suitability logic. Suitability logic looks at all the information available about a property and can make recommendations about what type of valuation to order, or how to proceed with title work. This technology looks at all of the available data and decides the most suitable course of action. This is another way technology is creating efficiency gains and helping lenders thrive in a difficult market.
Q: How can lenders be confident about investing in technology during these challenging times?
Smith: It is understandable that lenders might be uneasy about investing in technology, especially when they might be struggling due to unfavorable market conditions. However, the time and money that technology is able to save is enough to justify an investment. The ROI will not only cover the cost of the technology, but will help the lender become more profitable in the future, even when times are hard.
The efficiencies technology creates also help reduce a lender’s workload. This, in turn, helps staff maximize their time and become more productive. When competing for the few borrowers in the market, lenders must ensure that they are able to serve as many as possible, as quickly as possible.
It is also important to note that the efficiencies gained create a better experience for borrowers. Having their needs met quickly and efficiently is extremely important in this highly competitive market. When lenders are able to provide a positive experience for borrowers, they can expect to see growth, whether it is from repeat business or even new business.
Although lenders may be nervous about investing in technology, the benefits they are able to realize are worth the investment.
Cutting down on closing times, compiling data from multiple vendors and working more efficiently are all ways that lenders are able to save – just by implementing the right technology.