Industry
It’s the start of a new year! How this year turns out for your company will be determined by three tough decisions executives need to make this month.
Your operations staff will give you many reasons that they need all the people they have. One word answer: Bullshit. The chart below proves it. The average company spends about 3% of its cost on technology. And 33% on operational personnel. The typical company now spends more on operational compensation than sales compensation. In 2022, MBA puts the operational compensation spend at about $3,700 per loan.
Jonathan Corr, retired CEO of EllieMae told me:
“Most lenders use less than 20% of the automation available in their LOS, and spend too much money on ‘checkers checking the checkers’. Many operational managers have an aversion to automation and to rigorous business process improvement.”
And it’s so true. We’ve seen exceptional lenders spend half the industry average on operational compensation. They’ve modernized their business process, and trained their people on how to adopt automation and develop a mind-set of productivity. These efficient lenders benchmark and measure every operational employee. And it pays off.
One startling example: One lender’s cost to underwrite a file varied from $230 per loan to $970 per loan. Why pay four times as much to underwrite a loan? No benchmarking, no performance standards and managers that resist holding operational people accountable for results. Can you afford poor productivity? If you are ready meaningful improvement, click here for a roadmap.
Mortgage banking business processes are often needlessly complex. Complexity creeps in because our industry regularly changes regulations and product requirements. One must be intentional to simplify and improve a business process.
Often the typical response is to insert a fix into the existing process. Add a product. Add another fix. And before you know it, checkers are checking checkers, you’re pricing 600 products, complexity explodes and total cost to deliver steadily increases.
When was the last time you sat with your operations staff and IT team and asked, “If we were to start a new company today, what would we do differently? How can simplify and improve our products, processes, procedures and workflows? What if you began with a goal of a target cost and time to originate? How close can you get to that goal? What if the goal was to cut operational cost in half, speed the process and eliminate loan manufacturing defects? Sound impossible?
A Spectacular Success Example: The following is an example of quantum improvement of a technology platform dating back to World War II. The U.S. Army Air Corp approached North American Aviation to build Curtiss P-40 fighters under license for the Royal Air Force (RAF). The P-40 had a maximum speed of 334 miles per hour and a range of 716 miles, and a cost of about $75,000 in 1940 dollars.
Rather than build an old design from another company, North American Aviation proposed to simplify and improve the design and production of a more modern fighter. A fighter that flew further, cost less to produce, was faster and more agile than the P-40. It was called the P-51 Mustang. (Incidentally, this was the premise for the creation of Loan Vision. Better. Faster. Cheaper.)
The prototype P-51 Mustang was rolled out on September 6, 1940, 102 days after the contract was signed. The P-51 had a maximum speed of 440 miles per hour (almost 100 mph faster than the P-40) and a range of 1,650 miles (more than double the P-40). Technological innovation included an innovative laminar airflow wing, two speed automatic supercharger, automated fuel mixture controller, automated coolant temperature control, a 42,000 foot service ceiling, and a cost of $50,000 in 1940 dollars.
Over 15,500 P-51 Mustang aircraft were delivered between 1940 and 1945. By many accounts, The P-51 Mustang changed the course of World War II with its ability to accompany heavy bombers to Germany and back. This innovation occurred because the North American Aviation team dared to dream big and attempt something “impossible”. And it simplified pilot workload through a series of automated processes and features designed into the aircraft.
To prove Simplification allows rapid mastery of skills, my business partner, Maylin Casanueva put a 1944 P-51 Mustang through its paces. She flew with Top Gun F-15 Fighter Pilot and P-51 instructor pilot Lt. Colonel Jerry “Jive” Kerby (Ret.) (see the flight here https://youtu.be/Pmk9BQlSczc). She adapted to the automation and laminar flow wing technology as a first-time pilot. Maylin flew virtually all of the aerobatic sequences in the video, pulling 4 Gs in an inverted dive, just like Maverick in Top Gun.
The P-51 is still a technological marvel more than 75 years later. There are many examples of challenging the status quo and simplifying the process. Innovation and simplification can have positive breakthrough consequences for you.
The rise of interest rates and decrease in production has not occurred with this speed before. This is a once in a career opportunity to substantially outperform your competitors. Work on operational productivity. Simplify your processes. Understand what’s coming at you as a result of the challenging conditions.
A word about anticipating the next big challenge. What could be the next challenge? Recessions (which I believe we’re entering) increase delinquencies, slow home price appreciation, and create incentives for GSEs and correspondent lenders to push loans back to you as repurchases or indemns. Home price depreciation starts the process for the repurchase train to leave the station. So head off the repurchase issues starting now.
Repurchase and indemnification demands increase when credit performance is expected to deteriorate. We see clients receiving repurchase requests at an increasing rate. It will get worse.
The deluge of volume in 2020 and 2021 created pressure to get loans closed. In some cases corners were cut. It is important to analyze your repurchase tail risk, especially among loans with layered risks. Focus efforts on ensuring layered risk loans have perfect documentation. Income computation/documentation and collateral value are the initial points of repurchase causality. These are the areas to carefully vet now. If necessary, correct or supplement the documentation to fend of repurchase requests down the road.
2023 is a once in a lifetime opportunity to outperform your competitors by re-architecting your business process, automating the process, setting benchmarks and performance standards and cleaning up the potentially deficient loan files from the crazy workloads of 2020 and 2021.
James M. Deitch CPA CMB is a best-selling author and CEO of Teraverde. Teraverde works with 300 clients in North America to increase productivity and profitability, and manage risks.
James M. Deitch founded Teraverde® nine years ago, after serving as President and CEO of five federally chartered banks for over twenty-five years. Teraverde® now advises over 200 clients in mortgage banking, capital markets and financial technology, ranging from some of the largest U.S. financial institutions to independent mortgage bankers to community banks. Jim founded two national banks, including a top 50 national mortgage lender. Jim’s experience in residential mortgage banking for the last three decades on a retail, wholesale and correspondent basis led to an intense desire to learn about how technology could be applied to financial institutions. His experience includes multi-channel loan origination and sales management, mortgage product design, credit policy, hedging, securitization and loan servicing, and his beginning to end experience – and his love of high performance aircraft — has fueled his “need for speed” in applying technology to mortgage banking. He has served on the Mortgage Bankers Association Residential Board of Governors and served on CEO panelist and speaker for major financial institutions, financial industry associations, corporate clients, the Department of Defense and universities. Jim is a thought leader and has published numerous articles in the industry publications.
