by Joe Dahleen
If we were forced to come up with something good that has come out of the tidal wave of change that has descended on the home finance industry in the wake of Dodd-Frank, aside from any future benefits that might accrue to our customers, it would have to be the training it has provided our industry. Those of us who are still working here have received quite an education in change management. Those that were not able to cope with the rapid pace of change have left the industry, or been shown the door.
Now, instead of a typical industry where 80 percent of all firms in the space are locked into the traditional way of operating and the top 20% (or fewer) are innovators who drive change, we are working in an industry where every surviving company is in a near-constant state of change and the top firms have learned how to manage that proactively. By that I mean changing their operations to suit their own ends instead of only those imposed on them by federal regulators.
To more clearly see the difference between these two types of firms, I would offer this example. In its second National Survey of Community Banks, released earlier this year, the Fed and the Conference of State Bank Supervisors found that compliance costs for community banks ate up 22 percent of their net income. Overall, this line item cost these mid-tier institutions $4.5 billion annually. Because so many of these new rules have been focused on home finance, many of these institutions have moved completely away from the mortgage product, even though close to 80 percent of these institutions admitted that mortgages had been a core product for them before the crash. That’s not managing change proactively. That’s purely reactive, and it will cost community banks money.
Having been in the mortgage lending business for many years, I sympathize with the plight of these smaller institutions, especially when it comes to the rising costs of closing mortgage loans. Of course, traditionally, the cost to close a loan has been more important to consumers than lenders. The vast majority of these costs are passed on to the consumer directly and, prior to TRID, most consumers were locked into the relationship due to application or appraisal fees before they really had a good idea of what it would cost them to get the loan. TRID changed that and now lenders are faced with providing accurate cost data to borrowers before they are financially locked in, which makes cost to close a competitive issue.
And it’s a serious issue. In August, the Mortgage Bankers Association released data from its survey of members indicating that total loan production expenses had fallen from above $7,000 per loan to $6,984 per loan. This number included commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations. There was some celebration. There would have been much less if more people had remembered that the net cost to originate a loan in 2010 was about $2,700 (which included all production operating expenses and commissions minus all fee income, but excluding secondary marketing gains, capitalized servicing, servicing released premiums and warehouse interest spread).
It’s not yet clear how the rest of the lending community will deal with origination costs in a post TRID world, but you can bet that the leaders will take a proactive approach by working to lower their costs. Not only are there many costs, like compliance, that are difficult if not impossible to pass on to the consumer, but having lower costs will be key to being competitive in the new environment.
One way lenders will cut costs will be by cutting out the paper. I wrote recently how the government seems to be driving lenders to all-electronic mortgage lending, but the best lenders have wanted to go there for a long time. The costs are just lower — and not just the hard costs that most lenders track, but all of the others as well.
But again, this is a perfect example of how our industry has changed in the years after Dodd-Frank. Before the financial crash, the lenders that were pushing into electronic mortgages were trailblazers, clearly part of the top 20 percent, the innovators. Not today. Now, the GSEs want the appraisal data electronically, the CFPB wants everyone to go to electronic closings and a growing set of correspondent lenders don’t even care about the paper files. In a fast changing mortgage industry, paperless has become the realm of the “traditional” lender.
The best lenders are going beyond this, finding ways to push that envelope, like they always do. They are proactively seeking out changes they can make that others haven’t noticed yet or may not even be aware are available to them. My favorite example is verifying income with copies of tax returns. While other lenders are printing out paper, sending it out to a borrower to get a signature, then sending that into their IVES vendor to get a tax transcript from the IRS, leaders are doing it all electronically, from the borrower’s smart phone. This wasn’t possible a short time ago. It’s a great example of being proactive and driving the change.
No one likes change, but lenders that decide to drive it will lead the industry. That’s always been true, in every industry. The difference for us in this fast-changing mortgage business is that firms here are being driven much harder. The leaders are innovating at a tremendous pace, out of necessity and, in the end, that will do more good for our borrowers than any law Congress can pass.
About the author:
Joe Dahleen is the President of Taxdoor a paperless solution for borrowers IRS tax transcripts that does not require a signed 4506-T. Contact Joe at email@example.com or find him on twitter at @taxdoor, @cogentroad and personally @JDmortgageTech