In my last column, I teased a series of blog posts focused on the operations side of the business and was pleasantly surprised by the number of reader comments. It appears that plenty of people know that they need to provide some significant support to their operations team right now. It's just hard to figure out how.
I suggested that managers should send their operations folks off to get some much-needed training before the Consumer Financial Protection Bureau's TRID deadline hits. The column outlined the critical challenges to implementing TRID based on a survey we recently completed with industry leaders. For example, the survey showed that only 20% of lenders know who is going to actually do the closing disclosure.
But now, the CFPB has delayed TRID by two months, citing an "administrative error." Maybe the CFPB leaders read my article and were so moved by my description of the challenges faced by operations that they decided to delay two months. (Note: this is a joke, and I have absolutely no facts to back up this outlandish claim.)
In discussing the challenges for operations, and introducing some ideas as to what to do about them, I'm not sure I can change the perspective of regulators — but perhaps the perspective of industry executives will shift. The broad challenge faced by ops is best described by the fact that operations management personnel are faced with two at times opposing challenges — the first is to manage the business and the second is to change the business. That is sort of like saying, "please drive me from location A (applicationland) to location B (closingville), while simultaneously changing the tires." It's hard to even write about doing both things at the same time, so this discussion will be covered in two separate posts. This week we're going to talk about managing the business.
Managing the business is the challenge of processing the loans in a way that gets them to closing on time without making mistakes, and using the people, processes and systems you already have available to you. Of course, you're doing it in a climate that makes it harder than ever to get it done effectively.
Our numbers reveal that operations efficiency for the last few years has been steadily decreasing. The data shows the average lender funds 5 loans per fulfillment full-time-employee. Processors typically handle 10 loans per month which fund, underwriters 20 loans per month and closers 40 loans per month. Now, different mortgage entities perform differently, which is why we advocate benchmarking yourself against peers that have similar business models and product mixes.
However, as bad as those numbers may seem (compared to pre-bubble metrics), the bigger challenge is that they are likely to get worse because the business itself is likely to change. For example, we are surely going to be doing more purchase loans than refinance loans, and purchase loans are much harder to get done, and that impacts productivity. In fact, Stratmor analyzed this last year and found that the cost of originating a purchase loan was $1,000 more than the cost of originating a refinance loan. Why is that?
There are three reasons purchase loans are harder, and why purchase-centric lenders tend to have higher costs and lower productivity. The first reason is that there are a lot more steps involved in a purchase loan, including the review of a sales contract, more complicated title review, and first-time home buyer and other applications to handle, which are obviously harder than your standard refinance loan.
And, of course, there is always an appraisal on a purchase and each of those additional steps decrease productivity. After all, there is no such thing as a streamlined purchase (at least not since the pre-bubble era).
The second major reason is that the time is compressed, and typically is not variable. When a contract is written, the date is set and the lender has to work hard to hit that date. It's not like a refinance, where you can simply move the date if you have loans that need to get done sooner. We are fortunate that Realtors (Capital R!) always ask for reasonable dates, and never try to rush closings. (note: this is also a joke).
The challenge for operations managers includes the classic tradeoff that applies to IT projects as well as business processes — you have time, requirements and resources. You cannot consider them all as critical. Something has to give.
For purchase loans, it's the time that is fixed, which means that the features (loan requirements) or resources (staffing) need to be flexible. Right now, we work in an era of heavy emphasis on loan quality and compliance, so the requirements are not getting easier. Where does that leave us? Well, if you want to do purchase loans, you'd better staff for it and have the resources necessary to hit those dates.
And now the final pesky issue of having enough resources to hit those dates: peak staffing. With a refinance, you can try to spread out the business throughout the month. But in purchase loans, the work often compresses into the last week of the month. In fact, many lenders do over half their purchase business in the last week of the month. This is brutal on staffing, because you have to hire for that peak period and then have people with less to do, waiting for the next month end cycle to show up. And that hurts productivity.
This is a tough business for operations to manage and, with the percentage of purchase business expected to climb, it's likely to get tougher. While they manage the business under these challenging circumstances, the operations managers are also asked to change the business, often due to regulatory pressure or the need to be leaner, and more productive. Accomplishing that change in the business will be our topic for the next column.
This challenging environment is why it's so critical for operations managers to understand how they perform in relation to other lenders, to have a chance to learn from their peers, and to get the tools necessary to better manage the level of change that is expected of them.
Garth Graham is a partner with Stratmor Group and has over 25 years of mortgage experience.