MReport October 2018

TheMReport — News and strategies for the evolving mortgage marketplace.

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32 | TH E M R EP O RT FEATURE A s competition heats up in the U.S. home finance industry, lend- ers are expecting to see decreased profits in 2018. There are many reasons they expect this year to be tougher and for it to be harder to turn a profit. But it can still be done and the best lenders are already making the connec - tions that will allow them to do it. It won't just be about trying to get more business for the most successful lenders this year. That's going to be very hard given the MBA's volume forecast. It will re - ally be about working to increase their margin of profit on every loan they originate. That's going to be tough, too, as the MBA sur - vey of its members already shows that lenders are paying over $7,000 per loan to originate it. But again, the best will find a way. For example, the smart loan originator will look at reducing the hidden expenses in every loan. While we'll share some ideas on how that can be done, first let's take a closer look at the situation lenders find themselves in today. Borrowers vs. Competition D uring its annual conference in October 2017, the Mortgage Bankers Association released its estimates for loan-origination volume in 2018. The organization's economists predicted an overall decrease in mortgage originations from $1.69 trillion in 2017 down to $1.60 trillion in 2018. Worse, MBA anticipates refi - nancing originations will decrease by 28.3 percent from 2017 to ap- proximately $430 billion. This has been the easiest source of business for loan originators for at least a decade, but with rising interest rates, it is not sustainable. One bright spot in the MBA's 2018 volume estimate was an expected increase of 7.3 percent in purchase-money originations from 2017, rising to $1.2 trillion. Also, welcome news is that the estimate expects loan originations to rebound in 2019 to $1.64 trillion, with purchase originations of $1.24 trillion and refinance origina - tions of $395 billion. But if lenders don't find a way to cut costs and improve their profit margins this year, that business may come too late. The only conclusion is that lenders will be competing for fewer borrowers in 2018 and that means competition will heat up. One look at the most recent Fannie Mae Mortgage Lender Sentiment Survey demonstrates that lenders have reached the same conclusion. As Fannie Mae put it: "The share of lenders who said competition from other lenders was the top driver behind their negative outlook increased once again to another new survey high for the fourth consecutive quarter, continuing a trend that started this time last year." Historic High Costs I f you are in the business of home finance, we don't need to tell you that your costs are too high. The MBA's quarterly survey of its members confirms that even the biggest lenders—those who should be able to capitalize on economies of scale—were paying over $7,000 to close a loan in the third quarter of 2017, the most recent data available at the time this article was written. The organization's survey also touched on lender income and confirmed that margins remain very tight. With investors only beginning to come into the market for non-QM loans, most lenders are still targeting conforming loans and selling their products to the GSEs—and seeing less secondary marketing income on each loan. Lenders have no leverage with investors for qualified mortgage products, so even originating qual - ity loans won't make them more money on each deal. They must cut costs if they hope to increase their profit margin, but that will be challenging unless the lender has access to efficient partners. Improving Margins C utting costs may sound easy unless you're working in the home finance industry. The complexity of our work and the regulatory oversight that comes with it makes it difficult to nail down costs. It can be difficult just to determine how much the insti - tution is spending on a particular process, but that's the essential first step to increase profit margins. According to the MBA, about 70 percent of the cost to originate a loan is spent on people, usually those inside the institution. About half of that money goes to the sales department. Surprisingly, fac - toring in the human resource costs is often the missing step when lenders analyze the internal cost of a process. It's almost always more expensive than they think it is. Only by fully examining every expense that goes into a process can lenders hope to reduce their overall costs. Unless they have this number available, there will be no way to know how much they will save by outsourcing the process to a third party. This by no means suggests that by outsourcing lend - ers will be cutting down their resources; instead, the right part- ners will help them in bringing higher productivity with the same resources. For example, today a single loan processor spends X number of hours to process one loan. Experienced third-party providers will be able to study specific business environments, re- engineer processes, apply technol - ogy, and decrease their effort and When the Going Gets Tough In what is proving to be a difficult year for mortgage lenders, what can be done to improve profit margins and originate loans more cost effectively? By Eric Wilson

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