One of the challenges in discussing what the mortgage industry needs to do next is figuring out what’s actually coming next. In August, when interest rates topped 7% for the first time in 22 years, there was a rash of articles featuring leading industry economists predicting what interest rates would do for the rest of the year and into 2024. The consensus was… there really was no consensus.
On one end of the spectrum the most positive forecasts — for example, the MBA’s and NAR’s — expected rates to stay high through the end of the year and gradually ease back down in 2024, perhaps settling in at the 5% range. More pessimistic forecasters believed that the Fed would keep rates high to combat inflation and that 7% or even 8% rates would become the new norm.
Two very different outlooks. One projects an uptick in volume to $2.1 trillion in 2024 and a 20% increase in unit production year-over-year. The other would make 2024 a replay of 2023.
Rather than trying to predict where the Fed and the market are headed, it might make more sense to focus in on some long-term trends that lenders will still have to confront, no matter which way interest rates move.
Reining in costs
In all of 2022 and through the first half of 2023, the average mortgage lender lost money on every mortgage it originated. In Q1 of this year, the average loss was $1,972 per loan. In Q2 the size of the loss improved to $534 per loan.
A Freddie Mac study released in late 2021 foreshadowed the situation that many lenders find themselves in today. It predicted: “[A]s mortgage volumes start to subside and shift more to purchase market activity; lenders will be faced with intensified competition and compressed margins. A challenge that most mortgage lenders are now facing is how to remain cost effective no matter the macroeconomic environment.”
The study’s recommendations: focus relentlessly on cost and leverage digital technology to scale and drive customer experience.
When it comes to cost control, staffing is probably the most significant cost factor. The more tasks that can be automated, safely and efficiently, the better. In recent Wolters Kluwer surveys, most lender respondents said in the future they will rely more on technology rather than adding “bodies” to deal with up cycles.
Does this mean that technology is always the answer? No, sometimes less is more.
For many smaller banks and credit unions, for example, a case could be made that they may be spending too much on their legacy systems, like LOSs, in this lower-unit environment. Given recent advances in document, compliance and ordering systems many of these lenders may not need LOSs, whereas a document prep system may give them what they need with a lower price tag and less unnecessary bells n’ whistles. Similarly, financial institutions that offer an array of consumer loan products might replace multiple loan production systems with single platforms that can be used to create various kinds of assets.
Consolidating relationships can also provide cost savings. Working with larger, diversified providers, like Wolters Kluwer, can often result in several benefits: better pricing and easier integration of products, working within a single MSA, more efficient decision-making and reduced vendor costs.
Digital initiatives
As you’d expect, major investments in technology are much more difficult to green light at a time when many lenders are losing money or, at best, breaking even. This does not, however, mean digital lending has stalled.
In a recent HousingWire-hosted webinar, executives from Fairway Mortgage and Lennar Mortgage discussed their companies’ extremely positive experiences with eClosings in the purchase market. The speakers acknowledged the economic benefits of eClosings, but emphasized a more modern customer experience was the primary reason why their organizations have moved to hybrid and full digital closings.
A common theme that the participants kept coming back to was that the move to digital lending and closings doesn’t have to take place all at once, but rather can happen incrementally.
Their suggestion: look for partners that can support a transition from paper to hybrid to digital without significantly impacting a lender’s workflow and processes.
Closing platforms are an important element in eClosing transformations. In selecting these platforms, lenders need to make sure they integrate with doc systems and decide whether they want a proprietary, vendor-centric platform or an agnostic one, like Wolters Kluwer’s ClosingCenter, that can work with any settlement service provider. In a purchase environment, where the lender no longer controls the title and is dependent on the borrower’s title provider, agnostic solutions often provide greater flexibility.
In the cross-hairs
At a time when all lenders are struggling to reduce costs, some institutions may be tempted to reduce staffing in areas like compliance that don’t generate revenue or profits. Given the current zero-tolerance environment, however, this is dangerous, short-term thinking.
Fair lending examination, supervision and enforcement, for example, are top priorities for the CFPB, the prudential regulators, DOJ and HUD.
Regardless of market conditions, there is a need to ensure that compliance and risk management teams are fully staffed and supported at the highest levels of the organization.
One way to leverage these resources is to support them with data and analytics solutions that automate various compliance tasks, such as HMDA and CRA reporting, provide early warning signs for major lending issues, such as redlining, appraisal bias or to identify practices that could be deemed unfair or abusive. The goal should always be to identify these issues before regulators do.
Currently, Wolters Kluwer solutions like HMDA Wiz, CRA Wiz, ClosingCenter and their IDS and Expere mortgage content solutions are used by more than 1,000 banks, credit unions and mortgage lenders.
Having the right partner and technology in place is central to a successful mortgage strategy for 2024 and beyond. Wolters Kluwer provides options at every step of the way to help drive productivity, ensure compliance and enhance customer experience.
