A Playbook for Mortgage Lenders in Capital Preservation Mode

This piece originally appeared in the August 2023 edition of MortgagePoint magazine.

Since the Fed began hiking interest rates, many mortgage lenders have been forced to dramatically cut headcount. Despite these reductions, the latest Mortgage Bankers Association’s (MBA) Annual Mortgage Bankers Performance Report found that mortgage processing costs hit $10,624 in 2022, for an average per-loan loss of $301.

Unfortunately, it’s no easier to call the bottom (or top) of the mortgage market than any other complex market. So, now is not the time to make wholesale changes to your technology stack. However, you can use technology to automate specific workflows while establishing a playbook for when it’s time to go back on offense. A practical playbook contain three major parts:

• An assessment of current processes and technology
• Identification of risks and opportunities to achieving peak performance when the next wave of refinancings or purchase mortgages arrives
• Trigger points for when to start implementing each upgrade based on your strategic objectives

Let’s take a closer look at what each of those parts entails.

Phase 1: Assess Current Processes and Technology
Because of the feast/famine cycle of the mortgage industry, many lenders have evolved wildly inefficient tech stacks: outdated instances of loan origination systems, point solutions that fit clunkily together, manual workarounds, and emergency fixes that have become permanent.

There’s no time to update technology when you can barely handle the volume of applications, as many lenders experienced in 2020 and 2021. And there’s no appetite to invest in new technology when revenue slows to a trickle.

But at some point, most lenders realize they must address skyrocketing tech costs and process inefficiencies.

Current market conditions provide an excellent opportunity to take the first step: deeply analyze your systems and processes. The goal is to identify hidden risks and opportunities.

Assess each solution’s capabilities and determine whether you need to maintain every feature or subscription to keep your current functionality. Lenders can often reduce the number of solutions they’re paying for and simplify processes.

It’s also a great time to examine configuration rules, vendor and custom integrations, and data requirements, which can reveal opportunities to increase efficiency and reduce spending.

Phase 2: Rank Priorities by Cost and Impact
Once you’ve identified the opportunities and risks that your current technology and processes present, it’s time to prioritize them by cost and impact.

The theory here is simple, pursue projects with the highest impact and lowest cost first.

For example, suppose a lender knows their loan officers rely on many manual workarounds with their current origination software. They know this is inefficient, but they’re hesitant to adopt a new system, which would introduce a painful learning curve that could be disastrous if the market picks up.

A savvy partner can point to alternatives—refactoring the existing platform to introduce new functionalities and features (like e-sign and e-notarization) and eliminate common workarounds. Refactoring tends to be less risky than adopting a new platform (smaller learning curve) and less expensive.

Another way an external partner might help as lenders rank the cost and impact of technology upgrades is by helping assess the total cost of various implementation strategies, including offshore, onshore, near-shore, or off-shore supplemented by experienced consultants overseeing the work.

When you start with a deep dive and overview of risks and opportunities, you can also include opportunity cost in your calculations. For example, suppose an internal team can complete a project in nine months, but a hyper-experienced external one takes three.

In that case, you must factor in the opportunity cost of that six-month lag along with the outsourcing fees.

Phase 3: Identify Timelines for Implementing Upgrades
Even though it’s challenging (read impossible) to forecast significant inflection points in the market with precision, your FI still uses scenarios that include a base case for planning purposes. You’re also watching markets to identify opportunities—for new products, lines of business, etc.

So, start with your long-term strategic objectives and determine the technology required to achieve them, their cost, and their implementation times. At that point, you can approximate a start date for a particular project.

For example, suppose a strategic objective is to improve the mortgage application customer experience to boost your close rate, cut operating costs, etc. You may need to implement a new application portal, which can take at least 90 days. So, if you believe the market will turn about a year from now, then several months from now, you should start choosing and implementing an application.

Similarly, if your strategic objective is to enter a new line of business—mortgage servicing or expanding the menu of loan programs, for example—then that will require technology and processes you’ll need to implement that will take time to accomplish.

You Can’t Predict the Market, but You Can Prepare for It
If the last three years have taught mortgage professionals anything, we never know what’s next. In a cyclical industry like this, any relative lull is an excellent opportunity to take stock and make plans. We’re in one of those lulls right now.

As we wait to see where interest rates go next and how many other mortgage market variables play out, now is a great time to identify your organization’s most significant opportunities and define the conditions that will trigger action to seize those opportunities.