Is your mortgage production process ready for a purchase market?
It’s been a year of dizzying heights in terms of mortgage origination volume. Fannie Mae estimates an all-time high of $4.1 trillion (63% of that from refinancing alone) for 2020. For most mortgage originators, it’s been a year-long scramble to simply close deals and produce loans.
Most forecasts for 2021 suggest that it will be another great year, but at some point, and likely soon, refinance volume will begin to decline. With the implementation of FHFA’s adverse market refinance fee, it would appear the refinance boom’s days are numbered. We’re looking at a purchase-money market.
But are we really ready?
It’s well-known that a purchase mortgage involves more time and cost to produce. The margins are typically, therefore, smaller. Refinances are usually fairly straight-forward. In a refinance transaction, there’s no real estate agent involved. There’s no house shopping. No sales contract or negotiation. No real home inspection, and the appraisal is rarely an issue. For the lender, the choice of title and closing is straight-forward, and the closing process is fairly simple. There are fewer potential choke points, less emotion and fewer parties involved in general.
But with a purchase mortgage, there tends to be more emotion. There’s more need for communication — between lender and title agent, lender and real estate agent, buyer and seller (and their agents), and the like. Unexpected results from a home inspection can add days or weeks to a transaction that a lender has little to no control over. Because a property is changing hands, homeowners associations can get involved where there are liens. In other words, with a purchase mortgage, the transaction involves more parties, more professionals, and more potential for emotion, negotiation and/or even fallout, which can all lead to delay and expense.
It’s the messy, process-unfriendly points where the mortgage production process typically hits the shoals. Fee calculation, communication, data exchange, the introduction of game-changing information (e.g., the property has an undisclosed radon issue) — these are all parts of the process that, done inefficiently, explain why a purchase mortgage margin looks quite different from a refinance mortgage margin.
This is certainly not an effort to predict doom and gloom for our industry in the coming months. Far from it. But let’s face it: we’ve always been a cyclical industry, focused on fulfilling existing orders during upcycles and sales (and expense cutting) when origination volume abates. We’ve also become more and more reactive in recent years. When transaction volume is high, it’s “all hands on deck” to get the loans closed. When volume dips (or expenses rise), it’s time to trim our budgets. It sometimes seems there’s never a good time to take a moment to assess our processes and invest in improvement.
A quick look at the best-performing businesses in our industry, however, tells us why they’re doing so well. These are the firms that make time and resources for continuous improvement. It’s not just about sales. It’s about gaining competitive advantage or zigging while others zag. Many of the firms that were quick to adopt newer, better, integrated production technology have been reaping those rewards for a couple of years now as others struggled to catch up.
Improving operations needn’t always be a massive investment in shiny, new technology, either. Sometimes it’s as simple as taking a critical look at your process and finding tweaks to make it move more efficiently. The more regularly we do it, the less often we need to make massive expenditures on entirely new approaches.
Finally, efficient purchase mortgage lenders don’t just build strong Realtor networks or ramp up the sales process. They also examine the details of the settlement and production process. Are their preferred title partners efficient and effective — not only with garden variety closings, but with the inevitable curveball in the process? Is your TRID process locked down and does it involve minimal time on the phone, e-mail or (heaven help us) fax machine? Are your loan officers able to convey and receive important data and offer up immediate status updates for Realtors and their nervous clients?
If not, now’s the time to revisit your process. Or reinvent it, if there is none.
Consider this a call to our industry to get ahead of the curve now. The production process has long been our Achilles’ heel — the source of dreaded margin compression when revenue is not at record numbers. 2021 looks like it will hold plenty of opportunity for those prepared for it, but the current cycle is ending. As difficult as it might seem with orders clogging our sales funnels right now, now is exactly the time to reassess your operations and processes. Failure to do so could mean 2021 will be more of a time of catch-up for many.