How Lenders Can Be More Efficient and Reduce the Cost of Doing a Loan
Since hitting a historic low of 2.65% in January 2021, the average interest rate carried by a 30-year fixed rate mortgage has been on a tear. In November of 2022, the national average rate stood at 7.24% — nearly triple the lows. And while rates have come down slightly since then, they still hover around 6.36% as of February 9, 2023 — two and a half times where they sat just a year ago.
These rising interest rates have had a direct effect on mortgage demand and loan volume. According to a survey conducted by the Mortgage Bankers Association (MBA), mortgage applications for new home purchases decreased by a whopping 25.2% compared to a year ago. Meanwhile, Fannie Mae doesn’t expect the housing or mortgage markets to “meaningfully recover” until 2024.
With interest rates rising and origination volumes falling, lenders have been forced to do more with less.
But the good news is that this cycle’s belt tightening has spurred many lenders to consider ways to make their processes more efficient. After all, even the smallest of inefficiencies — when multiplied across hundreds or thousands of loans — can make a big difference in your bottom line.
It’s estimated that the average mortgage costs lenders more than $10,900 to originate. Recouping just 5% of that cost through improved efficiencies would translate into $545 saved per loan. For a lender originating 1,000 loans per year, that would equate to savings of more than $500,000 — money that you can use to reinvest in your business, or pad your bottom line.
Are you interested in improving efficiencies across your mortgage origination business? Below, we suggest ways to evaluate your current processes and identify areas of improvement. We also highlight specific steps you can take to target these inefficiencies and retain more value from each loan that you originate.
1. Evaluate your current situation.
In order to improve your processes and realize greater efficiency, you should first understand where you’re starting from. By understanding where you currently are, you can chart a path for where you want to be.
Start first by walking through your loan origination process from start to finish. Identify each discrete step in the process. This may include:
- Document collection
- Identity and document verification
Once you have outlined the entire process, ask yourself the following questions:
- How long do loans sit in each of these stages? Why? Is there anything you can do to reduce the amount of time spent in each stage?
- Which of these steps tend to contribute the most friction to your overall process? How might you reduce this friction?
- Where do bottlenecks currently exist? Are these bottlenecks caused by people or processes?
- Where do loans tend to stall or fall off? Why do loans stall or fall off in these particular stages? Are there steps you can take to better nurture loans through these stages?
- What does the handoff look like when a file is passed from one member of your team to another? Are there ways you can make the handoff more seamless?
The steps in your process that take the most time, which contribute the most friction, or which lead to the most stalled loans are likely your best targets for optimization. That’s because even small improvements can lead to outsized gains.
If you want to take a different approach, you might consider auditing your existing loan pipeline. Where in your pipeline are the most stalled files currently? What actions can you take now to reactivate those files and move them along? What actions can you take to reduce these stalled files in the future?
As you begin to form ideas about actions you might take to optimize your process, it’s important to have specific KPIs in mind that those actions could move. By tying each proposed optimization to one or two KPIs — and then benchmarking these KPIs now, before you actually implement any changes — you should be able to look back in a few months and determine what, if any, impact your optimizations actually had.
Some KPIs you might consider benchmarking here include:
- Average loan cycle time
- Cycle stage length
- Pull-through rate
- Fallout rate
- Average mortgage loan value
- Profit per loan
- Cost per unit originated
- Application approval rate
- Abandoned loan rate
- Incomplete application rate
- and more
2. Automate as much as possible.
Once you have a sense of your current situation, you can begin designing and implementing an action plan to boost efficiencies. For many lenders, this will involve simplifying or recreating existing processes in order to streamline them. Leveraging automation can be a very effective means of doing exactly that.
Automation can help your business in three key ways:
- It saves time: The loan origination process involves many discrete steps, each of which can be time consuming for a person to manually perform. Automating some or all of those processes can shave anywhere from a few minutes to a few days off of your total cycle time, allowing you to process more loans faster while also decreasing the risk of rate-lock extensions.
- It reduces labor costs: Many of the tasks involved in originating a loan can be considered “low-value” tasks in that they don’t require a lot of skill or expertise to perform. Reviewing a paper application, collecting documents, extracting data and entering it into your CRM — these can all be done quickly and accurately through automation. The result is that you can reposition your personnel to perform higher-value tasks, such as analysis and customer relations.
- It helps you meet customer expectations: Over the course of the past 20 years, more and more processes that would normally need to be performed in-person or via hard-copy documents have become digitized. Most consumers today expect “digital first” applications. Leveraging automation and digital processes can therefore help you meet customer expectations and delight them as they engage with your business.
Several steps in the origination process can potentially be automated through technology. Some possibilities include:
Application and processing
Traditionally, the application process would require a potential borrower to physically fill out paper forms. These forms would then need to be manually reviewed by a member of your team so that any relevant data could be extracted and potentially entered into your various databases (such as your CRM).
Digitizing the application process reduces friction by giving your borrowers the digital-first approach they expect. Eliminating manual review and data entry at these early stages also saves your employees’ time and can reduce the risk of errors. Meanwhile, digitizing processes like document collection mean that your employees can spend less time hunting down supporting documentation.
Potential technologies that you can leverage here include:
- Digital onboarding portals
- Electronic document collection
- and more
The underwriting process
For most loan originations, the underwriting process is where you will spend the most of your time. After all, this is where you must review and verify all of the information and documentation provided by the borrower. Credit checks, income verification, employment verification, identity verification, and property appraisal can each take days.
