Life After the Refinance Boom
Almost every mortgage lender in the country had a record Q3, thanks to a refinance boom spurred by low interest rates. Homeowners headed to their lenders in droves to take advantage of the lower rates. All told, mortgage lenders saw about $252 billion more in refinance loans than what experts predicted at the beginning of the year.
But the party is now over. The pent-up demand for refinances has been met, and mortgage lenders are back to where they were before the boom: struggling to find a way to make mortgage lending profitable.
We knew this would happen. The glut of refinances was a short-term fix that gave the industry a kind of sugar high. Moving forward, we have to find a way to fix the underlying problem of the rising costs of mortgage lending.
The Profitability Crisis in Mortgage Lending: A Look at the Numbers
To understand the scope of the problem of falling profitability in mortgage lending, it helps to deal in concrete numbers. Consider these, from Bloomberg:
- Though Citigroup almost doubled originations in Q3, it only increased revenue by $900,000.
- In 2018, Bank of America recategorized its mortgage revenue as “other revenue.” Historically, mortgages were a major revenue driver for the bank.
- JPMorgan’s auto and card lending unit outearned its mortgage unit by more than 4x this year, in part because the bank cut the number of mortgages on its balance sheet by 16 percent.
In other words, mortgage lenders can’t scale their way out of this problem. The good news, though, is that we’ve seen this cycle before. Every time interest rates rise, lenders go into crisis mode.
Higher lending costs aren’t necessarily a crisis, but they are the new normal. And while banks have the option of getting out of the mortgage game altogether and still surviving, nonbank lenders do not. Mortgage lending is too important to their operating model.
For mortgage lending to regain its status as a major revenue driver, we have to address the underlying forces making mortgage loans unprofitable and therefore unattractive: expensive, manual processes and inefficient, expensive technology. The most efficient way to do that is to incorporate more automation into the lending process.
Managing Loan Origination Costs with Mortgage Automation
The cost of mortgage origination was climbing before we hit the summer’s boom, up to $9,299 in Q1 2019. So what exactly goes into those costs?
The MBA published a helpful visual breakdown earlier this year that cites the following cost centers for mortgage lenders that are depository institutions:
- Sales: 46%
- Fulfillment: 23%
- Corporate allocations: 14%
- Technology: 10%
- Production support: 6%
What’s interesting here is what each of those items contains. Sales costs, according to the MBA, include not just expenses for loan officers and their assistants, but also for other sales managers and staff, marketing, and office leases.
Fulfillment costs include processing, underwriting, closing, and other essential services for closing loans. Technology includes all costs associated with front-end POS and back-end LOS software, plus any other software used to support individual parts of the origination process.
When I see those numbers, what jumps out to me is that nearly 80 percent of the cost drivers in today’s mortgage origination practices would be positively impacted by mortgage automation – i.e., mortgage automation would help control those costs.
Mortgage Automation and the Digital Mortgage
We’ve explained in the past that a true digital mortgage ties together a digital front-end application with a digital back end to create a streamlined, unified origination experience for both borrowers and lenders.
That’s possible because the software that powers the digital mortgage relies on automation to carry out many of the tasks that are today typically handled by employees, including…
- Pulling in data from multiple sources.
- Updating disclosures when the conditions of a loan change.
- Verifying that borrowers qualify for a loan product, based on income, employment, and assets.
So rather than paying Loan Advisors, their assistants, and other processors to juggle multiple screens and cross-check paper documents, lenders can let the mortgage automation software handle all of this instantly.
The cost savings can be significant.
The time required to originate a single loan will plummet, which means Loan Advisors can invest more time in building relationships with borrowers, which increases borrower loyalty and the likelihood that they’ll return to the lender for future financial transactions, including refinances and other types of loans.
It also means assistants and processors can do more work remotely, which can both save lenders on expensive real estate leases and help them beat the competition on time to close.
The latter is particularly important in an era of disruption from fintech startups: as non-traditional lenders make inroads in mortgage lending, incumbents have to do everything in their power to hold on to their customer base.
Adopting technology that automates mortgage lending processes is the simplest way to do that: with such technology in place, lenders can…
- Reduce the per-loan cost of lending.
- Deliver a better, faster, and more streamlined customer experience.
- Empower Loan Advisors to build deeper relationships with customers, which increases loyalty.
- Improve the transparency of the origination process for customers, thus empowering them to be active participants throughout the process.
No lending business can depend on demand surges spurred by low interest rates to maintain profitability. To build a sustainably profitable mortgage practice that endures through both boom and bust cycles, lenders must embrace automation technology that streamlines their customer-facing and back-end operations.
Curious about how mortgage automation might affect your organization? Calculate your likely savings with our ROI calculator.
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