Finding where the answer is suppose to be

We’re notoriously nerdy when it comes to mortgage lending productivity and its inverse counterpart, cost-to-close.  Being the geeks we are, we were immediately interested in a news story from last week about slide rules.  If you’re from our generation, you’ll remember this battery-free computing technology from the pre-calculator days. They are ingenious devices, though about as popular today as typewriters.

One thing about the slide rule, though, made them very useful in understanding mathematics:   They help the problem solver ‘see’ where the answer should be because they physically present the variables in an equation in such a way that the interplay and relationship between numbers is apparent.  Using a slide rule regularly – and visually –  reinforced this; it also helped illustrate the correctness of an answer to a problem in a way electronic calculators cannot and do not.

Today’s mortgage lenders are searching for answers to a difficult math problem.  The cost of closing a loan continues to increase. Correspondingly and inversely, productivity continues to decrease.  What’s a lender to do?

The answer is not ‘dust off your slide rule’.  The answer, or at least the start of getting to the answer, is a candid conversation about where the cost-to-close should be.  We know that it should not be $6,000 per loan. At that cost, lending is not sustainable, nor is it attractive.  We can also make the assumption that the expense to produce cannot return to pre-housing crisis lows of several hundred dollars per loan.  Setting lower and upper limits is the first step in ‘seeing’ where the answer should be.

Some knowledge of the average is helpful, too, as we seek to find and illustrate the answer to this problem.  In a recent study we’ve completed, the average for our group of lenders is in the neighborhood of $3,200.  The lower limit appears to be about $1,800, the upper is about $6,000.  Clearly the goal is to be better than average, so the answer has to be between $1,800 and $3,200.  Is this possible?

The answer is yes, absolutely.  The lenders whose cost-to-close is at the average or below are exceptional at managing the people and process variables of the people-process-technology equation.  Their teams not only know the mortgage business, they are also very good at identifying, as well as fixing, process problems.  Retooling lending processes now makes sense in light of all of the industry changes that have taken place in the past five years.  Mixing heavy refinance volume with these industry changes creates a surefire recipe for inefficiency.  Now that volume is lower and borrower characteristics are shifting toward first-time buyers, the need for process improvement is clear.

Technology is the isolated variable for this group of lenders since they all use the same tools. Great technology, which they have, enables performance that is both low-cost and highly productive.

Superior tools can take you far.  Inferior tools leave their users frustrated, making their limitations quickly apparent as people attempt to engineer processes that such tools do not support.  While our lenders have dealt with the technology variable, solving that portion of the equation remains a priority for many others.  If technology is still on your list, now is the time to be looking for technologies upon which to build efficient processes.  Lower cost lending demands it, especially when existing tools are being used to their limits.

While we reminisce about slide rules, we cannot honestly say we miss them.  They were a good tool for showing us where the answers should be, but they were incredibly slow when compared with today’s tools.

By comparison, spreadsheets are truly brilliant, better even than the mortgage banker’s friend the HP-12C, which in its day was also pretty amazing.  But the reminder from last week’s news story about how slide rules helped “see where the answer should be” is a valuable one. Lenders should start visualizing where their cost-to-close should be, then work the people-process-technology variables to get it there.  Mortgage lending should be your most profitable business, but to get there, you have to do the math.