Both interest rates and the cost to produce a mortgage loan are higher than they’ve been in years. Layered upon historically low inventory, these factors further compress mortgage lenders’ margins as they battle for a shrinking pool of homebuyers who have both the will and the funds to wade into a competitive seller’s market.
The good news for lenders is that there’s more to profitability than sales alone. For many lenders, internal process optimization is a goldmine for improving margins just waiting to be tapped. In fact, key findings from Freddie Mac’s Cost to Originate Study: How Digital Loan Offerings Impact Loan Production Costs have found that lenders who leverage digital offerings are able to lower loan origination costs and increase margins while realizing a host of other benefits related to increased adoption of digital technologies. Here are the top three takeaways from the report:
Takeaway #1: Lenders that adopt Freddie Mac’s digital tools reduce costs
Freddie Mac found that lenders significantly reduce the cost to originate a loan when they leverage Loan Product Advisor® (LPASM) tools such as asset and income modeler (AIM), which enables lenders to verify borrower ability to pay using FormFree’s AccountChek®, and automated collateral evaluation (ACE) appraisal waivers, which allow lenders to originate certain loans without an appraisal.
In fact, lenders with high adoption of LPA tools originated loans for $2,200 less than lenders with low adoption of LPA tools. Lenders with high adoption of LPA tools had higher profit margins than their low adoption counterparts, too. In all, the top cost-effective lenders originate loans nearly three times more efficiently than their bottom counterparts.
Where FormFree fits in:
When Freddie Mac customers use AccountChek, LPA automatically assesses verification of asset (VOA) reports so that underwriters and processors don’t have to. The resulting efficiency in the loan manufacturing process reduces staff time spent processing and underwriting documents, thereby lowering the cost to produce a loan. Additionally, the rep and warrant relief that comes with utilizing AccountChek in conjunction with LPA benefits lenders by decreasing loan loss reserves, which frees up more operating capital.
Takeaway #2: LPA tools shorten loan cycle times
In the study, lenders with digital applications shortened their production cycle time between 5 and 18 days. Shortening the production cycle offers a variety of benefits including improved operating costs and reduced carrying funds and hedging costs. The study found that for retail lenders utilizing Freddie Mac technology, every day shaved off of mortgage cycle times yielded an average of $22 in savings, which could yield ~$100 to $400 in total savings per loan.
Shortened mortgage cycles allow lenders to close more loans in a given timeframe. Data from the study found that for every calendar week, automation helped 1.5% more applications complete the origination cycle, producing more revenue.
Where FormFree fits in:
Automating VOA with AccountChek through LPA enables lenders to recover staff time spent manually verifying assets and run their business more profitably. With staff freed from “stare and compare” verifications, lenders assign staff to other tasks that make the organization more productive without increasing headcount. As an added benefit, the shortened cycle times achieved with automating VOA reduce lock times, which allows lenders to pick up more basis points.
Takeaway #3: Technology adoption increases efficiency and delivers better customer service
Notably, lender adoption of technology shortens, streamlines and maximizes every step of the loan origination process by reducing personnel costs. The study’s analysis of mortgage industry operations data found that for every hour of processing or underwriting tasks eliminated through technology, lenders realize a cost savings of $132 per loan.
What’s more, leveraging digital origination solutions unlocks the “soft” benefit of creating a more seamless loan application and underwriting process for borrowers, which increases customer satisfaction, loyalty and potential for referrals.
Where FormFree fits in:
AccountChek enables lenders to provide the modern, intuitive user experience that consumers have come to expect from financial service providers due to the prominence of apps such as Venmo, Stripe and TrueBill. AccountChek’s support of consumer technology expectations helps lenders develop brand equity that attracts more business.
In summary, technology adoption lowers the cost to originate loans on a per-loan basis, creates personnel efficiencies, increases customer satisfaction, improves pull-through rates and shortens production cycles. By providing a look at real numbers and tangible savings from lenders leveraging LPA tools, Freddie Mac makes a compelling business case for lenders to increase adoption of automation technologies like AccountChek in the loan origination process.