Technology spend does little to lower loan fulfillment costs: Stratmor

The automation mortgage lenders are investing in isn’t necessarily paying off in lower fulfillment expenses or higher profitability, according to a new Stratmor Group report.

“Very little, if any, correlation exists between the money put into automation and ... either lower fulfillment cost per loan or higher net production income,” Tom Finnegan, a principal at Stratmor, wrote in the study, noting that his conclusion comes from data his firm and the Mortgage Bankers Association have collected.

The analysis is in line with other recent research by the MBA that shows mortgage companies are finding it a challenge to manage costs as their margins normalize after a banner year.

To be sure, the average of 8% of total expenses that lenders put toward technology has a value, but it shows up more in broader organizational goals and productivity than in fulfillment costs, which represent a relatively small share of overall spending, according to the report.

“Fulfillment cost per loan, which has been in the $1,500 to $2,000-per-loan range over the last few years, represents only 20 to 25% of total, fully allocated origination costs. The potential for dramatic changes in cost per loan or per-loan profitability from reductions in fulfillment cost is constrained by this fact,” Finnegan said in the study.

The value of technology lies in whether it furthers individual company needs rather than a line item, Finnegan suggests, citing a concept promoted by one of his colleagues, Jennifer Fortier. Ensuring tech tools have high adoption rates is one way to maximize that, he noted in the report.

Automation might be having a positive impact on the productivity of full-time equivalent employees at big nonbank lenders, Finnegan added.

“The large independent retail channel subgroup does appear to show a developing positive correlation between technology spend and productivity expressed as closed loans per fulfillment FTE,” he said in the report, noting that the technology spend in this group varies widely, from 2% to 23%.

However, while the top quartile of companies closed 9.1 loans per FTE in fiscal year 2020, compared to 7.4 for all companies, lower volumes in the first half of 2021 did reduce the difference to 7 for the top quartile, and 6.2 for all other companies.

“It appears that the higher tech-spend lenders were not able to adjust staffing as quickly as would’ve been needed to maintain the very high productivity levels of 2020. The lower tech spend lenders experienced a lower percentage decrease in productivity,” said Finnegan. “So the jury may still be out on the long-term trend of this metric.”