October 24, 2023 – Mortgage originators have plenty of pressing challenges today. If you ask, they’ll talk about the high cost to originate, the struggle to get employee adoption of new technologies and the crushing cost of compliance.

Most won’t talk about their tech stack, even though that has a marked influence on every other challenge they face.

When we sat down to take a close look at the current situation for a new White Paper we just published, the seriousness of the lender’s plight was abundantly clear.

We’ll take a look in this article and propose an obvious, though not necessarily intuitive, solution. While any institution could implement this solution, those who already have — depository institutions — are already ahead of the game

A serious situation for mortgage lenders

The Mortgage Bankers Association will tell you that of the $13,000 it currently costs to get a loan from application to the closing table, only about 5% of it is spent on technology. We believe that’s true, mostly.

Where we differ is on measuring the lost potential savings that better technology could offer lenders who use it. Yes, those high costs are not technology costs, but better technology could reduce them.

The money lenders spend on technology will play a very large role in determining how much they must spend to originate each loan. That means it’s fair to say that current technology is costing lenders a lot more than 5% of their cost to close.

Case in point, lenders who don’t have mortgage servicing software right now are losing a lot of money. Not because they don’t have the software but because they don’t service loans, so they don’t need it. Plenty of mortgage lenders who don’t have those servicing assets are wishing that they did right now.

Does that mean that NOT buying technology is costing them money? Well, yes. It’s an opportunity cost.

If they had invested in the software so they could service loans, they’d have assets producing a return that could offset the origination revenue they’ve been losing.

What every mortgage lender needs now

According to the Consumer Financial Protection Bureau (CFPB), mortgage lenders originated 38.5 million loans in 2021 with a loan volume of $4.6 trillion. This was a significant increase from 2020, when mortgage lenders originated 29.3 million loans with a loan volume of $3.4 trillion.

We all know what happened after that. Rising inflation led the Fed to increase interest rates to banks, which ultimately resulted in higher mortgage interest rates. Steep home appreciation during the COVID years followed by a tightening of mortgage credit and a lack of housing inventory worked together to create a perfect storm that blew 70% of the volume out of the business.

It is still too early to say what the long-term impact of the decline in mortgage lending will be for the overall economy. However, it is clear that the home finance business is undergoing a significant change.

According to ATTOM, just 1.25 million residential home loans were written in the first quarter of 2023 in the United States — the fewest since late-2000.

Every lender reading this paper will tell you that they have been looking everywhere for ways to replace this lost loan volume and revenue. That’s what they all need right now.

The low-hanging fruit for a lender who needs to win more business are:

  • Hire better LOs with a good book of business
  • Be more competitive on rates, even if that cuts deeper into margin
  • Expand the loan product menu to attract more borrowers
  • Buy more leads (most lenders cut back on advertising in a downturn)

In general, this all points back to one strategy: be more competitive than the other guys.

Becoming a more competitive lender

Beating the competition in today’s market is really tough to do when the CFPB has been telling home loan borrowers to complete applications with at least three lenders in order to get a good deal.

The game for borrowers has been to apply with many and drop any who have a glitch in the origination process until there is only one left. That’s a tough market to operate within, especially if your own source of revenue is through originating loan assets for sale.

This has created a sort of renaissance for depositories, because when they service their own loans, they make money on both sides. Banks, community banks and credit unions lost out to the big independents during the refinance booms of the past, but that is all changing now.

According to the Federal Deposit Insurance Corporation (FDIC), community banks and credit unions originated only 22% of all mortgage loans in 2021. This was down from 24% in 2020.

Nonbank mortgage lenders could offer lower interest rates and faster closing times than community banks and credit unions. The big Independent Mortgage Banks (IMBs) also invested more in their digital lending infrastructure, making it easier for borrowers to apply for and get a mortgage online.

Despite the decline in their share of the market, community banks and credit unions continue to play an important role in mortgage lending. They often offer more personalized service than nonbank mortgage lenders, and they are more likely to lend to borrowers with less-than-perfect credit.

This is why we’re seeing some IMBs striking deals with depositories to sell them their loan product. Far better to just own your own portfolio and that’s where the smaller depository institutions have an opportunity.

Depositories haven’t been a very significant competitive force in the past, but with the right software we expect that to change.

Doing the math on full service profitability

When it comes to originating mortgage loans, there are many ways to make income, including origination fees, discount points, closing costs and ultimately gains on the sale of the assets.

What each lender earns depends upon many factors, including the type of loan, the borrower’s credit score, and the current interest rate environment. If they earn anything at all.

The Mortgage Bankers Association (MBA) surveys lenders and releases profit per loan statistics. The average profit per loan for independent mortgage banks (IMBs) was $301 in the first quarter of 2023. This is down from $1,099 in the fourth quarter of 2022.

By the second quarter of this year (2023), IMBs and subsidiaries of chartered banks lost, on average, $535 per loan.

This looks like a good time to look into servicing.

If the lender holds onto the loan and services the mortgage, there is obviously more money to be made. This includes monthly servicing fees, late payment fees, prepayment penalties, interest earned on escrow accounts and fees for selling off mortgage assets.

Their challenge is getting their origination and servicing platforms to work well together. But if they can, they’ll gain even more advantages and lead the market when the business returns.

About the Author

Craig Bechtle is Chief Operations Officer for MortgageFlex, the only technology provider in the mortgage business to offer both a loan origination and mortgage servicing platform. He can be reached at cbechtle@mortgageflex.com.