The funny thing about myths is the way they quickly turn into gospel.
Mortgage industry myths are no different, and in the July Insights report from STRATMOR group, senior partner Jim Cameron tackles three of them: that there are economies of scale in distributed retail mortgage lending; that centralized retail fulfillment operations are more efficient and will reduce cost; and that older borrowers are less tech savvy.
Myth Number 1: There are economies of scale in distributed retail mortgage lending
Conventional wisdom suggests that as retail lenders grow, the cost to originate declines due to economies of scale. Is it true?
Using data from the Mortgage Bankers Association and the STRATMOR Peer Group Roundtables program, STRATMOR compared information across four major cost categories for independent (non-bank) lenders. They found that from 2015-2018, large lenders’ average total cost for the four-year period was $9,565/loan, which was 10% higher than the mid-size group.
“Even when accounting for the higher sales cost related to the higher average loan size for the large independents, the larger independents still show higher costs. While the fulfillment and corporate administration categories were in the same ballpark, large lender costs still exceeded mid-size lenders by 2% in those categories,” Cameron writes.
The same comparison was done for large and mid-size banks, and STRATMOR found that large bank volume exceeded mid-size volume by a factor of 6x to 7x. The reality, then, seems to be that large banks don’t enjoy any cost benefits of scale at all, and actually experienced expenses that were 45% higher than mid-size banks over the four-year period.
This isn’t true for all industries, of course, and it may change in the future, as digital tools and applications become more prevalent. As it stands today, however, mid-size lenders come out on top when it comes to scale economies.
Myth Number 2: Centralized retail fulfillment operations are more efficient and reduce cost
While it might seem much more efficient to allocate resources, adopt and enforce standardized processes, and manage employees from a centralized model, STRATMOR data tells a different story.
Looking at the number of fulfillment locations/ops centers, the loans closed from each fulfillment locations/ops center, and the loans closed per fulfillment FTE, the data shows that more centralized model doesn’t appear to result in improved productivity for either larger independent (non-bank) lenders or for large bank lenders.
The explanation for the lack of efficiencies in a more centralized model is clear, Cameron writes: execution matters more than location.
“Costs are driven by the interaction of people, process and systems. Employing well-trained and knowledgeable people to fulfill loans using an efficient process and workflow enabled by the smart use of technology will result in higher than average productivity and lower than average costs. It matters less where the people are sitting than how efficiently they are working,” Cameron writes.
There’s actually been a movement more toward somewhat of a decentralized model, with a growing number of underwriters and other fulfillment employees working from home on a regular basis.
Large lenders tend to have higher costs not because they are more centralized, but because of other factors such as increased regulatory scrutiny and high growth. Having a higher throughput per fulfillment location isn’t enough to overcome the factors driving up costs.
Myth #3: Older borrowers are less tech savvy
As millennials have grown to become the largest group of homebuyers and the digital disruption has inundated the mortgage industry with the latest and greatest in technology, the assumption has been that older borrowers can’t—or don’t want—to use the technology of the day.
Data from STRATMOR’s MortgageSAT borrower satisfaction survey program, which gathers insight on what drives satisfaction and includes a Net Promoter Score (NPS), reveals that so far in 2019, borrowers over 65 were happier getting updates with an email (74 NPS) or text (78 NPS) than a letter (65 NPS). Even a personal phone call (83 NPS) did not provide a substantial lift compared to text. Data also revealed that in 2018, 26% of borrowers over the age of 65 read one or more online reviews compared to 32% for all ages, and that in 2018, 34% of borrowers over 65 applied via the internet, and were just as happy taking an application that way (NPS 75) as by mail (74) or by phone (76).
While some technology may be fairly new for older borrowers, the process isn’t, as most borrowers have been through a loan transaction multiple times. As a result, they’re more comfortable and less likely to feel the need to be walked through the process directly.
We also forget that the generation of baby boomers are having to adapt in order to take advantage of many conveniences of modern life, including new ways of communication.
“For me and many other older Americans, to keep the lines of communication open with children and younger adults, we communicate through the media they are actively using. Heaven forbid if you leave your teenage child a voice mail versus a quick text! Snail mail is not even on the table except for special occasions. So common sense suggests that the tech gap is narrowing,” Cameron writes.
Data from the Pew Research Center also supports that the tech gap is narrowing. Forty-two percent of adults over 65 report owning a smartphone, up from just 18% in 2013, according to a 2017 report. Internet use among seniors has also increased, from 14% in early 2000 to over 67% today.
There are, of course, many more myths that persist in the mortgage industry. Examining the data and discovering the truth, however, result in better strategic and tactical decisions that will benefit companies and borrowers alike.