What Led to a Margin Compression?
“We conduct an internal meeting once a week to discuss and decide on the best suited loan processing rates and fees that we can afford to offer in a particular week. This aids us to control the loan volume inflow”, quoted by a reputed lender during a virtual meeting in which I was a part towards the end of October 2020.
The US mortgage industry witnessed unique challenges in the year 2020 owning to the Covid 19 pandemic. The Federal Reserve’s push to keep interest rates at their lowest possible value helped homeowners’ expectation to save on their housing payments. This had also led to a mortgage refinance boom. Such favorable development boosted loan volumes and widened lenders’ profit margin till the mid of February 2021. The only challenge before lenders was to make their operations more scalable and make the most of the opportunities.
Peaking Interest Rates
Despite projections of favorable profit margins of lenders throughout 2021, things started to go downhill from February 2021. Consumers exhibited extreme sensitivity to even a slight increase in the interest rates that resulted in the drying up of refinance pool. This decreased the demand volume for loan to an excess of 20% which further induced lenders to reduce their profit margins. Small and mid-scale lenders are among the highly impacted sector who do not have any auxiliary source of income such as complex investments, fees income, and others.
This market condition revived the lenders’ worst fears of ‘Margin Compression’. It made its presence felt after almost a year. The cost of processing a mortgage loan rose to USD9000. This cost did not have much impact till the time lenders had their profit margins to compensate for it. But the situation is different now, low demand for loan has compelled lenders to offer competitive loan processing fees in a bid to survive in the competition. This, however, has taken a toll on their profit margins. This competition is expected to gain momentum as refinance volumes steadily decrease. It is a tough terrain ahead for lenders with inefficient operational processes and high operational overheads.
What’s the Way Ahead?
Decreasing operational overheads and rapid adoption of technologies are the two critical aspects that need to be addressed to handle margin compression.
Reducing operational overheads – In reality, lenders do not have a complete control over a significant portion of the total cost of processing a loan, which includes components like various third party expenses, loan officer comp, etc. However, they do have a complete control of the total expenses required to originate, process, and close a loan. They can control the amount of resources, the kind of workflow, and the effort dedicated towards servicing a loan. This makes it a feasible front which lenders must focus on to address margin compression.
Loan servicing costs now range between USD200-USD500. This is not a welcoming scenario for lenders who are staggering to get an edge in the fiercely competitive mortgage lending scenario. It jeopardizes the chances of getting a consumer buy a loan. Lenders must align their operations with best practices. This will not only open avenues to save on operational expenses but also bring efficiency that ultimately fosters decent customer experience. A satisfied customer or a real-estate broker can recommend lenders for high-value transactions that ultimately bring in a widened profit margin.
One way of achieving this ideal scenario is to outsource mortgage lending back-office operations to experienced service providers. They take an objective approach to probe into the potential loopholes of their clients’ operations and implement the necessary changes to streamline the workflow and boost cost savings. This is one of the most ideal ways for lenders to address the margin compression challenge.
Adoption of Technology – Technology in the form of automation, chatbots is now mainstream in the mortgage industry and lenders have multiple opportunities to make the most of these at different lending stages. Technological innovations are driving various processes such as sending, loan processing, underwriting, closing, and post-closing a mortgage loan. These technologies automate a major portion of these processes which results in significant savings in time and money.
Highly complex and resource-intensive tasks like underwriting can be automated in portions to further drive operational efficiency and cost savings. Based on the workflow structure, a loan application undergoes review anything between 10-20 times. Automation of these processes brings significant reduction in the total expenses on loan origination.
Technologically forward mortgage service providers leverage advanced technologies to overcome these problems. Tools like MSuite can recognize, read, and analyze mortgage-related documents and completely obviate the need to put manual efforts. The entire mortgage lending process typically involves multiple third parties. This makes it difficult for lenders to coordinate and integrate all the parties on the same plane while operating. Technological integrations negate the need for manual interaction between these third parties.
Adoption of these best practices essentially makes lenders’ operations more proactive to the inbound mortgage market complexities such as margin compression. To look at the brighter side, such complexities open opportunities to lenders to rethink and redevise their conventional operational strategy. In the long run, this helps lenders to survive in a hyper-competitive mortgage market that is also ridden with complexities.
Who We are and Why Does Our Expertise Matter?
This article is authored by professionals at Expert Mortgage Assistance, a prominent name in the third-party mortgage loan processing sector. We tap into our rich talent pool and cutting-edge technologies that are dedicated to shortening your loan closure time within an optimized operational cost. The aim of our services is to help you settle your workflow to the changing dynamics and complexities of the mortgage market and assist you sustain your expected profit margins for a long run.