The dismal 2024 mortgage market has one very silver lining: $32 trillion in home equity. Jim Deitch, co-founder and CEO at Teraverde, sees a golden opportunity for lenders who are prepared to serve homeowners with innovative options.
“The biggest year of mortgage production, from 2021-2022, generated $4.5 trillion. Compare that with $30 trillion in financeable equity — it dwarfs it. You have to think about how you monetize that equity,” Deitch said. “So, there’s opportunity out there, but you’re not selling it to Freddie and Fannie, at least not today.”
I sat down with Deitch for a wide-ranging conversation on the ways lenders can claw back profitability through smart technology and products that meet the moment. The traditional approach fo many LOs won’t cut it in this environment, Deitch said.
“The industry has to innovate. You can’t go: Here’s a home equity at prime plus 3. If they have a high-quality credit score, they shouldn’t be paying 9% for money. That should be a 5/1 closed end loan with a line of credit kicker,” Deitch said.
Being creative helps you win when others are struggling, Deitch said. “Innovation kills the competition. It’s only competitive out there with a commodity product.”
Baby Boomers are sitting on a large share of that $32 trillion in home equity and lenders should be working with them to leverage that for themselves or their children and grandchildren, according to Deitch. Reverse mortgages are an obvious way to help seniors age in place, but Deitch listed a number of other ways Boomers could accomplish a “generational transfer of wealth” that LOs might have to brush up on. These include parents cosigning on a mortgage loan for their kids using home equity, going to a lender and doing a 5-4-3-2-1 buydown for kids or grandkids, and/or using part of a home equity loan to fund prepaid college tuition through a 529 plan.
“First-time homebuyers are facing a triple whammy: they can’t afford a house because of payment shock and the escalation in home prices, while at the same time their income is not growing at the rate of real estate,” he said. In that scenario, parents who are sitting on a pile of home equity can be game-changers.
At financial institutions, helping consumers consolidate debt is another way lenders can leverage home equity, especially given the average credit card interest rate is around 22%.
Cost to originate
But providing the right lending products is only one factor in succeeding in this market. The other is reining in the cost to originate.
“The cost to originate a first mortgage is now about $12,500. How that happens is beyond me. It costs more in labor to manufacture a mortgage than it costs GM to assemble a Cadillac Escalade,” Deitch said.
Lenders are seeing costs rise, despite having made significant investments in technology and automation. What’s the disconnect?
Deitch thinks technology has made a big difference but has the ability to do much more. One obstacle is that many companies don’t end up using the technology they invest in. A recent Teraverde survey found that lenders used only 15-21% of the automation they already had. In addition, the results showed that 66% of the cost to originate was tied up in labor, specifically operations.
A second survey asked lenders: How much would your profits increase per loan if you used all the data available that you already have? The result was $2,400 to $3,100 profit per loan if they just used what they had.
Turns out that some pandemic-era workarounds got engrained into lending processes, Deitch said, and then inertia set in.
“In our industry, we’re stuck. Starting in 2020, lenders instituted ways to get loans done — they threw a lot of people at the problem, and many of those people are still there,” Deitch said. “It now takes twice as many people to close a loan as it did in 2019, so with volume down — costs are up.
“Lenders spend 66% on people and 6% on technology. That 66% has been constant since 2012 — all the money spent on technology hasn’t increased productivity.” Teraverde’s mission is to increase lenders’ profitability by helping them use everything they already own, Deitch said.
Sometimes that means reframing how they measure their costs. For example, some lenders only measure fall-out from application to closing, but this leaves out their first touchpoint with a consumer, Deitch said.
“They’ve lost thousands of loans, but they don’t even know they had a first touch. We’ve looked at numbers with clients where pull-through from the top of the funnel to the bottom is as low as 10%. But they weren’t looking at the top of funnel and if you aren’t measuring that you’re just ripping up hundred dollar bills and throwing them out the window.
“Think of the opportunity if you could capture just 2% of that fallout. Say you had 2,000 loans fall out — if you captured 2%, that’s 40 loans,” Deitch said.
