Mortgage origination is a tough business and industry professionals are all intimately acquainted with the current story: meeting the onslaught of new, existing and ever-changing regulatory requirements has driven the average cost per loan for all mortgage lending channels through the roof.
According to the Mortgage Bankers Association, the average net cost to originate a loan at the end of 2013 was $5,171. This is up from roughly $3,000 per loan in 2006. The past few years have winnowed the competition in both the vendor and the originator sectors, but it is still tough to make a living in this industry. What can lenders do to improve their cost per loan and profitability?
Survival in this industry is critically dependent on being able to effectively manage cost per loan, and doing so requires a balanced focus on controlling both loan volume and costs. Trying to improve profit margins by only increasing loan volume will have limited impact. There is no leverage to increased volume unless it is associated with a cost structure change or efficiency gain because without improving efficiency, more labor is required to support the increased volume.
Increasing efficiency is realistic and attainable, and can be addressed to a significant degree through technology and automation. Loan origination systems that lack significant automation and self-service capabilities hurt the bottom line as inefficiency reverberates throughout an organization, while more robust systems can streamline a meaningful number of processes, resulting in increased efficiency and scalability (or alternatively, reduce headcount).
There are currently about 30 LOS vendors in the market. Despite the fact that loan origination is for the most part a series of structured and repeatable processes, there are myriad variations for how these LOS mousetraps are built and deployed.
LOS platforms can vary by the origination channels and lender types they serve, and their functionality and usability is tailored to support those niche segments. LOS vendors exist in a highly competitive market and each attempts to create features unique and exclusive to them.
A lender's LOS can help or hurt its bottom line. When examining existing systems for process improvements or evaluating other alternatives, focusing on a number of key considerations can simplify the process and narrow down the field of LOS options.
Efficiency and Agility: An LOS should be process-focused and contain significant automation of routine tasks and third-party service ordering. Manual workarounds for custom policies and procedures should be kept to a minimum. Likewise, vendors and their technologies should be able to quickly respond to requests for customized screens, workflows and business rules, while also providing lenders with self-service features that enable significant self-control.
Connectivity and Security: System interfaces are a significant factor in any LOS implementation, and lenders need to ensure that a new LOS can support existing third-party origination relationships and accommodate other third-party interfaces and data exchanges in a cost-effective manner. How loan data is stored, protected and accessed is another important consideration. Lenders' specific data protection requirements and risk tolerances may determine whether a software-as-a-service platform that's hosted in the cloud or a self-hosted LOS that's housed on internal servers is required.
Performance and Aptitude: A vendor's reputation and track record for successful, on-time implementation and release delivery is critical, as is determining whether current clients are satisfied. Lenders may have to decide whether they are willing to work with a newer vendor with a shorter track record. To complement the vendor relationship, lenders must also have competent technical staff and acumen to build or maintain a toolkit LOS, particularly if the lender wants to maintain the infrastructure for an LOS deployed on-premise.
Functionality and Strategic Fit: An LOS must fully support all of a lender's origination channels, users, geographic locations, languages and loan products, as well as all state, federal and investor regulatory compliance requirements. Vendors should also maintain a development roadmap outlining all upcoming system changes. In addition, determining whether an LOS is an end-to-end platform or requires other technology to completely originate, process, approve and close a loan is essential. It's also important for lenders to consider both their current technology needs and expected needs three to five years from now to ensure that an LOS is capable of accommodating growth in loan volume or new origination channels.
Costs and Deadlines: LOS vendors make money in multiple ways, including per-transaction charges, as well as fees for licensing, system maintenance, professional services, custom development and third party integrations. Lenders must examine those expenses to get a comprehensive picture of a system's total cost. When selecting a vendor, lenders must also determine that the vendor has sufficient capacity to honestly meet its implementation deadlines and whether the lender can offer up its best and brightest staff to help configure and test the new LOS.
By focusing on these considerations, lenders can put themselves in the best position to effectively conduct the required due diligence of an LOS and its vendor. Exploring these topics critically and honestly will increase a lender's chances of selecting the LOS vendor that is both a good partner and a good match for its business and have the greatest positive impact on the bottom line.
Randy Loghry is founder and principal of Mortgage Technology Advisors.