Opinion

Lenders, leave no stone unturned in battle against margin compression

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The mortgage industry's battle against skyrocketing costs and margin compression is not a new story. But, after two years of "digital revolution" and the adoption of more consumer-facing technology, lenders continue to grapple with profitability.

One time-honored approach to increasing profits is to increase sales: the volume approach. And it appears the market is beginning to stabilize again. As a result, we're seeing lenders grow their footprints and product mixes again.

This strategy is cyclical and market dependent. It doesn't account for the next, inevitable dip in origination volume or rate increases. Additionally, expansion itself involves expense and investment, not to mention a learning curve at times. The good news is that this "old school" approach to growth can still be matched with "old school" approaches to sustainable growth that can give a growing lender the ability to expand while hedging some of its growing expenses.

We've been told repeatedly that the digital mortgage is a great way to address margin compression. In fact, it is. But it doesn't provide a total solution. Most "digital transformation" efforts have really focused on loan origination technology, rather than automation of most or all of the production process.

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We're still overlooking multiple areas of the transaction that bloat costs and breed inefficiencies. We typically think of loan production expenses as the costs of doing business, including employee compensation, sales commissions, infrastructure/equipment and other production expenses or corporate allocations, such as vendor outlays. Buried within are costs associated with the settlement and closing process. Although these are routinely overlooked when it comes to cost-cutting, it's an area ripe for streamlining through automation.

Even the most efficient origination system has little impact on the settlement process. The advent of new TRID rules proved this. There is still significant cost associated with the disjointed, ad hoc processes and proprietary, stand-alone technologies used to manage the settlement phase.

How much is the industry wasting or losing because of the errors or inefficiencies springing from manual form comparison or defect tolerance cures? Even if the third-party vendor is incurring the direct cost, it's eventually being passed back to the lender — not just in increased fees, but in the form of borrower experience and lost referral/return business.

There are real savings to be had in managing the traditional "back end" operations. Vendor management (vetting, reporting, oversight) has often been consigned to the lowest of priorities. But efficient partners can mean long-term cost savings in the production process. Those partners can simultaneously save clients money when it comes to new growth as well.

One way that lenders are containing costs while growing is the use of third-party providers with national reach. Note that this doesn't exclusively mean large vendors. Service providers can also use experience, technology and agility to provide the same geographic reach as the 800-pound gorillas.

For lenders seeking to take advantage of the origination volume spike by entering new markets or channels, it makes sense to leverage the expertise, scalability and reach of a national provider. These partners have likely worked with firms like yours. They've learned the lessons of growth and are eager to share them with you. Most are able to help clients avoid the typical, costly mistakes lenders can make upon entry to a new landscape. They're also using better and more scalable technology on your behalf. All of that is being passed on in cost savings.

Ours is a big-picture industry that tends to focus on volume and sales. When we do cut costs, we return to our usual suspects (head count, support centers versus revenue centers). While the necessary evil of settlement expenses might make up on overlooked portion of the total per-loan expense to lenders, it's one that could render the quickest and easiest relief on margin compression while supporting real growth during a mini-boom.

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