There’s no doubt about it – it’s getting harder to operate a profitable mortgage business.

In fact, according to the MBA, the average lender’s net production income fell from $580 per loan to $480 in the third quarter of last year. That’s almost half of the average income of $929 per loan reported during the same period in 2017. 

Meanwhile, origination volume is expected to decline this year, thanks in part to slowing economic growth, risks from the government shutdown, trade tension, and a volatile stock market. So lenders will be making less money per loan, and will be originating fewer loans, too.

In such an environment, it’s imperative to squeeze as much cost out of the mortgage production process as possible. Here are several strategies lenders can leverage to reduce expenses and improve profitability in a tightening market.

Automate as much as possible

Incorporating technology throughout the loan origination process is by far the best way to reduce costs at all stages of the mortgage lifecycle. Fortunately, recent innovations in robotic process automation, artificial intelligence, digitization, big data, and business intelligence have all shown promise in simplifying the lending process while also enhancing the borrower experience. However, few lenders are taking full advantage of these newer technologies, in part due to the relative complexity some of these solutions can introduce at a time when these investments may be difficult to fund.

To be sure, automation should be maximized at all stages of the loan production chain, including processing, underwriting and pre- and post-closing stages. If you’re relying on a mortgage outsourcing provider for any of these processes, your partner needs to fully leverage technology, especially when it comes to quality control. A competent third-party outsourcer should have no problem demonstrating how they do so.

Consider leveraging remote staff

When loan volumes shrink, talented employees become harder to recruit and retain. It’s simply a byproduct of doing business in a cyclical industry like mortgages. If you’re having trouble recruiting, training, and retaining appropriate staff, it may be worth considering remote and virtual capacity.

Again, technology makes it easier than ever for lenders to hire and maintain a remote workforce. But this alone doesn’t necessarily solve the problem of maintaining proper staffing levels, which are a major contributor to total costs. Often, the best approach is to engage the help of a trusted third-party provider, who represents more rapid capacity elasticity so you are more nimble as the markets change.

Such third parties typically have developed best practices and a wide range of expertise that leads to more efficient processes, whether it’s in loan fulfillment, underwriting, or pre- and post-closing reviews. 

Perform a cost-benefit analysis

If there ever was a time, it’s now to examine how much your current processes are costing your business compared to the cost of outsourcing underwriting, loan fulfilment and loan QC services? 

A good place to start is with loan QC, which is an important stage for managing risk and controlling costs. Consider measuring the internal costs of your pre-fund and post-close QC processes and comparing them to the cost of outsourcing one or more of these processes.

In some cases, there may be a good reason to maintain certain processes internally; in others, it may work out that outsourcing one or more tasks to a competent third-party provider will reduce extra costs or produce superior results. A cost benefit analysis will help you determine the best path for your organization.

If you need help, ask

There is no shortage of third-party outsourcers available to take certain tasks or processes off your plate at a lower cost than maintaining internal staff for these functions. For many lenders, this option has become more attractive as they continue to struggle retaining in-house expertise due to declining volume.

The value of a trusted partner outsourcing firm cannot be overstated, however, it is imperative that you carefully vet prospective firms to assess their depth of experience and capacity.  These decisions should be made with a long range view and intentionally foster a shared future that fits in well with your company culture and mission.

When markets shift, as they are now, the tendency to overreact is normal—but must be avoided. Knowing  that the market could improve in the coming months,  a drastic strategic change could do more harm than good. If you are considering a strategic shift to control costs and improve profitability, know that it can be done. And if you need guidance, we are always here to help. Just drop me a note at pgluesing@stonehillgroup.com.