A New Way Forward
When I first started in the industry as a loan officer over 35 years ago, initial loan applications were taken by hand. Paystubs, W2s, and bank statements were considered “alternative” documentation, compared to written verifications of employment and deposit.
Credit reports were ordered and delivered by hand by the local credit bureau representative, taking 2-3 days for the final report to arrive. Rates from the Secondary Department were obtained by calling a recorded line. There was no internet, no computers, and no fax machines. Cell phones were new, charged by the minute, and you never, ever called anyone while on “roam.” Beepers were great if you could find a pay phone.
While technology has continued to evolve, how much has really changed in how we produce loans?
Yes, we’ve seen the development of automated underwriting systems, the Mortgage Electronic Registration System (MERS), and the widespread use of the internet. The importance of these innovations cannot be understated. However, the basic rules for lending remain the same. The “Three C’s” (Credit, Capacity, Collateral) are still in place. Full appraisals are still required for most transactions. Title commitments, flood certifications, mortgage insurance—all the same. And the closing package has more pages than ever.
Loan originators take the application; processors gather the information; underwriters make the credit decision; settlement documents are prepared by a closer and sent to a closing agent (usually an attorney or title company) for disbursement. After settlement, a shipping person forwards the loan to an investor or the servicing department. Then, we wait for the final title policy. That’s at least six people involved in producing one loan—and this doesn’t include quality control or compliance costs. Or, for that matter, office expenses, employee benefits, and coffee for the break room. No wonder the cost of origination is so high.
Compare our industry to other service-based businesses. When was the last time you used a stockbroker to buy or sell a stock? How about banking? Payrolls are often processed by direct deposit, or if you receive a check, you likely deposit it via your cell phone. How many travel agents have you seen lately?
Looking at what has happened in these industries and others, the mortgage lending business is like a horse-drawn carriage in a world of Teslas. Think I’m wrong? Let’s recall what has occurred over the most recent “boom and bust” cycle the industry has been through.
"Plus ça change, plus c'est la même chose."
— Alphonse Karr
At the beginning of 2020, volume was relatively subdued. 2019 was a normal year, with some predicting that 2020 might be slower for the industry. What no one anticipated was the COVID-19 pandemic and the economic shutdowns that followed, causing a dramatic drop in interest rates. Suddenly, the issue wasn’t generating volume but managing the record-setting level of production.
Caught off guard, the mortgage industry reverted to its usual approach, hiring and training as quickly as possible. Hiring bonuses for experienced processors, underwriters, and closers skyrocketed, and payroll costs ballooned.
Then, almost as swiftly, with the start of the Biden-Harris administration’s inflationary policies and the easing of COVID-19 restrictions, interest rates rose rapidly, extinguishing the refinance boom and putting homeownership out of reach for many Americans. True to form, the mortgage industry began shedding jobs at an astonishing rate from 2022 through 2024. The cycle continues—hire, fire; hire, fire.
Now, in late 2024, the industry is beginning to see volume slowly return. Rates are drifting lower and are expected to continue downward. While no reputable economist predicts a return to the 3% interest rate era, rates are reaching levels where homes should begin to come up for sale, thus ending the “lock-in effect” of the last two years.
If rates drop into the low 5% to high 4% range, every mortgage originated above 6% will be refinanced. Layoffs in the mortgage industry are coming to an end, though large-scale hiring hasn’t yet begun. But if you’ve been in this industry long enough, you know it’s coming.
While some cyclicality in our business is unavoidable, is there a way out of this?
READY FOR WHAT’S NEXT
At Commonwealth Group companies, we believe there is. The Commonwealth Group is the future of the mortgage production business. Commonwealth offers fulfillment services for mortgage processing, underwriting, compliance, condo/co-op project eligibility, quality assurance, and technology.
Smart mortgage management is now putting contracts in place for these fulfillment services and beginning to utilize them to better manage the industry’s ebb and flow. When comparing the costs of maintaining staff through the boom-and-bust cycles of the mortgage industry, the financial advantages offered by fulfillment services such as The Commonwealth Group are compelling.
Cost to produce is perhaps the most overlooked statistic in the mortgage business. Every company will have a different cost to originate based on various factors, but regardless, the end result is cost.
By outsourcing the fixed-cost functions of mortgage production, payroll and benefit expenses can be dramatically reduced. And don’t underestimate the cost of training new staff.
The staff at Commonwealth are experienced mortgage professionals, providing your company with a ready resource, allowing management and sales teams to focus on what they do best: producing loans.
"Observe, orient, decide, act."
— Col. John Boyd, USAF
Mortgage lending operations are at a critical turning point. The successful mortgage executive will use this lull before the next wave of mortgage production to prepare. By partnering with firms such as The Commonwealth Group, they will be ready to handle increased volume without increasing payroll and HR costs.
Commonwealth allows companies to decouple variable revenue streams from fixed costs. This is the future of the industry.
Flexibility Drives Profitability!
—West Beibers, CMB, AMP, CRU
Chief Executive Officer
The Commonwealth Group Companies