The Holy Purchase Loan: A Monty Python Grail?

WE’RE HEARING that many in the industry think getting a purchase deal is the Holy Grail for sustainable business and the best way to generate consistent profits over time.

In fact, we see a big impact on M&A valuations based on the level of purchase volume that is generated. But a review of the data may reveal something much more complex.

We recently conducted a statistical analysis of data from over 40 lenders who participated in the MBA/Stratmor Peer Group in an effort to figure out the difference in fulfillment costs by loan mix.

How do you figure this out? First, you get multiple degrees from MIT; then, after you’re kicked out of MIT’s doctoral program, you settle for a math Ph.D. from Harvard as our senior partner Matt Lind has done. Then you apply that brain power to sifting through the variables present in the huge data set that represents the peer group study.

Matt then used a regression analysis to determine that over 84% of the observed difference in fulfillment costs across the 40 lenders in the sample can be explained by loan mix and that the difference in cost was...drum roll please...approximately $950 more to process a purchase loan than a refinance loans. Wow.

Now that the mathematician has done his wizardry, let’s discuss whether intuitively this makes sense.

First, there is more underwriting and processing for a purchase—it typically requires more credit-related documents (income, assets, etc.) and there is the sales contract to review as well. Title work is more complicated.

And then there is the pressure of time...When you get a purchase loan, you have to hit the closing date, usually the end of the month, and that forces you to staff for peak period demand, resulting in lower productivity during the first three weeks of the typical month. When you have a purchase loan in process, you have to keep both the consumer and the Realtor updated on the progress—anyone who has dealt with Realtors knows about the need to be responsive.

You have to be prepared to handle questions from the closing table and you have to be sure the documents are there on time. That all adds up to real money. And that does not even factor in the sales costs associated with the transaction—anyone who has tried to hire a good purchase LO knows they are more expensive that the more readily available refinance agent.

Of course, if you can charge more for a purchase loan than the extra processing cost is worth it. However, we all know that is not the case. In fact, many of our clients have pricing that is LESS for purchase loans, in an effort to maintain relevance to referral sources and thus protect against higher rates and lower volumes in the future.

As lenders prepare for 2013, many are considering that increasing purchase volume is the Holy Grail to enable them to continue to maintain strong profits as refinance volumes wane. But as fans of Monty Python know, the pursuit of the Holy Grail can lead to killer bunnies, with these killers in the form of tougher loan processing and higher costs. (If you don’t understand this reference, please rent the Monty Python movie and laugh a little.)

So, what should you do about this? My suggestion is to take a hard look at your own numbers (costs and revenue) and ensure that you have the processes and pricing in place to originate purchase loans profitably.

Garth Graham is a partner with Stratmor Group, and has over 25 years of mortgage experience, from Fortune 500 companies to startups, including management of two of the most successful mortgage e-commerce platforms. He was formerly with Chase Manhattan Mortgage and ABN Amro, where he was a senior executive during the sale of its mortgage group to Citigroup.