The good news is that there are a variety of solutions that can help you speed this process along. APIs exist, for example, that allow you to integrate directly with payroll providers, asset management companies, banks, tax accounts, credit bureaus, and other third-party data providers. These APIs reduce the need for your borrower to provide physical documentation, leading not only to a better borrower experience but also to faster (potentially near-instant) verifications.
Potential technologies that you can leverage here include:
- Digital identity verification
- Automated employment, income, and asset verification
- Appraisal workflow software
The closing process
For many lenders, the closing process has remained a largely in-person transaction. Unfortunately, getting all of the required parties in the same room at the same time for closing can prove cumbersome, and scheduling conflicts can add days to your cycle time.
But remote closings have been possible for years, thanks to eNote providers, eVaults, remote electronic notarization (RON), and more. Better yet, these technologies can reduce the risk of signing errors that are common in in-person closings, such as a missing signature or date, which might require followup or otherwise drag a closing out.
Potential technologies that you can leverage here include:
- Embedded insurance
- Remote online notarization (RON)
- Mortgage Electronic Registration System (MERS)
3. Think about alternative revenue sources.
Reducing your expenses and making your processes more efficient can be a powerful way of improving your margins and maintaining profitability. But it’s important to note that you can also attack the other side of the profit equation by bringing in revenue from new and complementary sources.
For example, you might consider embedding homeowners insurance into your processes. In addition to providing value for your borrowers and potentially expediting the origination process, embedded homeowners insurance can also empower you to generate cross-sell revenue.
Another option might include offering borrowers new loan products. If your business currently deals strictly in mortgages, branching into related products such as home equity loans, HELOCs, or home equity conversion mortgages (HECMs) can create a new revenue stream.
Meanwhile, if your business services its own loans on top of originating them, you might choose to focus on improving your recapture rate by providing additional value to your customers throughout your relationship with them.
The value of embedded homeowners insurance
For mortgage originators
As mentioned above, there are many potential technologies that you might leverage to improve the efficiency of your loan origination process. But there are few solutions that can help you improve efficiencies while also acting as a source of new revenue — and even fewer that empower you to delight your borrowers. Embedded homeowners insurance is one such solution.
Embedded homeowners insurance refers to the process of a borrower purchasing an insurance policy through your business as a part of the loan origination process, or even as part of the experience of owning a home (in the case of loan servicing). The act of purchasing insurance is literally embedded within the loan process.
It works like this: At the moment in the mortgage origination process that homeowners insurance becomes necessary, your borrower is prompted to purchase an insurance policy. This prompting typically occurs digitally, through landing pages, widgets embedded directly in your website or borrower portal, or through links that are sent to your borrower by text or email.
Incorporating embedded insurance into your mortgage origination process can help your business in a variety of ways:
- It lowers loan cycle time: The longer it takes for your borrower to purchase adequate insurance, the longer it can take for a deal to close — and the longer your loan cycle time will be. By prompting your borrower to purchase insurance right when it becomes necessary, and by making the process as easy for them as possible, you can shave days off of the origination process.
- It provides value to your borrower: When borrowers have to shop around for an insurance policy on their own, it can be stressful — especially for first-time buyers who may not know anything about homeowners insurance. A seamless embedded insurance process that makes comparison shopping quick and easy can reduce this stress, helping your borrower save time and money. That engenders customer loyalty and brand affinity, and can even lead to that borrower referring new customers to you in the future.
- It unlocks new revenue: Some embedded insurance solutions work on a revenue-sharing model. When one of your borrowers purchases a policy through your embedded insurance process, you may earn cross-sell revenue. This revenue boost can help you make up for revenue that you’ve lost due to the slowdown in mortgage demand.
For mortgage servicers
Embedded homeowners insurance also provides value for companies that service the mortgages they originate, as well as standalone servicers.
Mortgage servicing tends to be very transactional in nature. The servicer collects payments from the borrower and, beyond this, doesn’t typically have much of a reason to communicate with the borrower. This means that the average mortgage servicer doesn’t have many opportunities to provide value to the borrower. Without the opportunity to provide value, it can be very difficult for servicers to build goodwill and customer loyalty.
Embedded homeowners insurance provides servicers a pathway to providing value and engendering goodwill.
Servicers don’t just collect mortgage payments from their borrowers. They also collect payments for property taxes and homeowners insurance premiums, which are held in escrow until they become due. This means that servicers have access to a wealth of information about a borrower’s homeowners insurance policy, such as:
- Their premiums
- Their renewal/expiration date
- Their coverage levels
- and more
If a servicer knows that a borrower’s policy is about to expire, they can leverage an embedded insurance platform to help the borrower find a new policy that is potentially better or cheaper. If they see that the borrower’s premiums are about to increase, the servicer can use embedded insurance to help them find a plan that offers similar coverage for less money.
By providing value in these ways, servicers can build customer loyalty and reduce the risk of losing a borrower to refinancing.
How Matic can help
In a high rate environment like the one we are in today, it’s important to streamline your processes, reduce your expenses, and generate new revenue. Partnering with Matic to embed homeowners insurance into your mortgage workflow empowers you to achieve all three of those goals.
Our platform quickly and seamlessly matches your borrowers with the right price and policy options for them from a network of more than 40 A-rated carriers.
Better yet, our embedded insurance solutions are incredibly easy to implement. Our flexible API integrations are compatible with a range of technologies and platforms that you’re probably already using — and require little technical work to put in place.
The content contained herein is for general informational purposes only and is provided on an ‘as is’ basis. Matic makes no warranties, expressed or implied, or representations concerning the accuracy, likely results, or reliability of the content or any content linked herein.
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