Participants in Fannie Mae's latest annual benchmarking study saw the average cost to originate fall for all channels-except retail. The Internet/call-center channel posted the biggest drop in per-closed-loan origination costs.
Mortgage banking is cyclical and constantly buffeted by market, demographic and technological winds. Last year was no exception. Lenders that participated in Fannie Mae's seventh annual Mortgage Focus benchmarking study bid farewell to the days of "order-taking" their way through a queue of calls from eager refinance borrowers. Sky-rocketing home prices, narrowing spreads between adjustablerate mortgages (ARMs) and fixed-rate mortgages (FRMs), and a shift to a purchase environment forced lenders to dust off timehonored skills of salesmanship, innovation, outreach and execution. * Successful lenders kept costs down and profits up by calibrating their product mix, focusing on staff and customer retention, and making strategic investments in technology. * Data collected for Mortgage Focus 2006 cover calendar year 2005 and, for the first time, the study includes an analysis of servicing. The origination study includes detailed information on origination costs, productivity and loan production for five channels: retail, Internet/call-center, wholesale, correspondent and credit union. * In this year's origination study, 186 lenders participated, representing one-third of the top 100 U.S. lenders by production volume in 2005. Twenty-eight servicers participated in the pilot servicing study (see sidebar, "Spotlight Shines on Servicing"), including 10 of the top 100 servicers by portfolio size in 2005. Research focused on portfolio volume and composition, financial statements, technology costs, staffing and outsourcing.
Participating lenders use Mortgage Focus as both a benchmarking tool and blueprint for future change. "One of the reasons we find the Mortgage Focus study so useful is that it provides detailed breakdowns of income and expense statements. Using these, we can benchmark our performance against our peers, identify year-over-year changes and adjust our strategies where needed," says Rick West, senior vice president in the San Diego headquarters of Union Bank of California's mortgage division.
Market realities and lender response
As rates rose slightly in 2005, consumers were more likely to pursue purchase or equity transactions such as seconds, home-equity lines of credit (HELOCs) and cash-out refinances and less likely to pursue rate-term refinances. According to Fannie Mae's economics department, industry origination volume increased a modest 6 percent to $2.89 trillion-the second-highest figure ever. For the first time since 2000, purchase originations edged out refinances-51.1 percent of total originations versus 48.9 percent, respectively.
Affordability suffered due to soaring price appreciation and modest income growth. Accordingly, ARM share rose as home-buyers realized fixed-rate financing would price potential purchases out of reach. Lenders originated more interest-only (IO) loans, payment-option ARMs and hybrid ARMs, and fewer conforming and government loans. (Note: In the Mortgage Focus study, alternative-A loans are segregated from conforming loans.)
Generally, these forays into new product offerings contributed to higher profitability. For example, among retail channel lenders for which alt-A loans represented more than 5 percent of their total product mix, profitability averaged 33 basis points-17 basis points higher than the channel average.
Successful lenders placed greater emphasis on recruiting and retaining experienced loan officers and account executives (AEs) able to sell and support expanded product menus. Technology use greatly influenced productivity in every channel. The capability to view and sign documents over the Internet, for example, significantly improved cycle times and pull-through.
Recognizing historic interest in non-owner-occupied properties, retail lenders originated 10 percent of their volume from these loans, wholesale lenders 16 percent, and even the typically refinance-oriented Internet/call-center channel originated 13 percent. …