Fewer Dollars To Close

‘Crazy Expensive’

Times were good. “When you’re making money and business is flowing, you don’t really look at it as clearly as you could,” says Linda Davidson, senior loan originator at Fairway Independent Mortgage. “When the market shifts, that is when leadership should rise to make those decisions. What can we do better to manage expenses?”

The National Credit Reporting Association (NCRA) announced the pricing structure of credit reports would rise up to 400% this year. While borrowers are typically responsible for the cost of a credit pull, it’s up to the lender to absorb when applications are canceled or denied.

Watch it on The Interest: Pulling From The Reserves

The cost to verify an applicant’s employment in order to issue a pre-approval also has risen.

“Just those two things alone have been crazy expensive,” Davidson points out. 

“Your verifications can be $100-$150 depending on how difficult that file is, and you may or may not ever close that loan.”

High interest rates, simultaneously low inventory, and “hairy” loans have become commonplace.

“Right now it seems like every single loan has hair on it,” Davidson says. “There’s not a lot of perfect 20%-down, 820-credit score borrowers. Those do not exist right now, and if they do they’re rare and far between. So you’re spending a lot of man hours on those (hairy) loans, and that’s another cost you have.”

Then with inflation, there have been increases in payroll, rent, and utilities for lenders running offices, retail branches, mortgage banks, and brokerages. 

“Everything we do has gone up, but our revenue has gone down, so that’s why you’re seeing the mergings, the shutdowns,” Davidson says. “If companies have not set money aside and prepared for this type of season, they’re not going to be able to sustain until the market shifts.”

As a top-producing branch manager and LO for almost 28 years, a large part of her focus is mentoring other industry leaders through professional development workshops.

“I get the wonderful benefit of being able to talk to a lot of people from lots of different companies. Everyone is struggling right now, whether it’s an IMB, a broker, or a depository,” Davidson says.

She counsels fellow executives to pull from their experience and, when necessary, reserves.

“There’s no manual someone picks up in leadership. You look at your reserves versus what is needed. What is the best next right thing? That’s what you do.” 

One Next Right Thing

Snapdocs Vice President of Customer Success Todd Maki has identified significant savings in closings through fintech.

“We’ve conducted a deep dive with over 25 of our lender customers and have identified a hybrid closing can save customers on average over $110 per loan due to operational and secondary market efficiencies,” Maki explains. “That savings increases to over $290 per loan when the hybrid closing has the addition of an eNote.”

In mortgages, an eNote is essentially an electronic promissory note detailing repayment terms, which serves as a binding agreement between lender and borrower.

Other closing documents, such as a certificate of title, deed, and bill of sale, can also be signed remotely. The “hybrid” model involves a combination of digital and ink signatures. 

Lenders store eNotes in eVaults, secure electronic systems in digital lending. There are a lot of eVault providers registered with the Mortgage Electronic Registration System (MERS) that tracks the owners and servicers of U.S. loans. Vendors also should be compliant with the Mortgage Industry Standards Maintenance Organization (MISMO) and the government-sponsored enterprises (GSEs). 

Between the real estate agent, borrowers, lender, third-party servicers, attorneys, and others, many parties are involved in a loan transaction from start to finish. And all of them must sign off.

“The closing process requires a lot of coordination across dozens of different parties,” says Maki, who manages the team that directly serves SnapDocs’ lender-customers. “We’re focused on multiparty defragmentation.”

Specialized software allows documents to be created, reviewed, signed by multiple parties and stored in a secure, remote network. This translates to an immediate savings of ink, fuel, time, hassles, and money. 

“Tech is a line item in a lender’s business, but where we see the value of tech is driving efficiency in terms of how lenders do business,” Maki says. “Even with technology being more and more pervasive every year in the mortgage industry, there remains significant opportunity for efficiency and cost reduction because many of the technologies in the space serve a point purpose. It’s the fragmentation across the different entities and people involved that creates inefficiency.”

Control Over Expenses

But tech isn’t the only place to find savings. People also can find savings on their own. 

“There are still going to be costs no matter what you do,” Davidson says. “Every smart mortgage lender has gone in and said, ‘OK, let’s identify what things we can do to help keep costs down.’ We have five things that we call expenses we can control. We’ve identified those, and we talk about them every single month. This is what we spent, this is what we spent last year … that way you’re seeing the savings.”

Small changes can add up over time -- pennies in a jar transforming into dividends.  

Among Davidson’s suggestions for controlling expenses is an alternative to ordering Verifications Of Employment (VOE) during the pre-approval. Instead, she says, ask applicants for pay stubs representing each of the last few years to find out what they made, broken down over time. Then at least the official VOE is only an endgame before closing. 

Additionally, some companies are employing soft versus hard credit pulls, a cheaper, though limited, option.

“You can’t run automation approvals, etc., but they are cheaper for a glance upfront before you go into the other expenses you need for underwriting,” Davidson says.

While the phrase “a reduction in force” is not one anybody wants to hear, this is a primary way companies cut costs during hard times.

When staff positions are eliminated, appropriate delegating of resources and staff can mean the difference between stamina and shutdown.

“A lot of companies are sharing processors between branches,” Davidson says. “Maybe one branch had to do a force reduction and a different branch has the capacity to handle another 15 files. They can pay a fee per loan versus hiring someone else.”

The Big Picture

Every industry has seasons and markets. Putting away savings in reserve funds during better times ensures an industry professional doesn’t crash and burn, at least right away. 

“As we say in the South, we’re buckling down and honing on what we can, but being really wise on how we share resources with each other, looking at the big picture and what can be done,” Davidson says. “Even in biblical days, Joseph was a leader and he knew there was a famine coming, so he stocked away the grain so that they could have it during lean times. It’s the same concept. Whether it’s back 2000 years ago or today, good leadership has the foresight to say, ‘What can we do right now to hold us off when the market shifts?’”

While the fingers of mortgage lenders have been crossed for a more lucrative market in Q4, some might still depart 2023 empty-handed. 

As Davidson predicts, “It will be next year before we see the righting of the ships again.”