By Roy Urrico
Real estate lenders continue to employ large, antiquated legacy platforms with so-called “glue-on” technology, which increase the cost per loan without improving efficiency, profits or customer experience.
Those are some of the major angles discussed in a video presentation hosted by Augie Del Rio, CEO and co-founder of Gallus Insights, which provides software as a service (SaaS) analytics solution; and featuring Tammy Richards, CEO, LendArch, which enables mortgage origination firms to digitize the loan process; and Rob Chrisman, a capital markets consultant and expert.
Finopotamus sat in on this mortgage webinar, which we highlight in the first of a two-part series.
State of the Mortgage Industry
“We are experiencing one of the most significant downturns in decades. We are at the crossroads of the perfect storm,” said Del Rio. He added, “We are experiencing the fastest rising rate environment. We are also experiencing the least volume, and revenue margin compression. And all this is happening on the back turn of a rising cost per loan situation for most firms in the industry.”
In 2020, the industry was producing more than $5,500 profit per loan, Del Rio explained. “In 2021, we still had significant volumes and we had healthy margins, and the industry was delivering, depending on the quarter, north of $2,500 per loan in profit.” However, independent mortgage banks (IMBs) and mortgage subsidiaries of chartered banks reported a net loss of $624 on each loan they originated in the third quarter of 2022, down from a reported loss of $82 per loan in the second quarter of 2022, according to the Mortgage Bankers Association’s (MBA) Quarterly Mortgage Bankers Performance Report.
Richards noted, “There are a lot of challenges, and people could call it a nightmare, but there are also opportunities within this environment, and we cannot manage the way we have always managed. Of course, the volume and margin compression has been tough. The cost per loan is due to the huge capacity that we amassed during (COVID-19), where the rates were so low.”
She pointed out the cost of the antiquated processes and models is also due to the fact that there is still too much capacity in the industry. “The cost is the holding onto the staff beyond our capacity models. I never like having reductions in force; and we do as an industry need to get much more normalized in regards to having our capacity able to ebb and flow with the different times in our industry.”
Richards pointed out the mortgage industry traditionally has a small downturn in the winter, and then in the spring, the market usually bounces back. “But because we also have a low amount of inventory out there with the higher rates, it has made it very interesting. I do think that the opportunities right now are to change the model and improve automation in order to be able come out of this a stronger company.”
Examining the Marketplace
Del Rio said, “We built capacity for about $4.2 trillion in 2020-2021. Now we are seeing a market closer to $2 trillion or $1.5 trillion, whatever the forecast may be for 2023.” Richard explained, “We haven't done the reductions we need in order to be profitable, and it is possible to be profitable in this market.”
It is an issue of supply and demand combined with lenders who established these mortgage factories, suggested Chrisman. “They built up these mortgage factories in order to accommodate the borrowers that were literally falling out of the sky. Now we are dealing with the hangover from a couple years at that party. So, you have lenders who are trying to get ahead of costs right now, just trying to keep up with the decline in volume, decline in margin, decline in revenue, because it is very, very difficult to be a manager in this position, obviously in the last few years.”
Chrisman put the situation in perspective. “It is fun as a manager going out and hiring staff. Just waving in the underwriters, waving in the (document) drawers, the processors, the funders and so forth. “Let us get the warm bodies in the seats because the loans are coming through. We are draining from a fire hose. When that fire hose goes down to a trickle, they are dealing with some very tough choices now.”
As a result, cost-cutting has not quite kept pace with what is going on in the marketplace, pointed out Chrisman. “We are dealing with an industry that still has over-capacity. And when you combine that with some of the efficiencies afforded by some of the vendor products that are out there, making the lender's jobs easier and less labor intensive, and able to escalate up, escalate down without the changes in manpower, you have a situation that lenders are dealing with. I would argue it is unprecedented.”
Anticipating the Next Moves
Heading into 2023, Chrisman noted that moneylenders face some tough decisions. “Many lenders are saying, ‘We were able to save a lot of money during those couple years during (COVID-19) and during the refi (refinance) boom. So, how much of that capital do we want to use up?’ There is a certain contingent of lenders who are saying, ‘We are going to take our chips off the table, merge with somebody, be acquired by somebody.’ We are in an environment where owners of companies and managers of companies are making some tough decisions and figuring out how much of that capital they want to burn through, how long do they want to wait, especially if they are losing money.”
Chrisman also pointed out that many companies would be happy to break even in this kind of environment, and many companies are not. “Many lenders who have seen their volumes drop by 60, 70, 80% have gone from being mortgage bankers to being mortgage brokers in an effort to cut costs. They do not necessarily need those underwriters, doc drawers, some of the other functions, especially back office functions as a broker.”
In essence, companies are changing the way they do business, Chrisman added. “From a capital markets perspective, going from a mortgage bank and watching your volumes decline, you suddenly have execution capabilities that gradually are taken away from you.”
Paring Down Operating Expenses
Del Rios noted lenders are struggling with operating leverage and the ability to pare down expenses especially when revenue slumps. “Why is that so difficult in mortgage?”
Richards explained, “In mortgage, we have been so manual for so long, and even though we went to computers, our computers simulate our paper file flow process. It is as though we still have our paper files, we are handing them from the processor to the underwriter. When the underwriter has it, nobody can get into it. It is as though we are handing a physical file to each group. We really have not done anything to make that process, better, more efficient, more effective. We still have the same process that we had when I started in the industry in the early eighties.”
Richards also noted, “Everybody talks a lot about technology. And even though teams have been changing their technology or adding extra technology, it does not seem to be taking the price or the cost of the loans down from a fulfillment perspective.”
Ungluing Mortgage Systems
The mortgage industry is putting those new, cool tools into old processes suggested Richards. “We really have to rethink the process. A new model is needed and with less touch.” Richards said, adding she is not talking about the front-end perspective. “I still really believe in the relationship between the customer and the loan officer, between the real estate agents and builders and loan officers. The customers need trusted advisors.”
Richard maintained from the backend office perspective, there is technology to automate processing, underwriting and closing. “Instead, we have continued to use large systems that have been around for a long time and just glue different microservices to them and add more cost to the process without improving the efficiency. I always say, ‘don't build anything or don't buy anything unless it's going to improve your customer experience, reduce your cost and improve your quality.’”
Richards recommended, “If you have something that you're working with today that does not do that, rip it out and stop using it, it'll save you more money to not use it than to say you're digital and be paying extra.” She emphasized, “If you take those tools and put them in the right place in your process to have huge improvements, huge efficiencies, we could really turn around this capacity issue and be able to be very elastic through automation, and through utilizing those tools that are already out there.”
She also pointed out there are currently many great tools available in the market. “But we cannot mix them with the antiquated tools and get to the place we need to get to. We cannot still hand a loan from a processor to an underwriter, back to the processor, back to the underwriter, back and forth. It has to be a streamlined, straight through process for both the customer experience and for our cost.”
Tomorrow, Part 2 of this webinar coverage focuses on mortgage servicing rights, distribution models, mortgage originators, hiring practices and technology investing.