Servicing/Processing Cost Per Loan Continues to Increase With Little End in Sight
Thank you to Carol Kimball who sent along this site of "inexplicably terrible real estate photos." My guess is that every underwriter has seen their share of them.
I
asked my cat Myrtle if she thought that the cost of producing a loan
has gone up. She gave me a look that reinforced my opinion that she
couldn't care less. But plenty of lenders want numbers, and although
regulators rarely consider the costs of regulations to an industry or
the consumer, they should be aware of them. After all is said and done,
the costs are passed on to borrowers, of course. For example, KBW's
research team in a recent piece points out that Stonegate Mortgage's net cost to originate a loan and retain the MSR is 100 basis points. (This
"net cost to originate" is revenue minus expenses, and does not include
the mortgage servicing rights, and results in creating an asset worth
125 basis points. Stonegate hopes to increase this 25 basis point spread
by driving down the net cost to originate to 80 basis points in 2015.
Per the piece, Stonegate is continuing to focus on growing the
percentage of its volume that comes from the retail and wholesale
platforms where margins are greater.)
Every
lender knows when underwriters go from 6 files a day to less than 2 the
cost per file is going to go up, if underwriter's pay is constant. And
every lender knows that the marginal costs for large banks to originate a
loan will be consistently less than other lenders - yet in many cases
smaller lenders are "better" at originating loans than the big banks.
Garth Graham, Managing Director at STRATMOR Group shared with me this week that, "Since 2009, Direct Product Expenses have increased annually by an average of $400 per year.
So, that adds over $2,000 to the average cost of origination and, with
an average loan amount of $200,000, equates to an extra 1% on every
loan. It's as if the market now requires an 'extra point' on every loan.
Production expenses cannot continue to increase at the pace of the last
five years. Since 2009, Direct Production Cost for larger independent
mortgage bankers has increased by an average of 562 bps per year.
Compensation accounts for 79% of Direct Production Expenses.
"Per
the STRATMOR Group, following the industry meltdown, intensified
regulatory and compliance oversight has triggered a return to more
manual, inefficient processes. The result is skyrocketing production
costs and increasingly irritated borrowers. Additionally, antiquated
loan manufacturing processes still average 45 to 50 days from
application to closing. Current loan origination systems were designed
around past practices rather than optimizing the information submission
process and automated decisioning. Our
CIO study shows that lenders remain heavily focused on adding MORE
compliance to these systems (not less) and are less focused on the cost
to originate or even making sales people more effective.
STRATMOR however predicts that as the market begins to normalize (less
refinance volume), the pressure from rising expenses will reach a point
that will trigger true technology innovation designed to update the
manufacturing process with the requisite efficiencies. When? Who knows, but the MBA Mortgage Tech show may be interesting."
Annemaria Allen with The Compliance Group
wrote an article for Mortgage Banking Magazine last August, and
contributes, "For the lender who both retains all its servicing rights
and performs the servicing on its portfolio loans, being a servicer can
be very lucrative. Servicing your own loans creates an asset on your
balance sheet that can yield a nice return. This constant residual
income can help your organization during flat origination cycles. For
example, sub-servicer Flagstar Bank, Troy, Michigan, made public its
intention to more than triple its servicing portfolio from 370,000 loans
to 1 million with a mix of servicing and subservicing roles. Flagstar
cited that for every 100,000 loans added to its 'book,' it adds between
$5 million to $7 million in operating profit. Granted, Flagstar is a
top-20 servicer and a top-10 subservicer, but the profit strategy
accrues to smaller operations, too.
"Lenders
that retain servicing rights but outsource to a subservicer not only
realize considerably less profit in the short run, but also lose the
long-term value cultivated through customer care and personal touch
points. That's why for many lenders, the value of servicing outweighs the cost regardless the cycle.
There are important points, however, of which to be mindful. First,
it's no longer cheap to service a loan; and second, servicing is now at
the forefront of regulators' minds, whereas seven to 10 years ago, not
so much. Fitch Ratings, New York, predicted in early 2012 there would be
a sharp rise in the cost to service mortgage loans. At that time, Fitch
estimated the cost of servicing a performing mortgage could increase by
as much as 25 percent to 50 percent from pre-crisis levels. The agency
said nonperforming loans' servicing costs would likely to double or
more.
"And, in fact, the cost to service a loan continues to rise.
According to Mortgage Bankers Association's Servicing Operations Study
and Forum (SOSF), prior to the credit crisis it typically cost servicers
an average of $55 per loan per year. Today experts estimate the cost to
service at $208 per loan per year or more. The cost to service
non-performing loans is rising, too, such that it now costs four times
what it cost to service a delinquent borrower just four years ago."
And Dustin Pfluger with Richey May
writes, "The costs to originate, and in particular fulfillment costs,
have been on the rise since 2012. Variability in production volumes,
which at times has resulted in excess capacity, has contributed to at
least a portion of the increase in costs on a per-loan basis, but does
not account for the entire $400 increase in costs to originate over the
last three years. Regulatory
compliance has played a significant role in the overall increase and
has impacted processor and underwriter productivity levels.
Fulfillment costs include those related to processing, underwriting,
and closing. Back office costs include those related to secondary
marketing, post-closing, QC, compliance and other corporate personnel.
Richey May came out with a graphic
showing the rise and the breakdown of costs. (Loans per month is
calculated by dividing the total number of funded loans by the number of
full-time equivalents within each functional area, and the data comes
from RICHEY MAY SELECT which compiles quarterly financial and
operational metrics from independent mortgage lenders across the United
States.)
