In the past decade, the mortgage lending industry has invested significantly to meet the evolving demands of consumers and regulators. The result, according to data from the Mortgage Bankers Association (MBA), is a dramatic spike in costs to originate a loan.
At the Future of Real Estate Summit the MBA’s VP of Industry Analysis, Marina Walsh, discussed factors influencing mortgage companies’ costs to originate and whether technology spend will ultimately result in efficiency gains for mortgage lenders.
Her analysis? It may be too soon to know the effects of technology; however, certain indicators point to lowered costs in the future as technology investment catches up to increased regulation and compliance measures.
Mortgage lenders’ cost to originate a mortgage
The MBA’s data demonstrates that average costs to originate a mortgage steadily increased from 2009 until now. A number of factors can be attributed to this rise including (most notably) an increase in regulation after the housing market crisis in 2008.
Interestingly, 2019 saw a sizable decrease in origination costs from Q1 to Q4. At the beginning of 2019, the average cost to originate had reached a decade high at $9,299 per loan. By the second half of 2019, this number had dipped by nearly $2,000 per loan (at $7,217 per loan).
Walsh acknowledged that this significant decrease was partially a result of volume changes spurred by lowered interest rates (witnessed in the second half of 2019) which resulted in higher volume. She also noted that other factors could be at play including efficiencies from technology. In the past few years, lenders have increased their technology investments across point of sale, loan origination, quality control, and compliance systems. “When volume ramps up, if we’re seeing a significant cost decrease it could mean that technology is working to streamline processes.”
Technology spend differs between large and small mortgage lenders
To further understand mortgage lenders’ technology investment, Walsh broke down the different components involved in the the cost to originate a mortgage.
For larger institutions (depositories), “production and corporate technology” factored into 10% of the cost to originate. For smaller independent mortgage banks (IMBs), “production and corporate technology” accounted for 4% of the cost to originate.
Walsh clarified that although technology takes up a larger portion of the cost to originate for depositories compared to IMBs, larger institutions are not necessarily more tech-forward or innovative than IMBs. In fact, both mortgage lending entities are equally prioritizing innovation to keep up with regulatory changes and consumer expectations.
So why do depositories have higher technology spend? Walsh explained that depositories naturally have higher corporate costs (legal, risk management, and overall network technology) than smaller institutions. Additionally, depositories are in the midst of a transition from their own legacy systems to more modern systems.
“It’s important to keep in mind that a lot of these larger banks have very old systems in place and they are operating on numerous loan origination systems,” she said. “On top of building something new, they are also still working [in the interim] on these older systems with band aid fixes.”
Meanwhile, IMBs do not have their own systems to replace or fix. These businesses use software as a service and rely on their software vendors to adjust to marketplace changes.
Technology spend shows promise
Next, Walsh displayed a technology spend chart which demonstrated the significant rise in technology spend for both depositories and IMBs over the past decade. For larger institutions, an average of $1,080 is spent on technology costs for mortgage origination. For IMBs this figure is $399.
Walsh posed the question “will the increase in technology spending ultimately improve fulfillment productivity?” The MBA’s data points to an modest but encouraging “yes.”
“In the last 10 years, we’ve seen a major productivity drop,” Walsh said of the number of applications fulfilled per underwriter; “however, in the last year, we’ve seen a slight increase in productivity.” Walsh noted this productivity increase was likely due to a combination of: a) technology creating efficiencies as volume increased at the end of 2019 and b) regulators working to provide clarity to make compliance smoother.
In addition, Walsh cited the slight improvement in the number of days from application to closing in the retail channel as an indicator of technology efficiency. Since 2012, the number of days from application to close has dropped from 50.1 days to 43.7 days for purchases and from 52.6 days to 45 days for refinances.
Overall, the impact of technology investment in the mortgage industry will likely be determined in the coming years as technology catches up to meet the demands of consumers and regulators and as more businesses adopt technology to replace outdated systems.
To watch Marina Walsh’s presentation from the Future of Real Estate Summit, click below.