Looking For Change Under Every Couch?

Don’t overlook the obvious – employees have ideas for cost savings, too

Insider

Contributing Writer

When conducting business reviews, lenders must take into account the huge increase in costs which the Mortgage Bankers Association (MBA) pegged at more than $12,000 per loan in the fourth quarter of 2023. These costs have been thrown into sharper focus with the MBA also reporting that the average pre-tax net production loss was 73 basis points (bps) in the fourth quarter – $2,109 on each loan originated – more than double the average net production loss of 34 bps in the third quarter.

Taking the long view, the average quarterly pre-tax production profit, from the fourth quarter of 2008 to the most recent quarter, is 43 basis points, according to the MBA.

These costs are varied and rising, and impact lenders of every size, from guarantee fees imposed by Fannie Mae and Freddie Mac to compliance, servicing, foreclosure, and buy-back reserve costs. These costs have to be covered by the current fundings and erode the margin and the spread. Some companies’ books of business shape whether they have more or less cost. For example, jumbo and other non-QM loans are not subject to the enterprises’ guarantee fees.

In 2024, lenders have flipped every office couch cushion in case there’s a nickel to be found. Now what? How can different lenders save money in this high cost, low profit environment?

To start, senior management should solicit ideas from employees. Occam’s razor: the best ideas are often the simplest. Hold an “Efficiency Meeting” that includes a round-table discussion covering ideas submitted by employees about how to make their departments more efficient. An initial meeting could be held with no managers involved. Cost savings may not spring from these meetings, but asking employees to engage in cost considerations helps to demystify these kinds of “back-office” topics.

Loan officers and departments that want to spend money should be required to draft a proposal/ROI for evaluation by management. Custom marketing costs should be given a hard look, as well as comparing marketing pieces to how many loans that marketing produces. Review job ads that can be canceled and any “premium” accounts not being used. Office spaces can be shrunk and shared.

Bringing employees into the cost-management conversation also builds awareness about employees’ strengths and weaknesses, leading to opportunities to increase productivity, thereby increasing the cost-effectiveness of the people already on payroll.

For example, skill-set cross-training can prioritize coverage and empower team members to play to their strengths, while building other proficiencies. Are you minimizing file touches, such as the number of times income is being calculated? Using cheaper resources for parts of the file and re-allocating duties from underwriters to less expensive personnel can effectively trim costs if skill sets have been cross-trained. Without training, these cost-saving measures can increase quality and compliance risks.

“If trained and compliant loan officers add value by educating and coaching their clients, the same is required of effective managers. Manage costs like it’s 2024.”

Skill-set cross-training goes hand-in-hand with assessing aspects of the loan process that can be streamlined or otherwise made more cost-effective.

For example, credit-pull costs rose dramatically in 2023 and the first quarter of 2024. Processors and loan officers are encouraged to do soft credit pulls first, at a huge cost savings (although the cost of soft pulls has also risen). If one score is below a certain level, stop there. Save the money. As an added bonus, soft credit pulls don’t trigger the credit bureau selling your lead to another mortgage provider.

Lenders are advised to analyze post-closing conditions and adjust shipping to minimize paying warehouse line fees. Reducing shipping delays helps reduce the cost of warehouse lines. Some lenders automate the conditions’ import from investors into the LOS.

Tolerance cures are another specific area of examination for some lenders when it comes to reviewing the cost of the loan process. Where are these coming from? Why did they happen? How much are they costing? Lenders can create business rules to avoid generating tolerance cures in the first place.

Vendor management is another key area to assess for potential savings, given how much money lenders spend on vendors monthly. Ask your teams: Which vendors truly trim costs and make loan processing more efficient without sacrificing quality and compliance standards?

Automating various loan processes can eliminate the need for certain vendors, lowering overhead costs, especially for CRMs. Some lenders are adopting back-office software to increase the cost effectiveness of human resource, information technology (IT), and administrative teams, as well as things like travel requests and booking.

In capital markets departments, there are renewed efforts to wring every penny out of loan sales.