Tech drove closing cost spike, but most lenders not yet getting value
Mortgage lenders' costs to close surged in the last decade because of technological investments as borrowers clamored for speed and digitalization.
All the advances in technology over the last decade were supposed to lower origination costs, but they did the opposite. However, that could have been a product of the upfront investments and implementation of the technology. The average total expenses to close a mortgage spiked, going to $8,405 in 2018 from $5,958 in 2013.
The change came as the mortgage industry appeased consumers by keeping up in the digital age. Christopher George, the chairman of the Mortgage Bankers Association, reminded the crowd in the opening session of the 2019 MBA Tech conference that people don't want their grandfather's mortgage.
"The only reason people are going to stick with you is if you provide a superior digital experience," Marcos Carvalho, co-founder and chief revenue officer of NestReady, said in an interview. "The reason why you take an Uber is because it's simple and easy. Mortgage is the same thing. If I'm competing with many lenders by providing the same type of online application, I need to compete on the experience first."
Trying to please consumers by maintaining a spot on the cutting edge comes with a price. Some companies add technology for the sake of adding it without it actually providing value.
"Everybody seems to be chasing what other people are doing from a technology perspective," Jim Pathman, chief information officer at Plaza Home Mortgage, said in an interview. "There's this stare-and-compare. You have 'that' so I must need it to be competitive and successful. We don't want to be the dog wagged by the tail."
In the same vein, lenders were often misguided in their attempts to distance themselves from the pack and misdiagnosed technology as the challenge to conquer.
"The truth is we've had the technology to do this properly for about 20 years," Aaron King, CEO of Snapdocs, said in an interview. "This was a network challenge. If you're a lender dealing with a thousand settlement agents in a year and you're selling your loans to investors, how do you align all those parties on a single platform, a single process, a single set of rules? Nobody's really settled that problem to date. That's why it's more expensive. Because people are paying for and implementing technology that's not actually providing value at the gates."
Of course, constantly shifting requirements can force a lender's hand and sustain the high costs as well. The changes in HMDA, URLA and MISMO standards ultimately should be better for the industry. Though Pathman said half of Plaza Home Mortgage's costs go toward keeping up with the modifications.
Tech ushers in hefty costs upfront and it takes time before getting a return on investment. For companies to recoup that money, they pass the costs onto their customers. Despite the continually rising costs, some industry experts believe they'll decrease in the near future. Tim Smith, the CRO at FirstClose, thinks the average closing cost will fall over time, but it will be another 18 months before that happens since many vendors still have yet to fully acclimate to their integration.