Why in-house underwriting isn’t for every lender

One of the most critical parts of the home loan journey is underwriting. A behind-the-scenes process, underwriting is when a lender takes an in-depth look at a borrower’s credit and financial background to determine their loan eligibility.

Some lenders choose to keep underwriting services in house, so they can control the entire loan operation from start to finish. But in an increasingly volatile and cyclical market, it is clear that the best price and the newest technology matter more than ever for each transaction. Lenders need to come to terms with the fact that outsourcing some or all of the underwriting process can sometimes be the best option.

This is especially true when considering that, as the world comes out of the COVID-19 crisis, interest rates at best are expected to remain stable, but more than likely will increase slightly, and industry volume more than likely will decline, leading to necessary cost controls. As the industry goes through the down cycles of the mortgage business, mortgage professionals are always reminded by market forces that they should return their focus onto their fixed costs. Recalling 2018 is a good exercise. The U.S. had a healthy economy, higher rates caused lower refinancing volumes, and low housing inventory tempered the purchase market. Per the Mortgage Bankers Association, the average production expense was $8,278 per loan, while profit per loan was $367. This is a far cry from the realities of 2020.

The case for in-house underwriting
Many in the industry might question why they should outsource one of, if not the most, important pieces of the mortgage process. While benefits of in-house underwriting include a loan officer, processor and an underwriter working in close proximity, making the process go faster and smoother for the borrower, it also has costs. Some lenders that have always completed underwriting internally might not even realize those hidden costs, which include credit risk, compliance issues and constant training due to turnover.

There are also scale requirements for in-house underwriting. Delegating this function can allow for business growth by simply helping a lender expand their capacity internally and focus on the services they excel at most.

What outsourcing offers
Advancements in technology — such as AI, document recognition, automated workflows and more — are growing exponentially, requiring scale to compete in the marketplace. With outsourcing, none of these costs fall onto the organization, as it pays a flat fee for these services.

It is imperative that you understand the hidden costs of credit risk. Having an unsalable loan is a sure way to quickly erode profit. With so much at stake, it is crucial to select the right long-term partner — one that can provide underwriting services at a reasonable price, while handling the credit risk aspect of the loan.

Outsourcing is not for everyone, but the good news is that there are choices. Organizations can choose to retain their lender status while outsourcing some or all of their underwriting. Or, organizations might find success in employing a hybrid model. This could take the form of a nondelegated correspondent lender, which allows an organization to increase profitability in many ways, including through a customized business plan based on volume and pricing flexibility. Another option is a mini correspondent, which is a lender that outsources underwriting and closing.

As the industry rebounds from COVID-19 and prepares to tackle future unprecedented challenges, it is wise to use this time to make sure any given business is as nimble as the mortgage industry is cyclical. With the right strategy, partners and technology, organizations can outsource a portion of their labor, cede credit risk and refocus their resources on more appropriate tasks.