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Slowdown in Loan Volumes Provides Opportunities for Automation

This piece originally appeared in the September 2022 edition of MReport magazine, online now.

Mortgage lenders in the U.S. are bracing for volatility, as interest rates rise and a sizzling hot retail housing market cools down.

Financial conditions have tightened significantly, and the economy is slowing faster than expected, as markets adjust to the Federal Reserve’s interest rate hikes. Historically, higher federal funds rates cause mortgage rates to rise quickly, which slows homebuying and refi activity. Preparing for a shifting marketplace is a challenge for lenders.

As residential mortgage demand softens, banks and other fintechs have to right-size staffing levels, and squeeze more profitability from less volume.

While the banking industry tends to be slow to embrace technology, digital transformation has created a new paradigm that may help insulate lenders from a slowdown. Mortgage lenders can take advantage of a slower market by implementing new automation strategies to streamline the mortgage loan process.

Get Leaner and Work Smarter
Boom and bust cycles used to mean massive layoffs in the banking industry. But today, thanks to a reliance on digital mortgage workflows, many fintechs have expanded their mortgage processing capacity with better technology, rather than hiring more people. That means personnel overhead is lower than it has been during past market downturns.

While more agile financial institutions are in a better position to manage market volatility, mortgage lending specialists are still vulnerable during a slowdown.

Data from the Mortgage Bankers Association (MBA) and STRATMOR Group shows that Loan Officer turnover increases as mortgage volume decreases. The turnover rate reached a historic low of 21% in 2020, with mortgage origination volume at record high levels. Conversely, Loan Officer turnover peaked at 51% when the housing market contracted in 2007.

In the long run, investments in technology help lenders avoid layoffs by enabling them to invest in key personnel, and save on overhead rather than simply cutting costs by reducing staff. In fact, adapting to market variances by adjusting staffing models is costly.

The cost to lay off and rehire a Loan Officer is approximately $27,300. This cyclical reaction can actually add to lenders’ deficits, and slow down growth when volume returns.

Some staff reductions are inevitable as mortgage originations slow, but fintechs and traditional legacy banks can help mitigate the impact of lower volume with technology that increases automation, and enable personnel to work more efficiently.

Drive Down Costs
While lenders cannot control the market, they can control how they respond and future-proof their business. Among the many opportunities for lenders, a softer market enables lenders to optimize their organizational structure to be more agile and better positioned for dynamic market shifts. In addition to adding technology to their operations, a recent report from the Mortgage Bankers Association (MBA) noted that many factors influence management approaches to downsizing as a way to improve their workflow, including Loan Officer performance, company culture, licensing requirements, incentive compensation, the availability of product offerings, and pricing parameters.

A slower market will put downward pressure on profit margins. This increases the importance for mortgage lenders to reduce costs. In particular, a Freddie Mac study noted that the average cost to initiate a mortgage for retail-only lenders averages more than $8,500 per loan. That cost increases significantly for less efficient lenders.

Automation has the ability to reduce loan costs, while helping mortgage loan personnel increase their efficiency. According to a recent survey of lenders, the biggest pain point in mortgage processing is document review and validation (32%), followed closely by completion of forms in loan origination systems (31%), document sorting (17%), and income calculations (16%).

Mortgage workflows are rooted in a human decision-making process. That said, more than 90% of mortgage specialists surveyed indicated they would benefit from a tool that could automatically capture income information from submitted documents.

In fact, automation can streamline mortgage processing at every step along the way, from origination and processing, to underwriting and closing. Freddie Mac noted that the most effective and profitable lenders are using digital technology to lower costs and reduce cycle times.

Align Processes and Technology
Integrating technology into the mortgage workflow can be challenging when a hot market has lending teams focused on closing loans. A slower market gives lenders time to ensure that human-centric processes are aligned with new technology.

Optimizing human workflow with automation enables mortgage personnel to make decisions faster and more accurately. As loan volume decreases, more efficient loan processing can help improve margins, and profitability.

An economical way to improve efficiency is for mortgage lenders

to adopt technology that automates document processing and validation. The key is implementing user-friendly solutions that require minimal staff training and provide mortgage loan personnel with assisted decision-making tools that ensure transparency and user control.

Ensure Data Accuracy
Accurate data is mission-critical for mortgage loan processing. As the market cools, lenders will have more time to implement solutions that improve underwriting quality, reduce turn times, and enhance the borrower experience.

Successful mortgage lending requires a high level of trust among the key stakeholders. Accuracy is vitally important for everything from analytics to loan decisions.

Automation that reduces errors and improves quality will help build that trust, both with mortgage processing personnel and with customers.

Transparency is a core component of building trust, and mortgage specialists rely on their ability to easily track, verify, update, and record data during every step of the loan process.

Lack of transparency is another major pain point that mortgage loan automation technology can help address. Automation helps lenders improve transparency, leading to more trust, better accuracy, and improved regulatory compliance. Providing mortgage lending specialists with the ability to control and edit loan documents ensures transparency, and establishes a trusted process.

Integrate with Loan Origination Systems
Another opportunity for lenders during a market slowdown is to invest in optimizing loan origination systems (LOS) integrations. This starts by ensuring a good user experience for mortgage lending specialists.

Lenders often use a multitude of third-party solutions. When mortgage volume is slow, it is the ideal time to ensure that all systems and software are tightly integrated, and are optimized to work with their LOS.

A well-integrated LOS environment helps everyone—from Loan Officers and Processors, to Underwriters and Closers—get the most out of their automation technology. That leads to better workforce efficiency and a higher return-on-investment (ROI) for the lending organization.

Replace Outdated Legacy Processes
Many lenders still get bogged down with manual processes. In a low volume, low margin market downturn, they cannot afford the costs associated with legacy loan processing procedures.

Automation that reduces manual work tasks can lower costs and boost efficiency. For instance, automation software can help improve the speed and accuracy of reviewing, and verifying mortgage loan documents.

Technology can also help lenders identify inconsistencies in loan documents and potential fraud. By automating the due diligence process, lenders can reduce their risk of exposure to bad loans. One of the ways in which technology can help in fraud detection is through the use of machine learning models. A market slowdown provides an opportunity to dedicate resources to implementing artificial intelligence (AI) solutions that can help with everything from document processing, to fraud detection.

Increase the Appetite for Technology
While there is no panacea for a market downturn, lenders with an appetite for the right kind of technology can benefit from a slowdown by investing in a more automated future.

Mortgage loan automation requires cooperation between the lending team and IT department.

The goal of automation technology should be to enable mortgage lending experts to make decisions faster and more accurately. The key is to reassure mortgage loan specialists that technology is meant to improve their jobs, not replace them.

Automation is a proactive step that lenders can take to help eliminate outdated manual processes and expensive overhead.

The bottom line for fintech managers navigating a market slowdown is that lower volume presents a golden opportunity: use technology to reduce costs today and help prepare for a more efficient, and profitable future.

About Author: Suzanne Ross

Suzanne Ross is Director of Mortgage Product at Ocrolus, a document automation platform that automates credit decisions across small business lending, mortgage, and banking. Suzanne has a background in mortgage that spans almost her entire career, and at Ocrolus, she spearheads mortgage product strategy, while expanding the company’s offerings at a rapid pace.
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