Bopping
over to the markets, for thrilling news yesterday we learned from the
National Association of Realtors that Existing Home Sales improved
slightly in February. They were +1.2% in February and the median sale
price for a previously owned home was up 7.5% from a year earlier to
$202,600 in February. Total housing inventory at the end of February
increased 1.6 percent to 1.89 million existing homes available for sale,
but remains 0.5 percent below a year ago (1.90 million). For the second
straight month, unsold inventory is at a 4.6-month supply at the
current sales pace. But the lack of inventory persists.
One
thing that caught traders' interest was the fact that the 10-year and
current coupon agency MBS prices both improved about .125 - somewhat
unusual to have those both move by the same amount.
Today
we will take a look at inflation through the CPI numbers although no
one under the age of 30 remembers what serious inflation is. Expected
+.2%, it was +.2%. We can also expect the FHFA House Price Index for
January, the Markit Manufacturing PMI - whatever that is, New Home Sales
for February (expected to decline 2.3%), Richmond and Philly Fed PMIs for March, and a $26 billion 2-year note auction by the Treasury.
Soon after the CPI the 10-yr, which saw a 1.91% close Monday, is at 1.92% and agency MBS prices are roughly unchanged.
Jobs and Announcements
Optimal Blue is currently recruiting for a Secondary Services Sales Specialist (based in Denver) and a Mandatory Pricing Relations Manager
(location flexible). The Sales Specialist role will be responsible for
assisting in the sales efforts on the secondary service model, working
with the sales team to promote secondary services functionality,
performing detailed demonstration of the software and explaining the
model characteristics and functionality. The position requires a strong
background in mortgage capital markets with a strong understanding of
hedging models including empiricals, duration and convexity, mark to
market, trade operations, servicing valuations, risk management and best
execution analysis. The Mandatory Pricing Relations Manager will be
part of the Investor Relations Department and is responsible for
building and managing the relationship with our mandatory investor
clients. The ideal candidate will have experience working at an investor
with emphasis on trading and pricing as well as a strong understanding
of mandatory structures, AOT, bulk, direct trades and co-issue
structures. E-mail inquiries to careers@optimalblue. com.
Freedom Mortgage is growing again, and looking for experienced wholesale AEs throughout all areas of the US. Freedom
is licensed in all states, a direct FNMA Seller Servicer, and one of
the nations' largest GNMA issuers. "Whether it's Freedom's outstanding
Broker program, or its Wholesale Correspondent program, Freedom is
designed to serve all client needs: brokers, emerging broker to bankers,
wholesale correspondents, and financial institutions. Become a part of
Freedoms family, and join the 2015 '25 Year' Anniversary celebration.
For more information please contact SVP of Wholesale Keith Bilodeau.
Greg Frost is looking for a few more Branch Partners. "Yes,
it's the same Greg Frost who was the mortgage industry's first billion
dollar Loan Originator and current popular motivational sales
trainer. Greg's organization currently has Branch Partners in New
Mexico, Arizona, California, Colorado, Texas, South Dakota, Illinois,
Iowa and Mississippi. If you're operating in one of these states, and
would like to investigate his very profitable Branch Partner business
model, just click here
to schedule a confidential conversation with Greg. Imagine working with
and being mentored by one of the industry's' most prolific mortgage
professionals. Click Here now."
WinWater Home Mortgage LLC
is searching for a person for its Tampa office to assist members of the
Conduit team by providing administrate\clerical support. The
individual will be responsible for ordering, receiving all
information\documentation necessary to assist in the purchase of loans.
This is an extremely detail-oriented position in which a successful
candidate will perform essential support duties with external and
internal customers and vendors to ensure work-flow deadlines are met.
They include monitoring and documenting condition submissions and emails
from correspondents, sending daily updates to WinWater's Third Party
Review (TPR) vendors, and so on. For a complete job description or to
send confidential resumes, contact Joseph Kohout, SVP and Head of Residential Credit & Pipeline Management.
And if you're an LO licensed in Florida, "The next generation
of internet-based, purchase mortgage loan origination is here. One
of the fastest growing multi-billion dollar, full agency direct
mortgage lenders in the country is seeking very select licensed mortgage
loan professionals for Miami-Dade, Broward, Palm Beach, Orange, Martin,
Lee, Hillsborough and Pinellas counties. As an originator for this
one-of-a-kind opportunity, the company will provide you with multiple
PRE-QUALIFIED, PRESET, IN-PERSON customer appointments every week.
Proven,
top-tier purchase originators can expect 5+ appointments weekly. You
will enjoy complete flexibility to work from our office or your home.
These buyers are highly motivated and actively seeking to purchase a new
home. Allowing you to focus strictly on sales, we provide you with full
processing and underwriting/closing support at our dedicated Florida
fulfillment center. Qualified top-performing, purchase-mortgage
originators are encouraged to submit a resume or letter of interest"
directly to me at rchrisman@robchrisman. com.
Congrats to Daniel Gardner as Freddie Mac tapped the Capital One VP to lead its affordable mortgage lending efforts. And Envoy Mortgage, Houston-based full-service mortgage banking firm, has announced the hiring of two industry veterans on the West Coast, Michael Castanon and Michael Kuehner.
Mr. Castanon, an executive with over 20 years of mortgage and financial
industry experience, has been hired as Regional Vice President,
Southwest for Envoy Mortgage's retail operation, which includes Southern
California and the state of Arizona. Mr. Kuehner is heading up the
Northern California.