Lower cost-to-close is good news for credit union mortgage lenders
There was good news a few weeks ago for mortgage lenders. In late August 2015, the Mortgage Bankers Association reported that the all-in cost-to-close for mortgage loans decreased from $7,195 to $6,984, a total savings of $211. Two hundred bucks might not seem like a big deal, but it is, for several reasons.
According to the Mortgage Bankers Association, mortgage production costs have been consistently on the rise since 2009. The MBA publishes its Mortgage Performance Report annually, with quarterly installments throughout the year. This is a must-read for every mortgage lender with an eye on manufacturing costs, productivity and industry trends.
The decline to $6,984 in the second quarter of this year is – hopefully – the beginning of a long-awaited trend toward more reasonable mortgage manufacturing expenses. Up to now, costs have been rising as lenders face an increasingly complex regulatory and investor environment.
Purchase-money lending plays a role in costs, as well. Compared to refinancing loans, loans for the purchase of a home take longer, involve more people, require more documentation and, overall, have more moving parts. The switch to purchase lending is a positive and expected dynamic, but it is yet another component for lenders to address while keeping expenses in check.
Whether this quarter’s cost-to-close decrease is truly indicative of a new pattern within the industry won’t be confirmed until fourth quarter numbers become available in early 2016. Know Before You Owe, the new mortgage disclosure rule, becomes effective October 3. The common wisdom among credit union mortgage lenders is that this will likely affect lending costs, at least in the short term.
When it comes to fielding a competitive mortgage program, nothing is more important than cost-to-close. This quarter’s $200 per loan savings can be seen either as extra revenue or as a slight improvement in the mortgage rate members pay, or perhaps as both. Offering the lowest rate isn’t everything in mortgage lending, despite the use of interest rates as a standard basis of comparison for the average borrower.
Managing Cost-to-Close
Controlling cost-to-close — or at least understanding it — is easy. This week’s MBA announcement provides insight. Productivity, the ratio of closed loans to mortgage employees, increased in the second quarter from 2.4 loans per employee per month to 2.8. The seemingly insignificant move of just .4 is actually incredibly important. Productivity and cost-to-close have a tight inverse relationship. Increase productivity and cost-to-close will predictably – and reliably – decrease.
This is true because of the make-up of cost-to-close. About 50% of the cost to manufacture a loan is labor. Labor — as represented by the number of employees — is the denominator in the productivity equation, hence the intimate relationship between these two metrics.
Two variables affect productivity. Labor is one; the number of closed loans is the other. By making more mortgage loans, credit unions have an opportunity to extend and accelerate the decreasing cost trend that the MBA reported. This may seem like an overly simplistic analysis of a complex problem, but it isn’t. Credit union membership grew at a faster pace in 2014 than at any time since 1994. Many new credit union members means many new potential home buyers. Organizations that make more loans, increase productivity with existing staff, decrease the cost-to-close, and offer a more competitive and profitable mortgage program will produce even more loans. This is a great example of a feedback loop, and the best thing about it is how well it works.
We study, talk about, publish and offer insight on credit union mortgage lending performance, an obsession of ours for more than a decade. Interested in knowing more? Read our latest thoughts on cost-to-close, productivity in our High Performance Lending Report.
