Mortgage Focus 2004: in the latest annual edition of Mortgage Focus, a benchmarking study, Fannie Mae found that wholesalers saw their average cost to originate per closed loan rise by 30 percent in 2003. Retail lenders, by contrast, saw their average cost per closed loan drop by 13 percent.

Author:Davis, Terri

IN 2003, MORTGAGE LENDERS DEALT WITH THE DUAL CHALlenges of staying ahead of record mortgage origination volumes while preparing for change in the market. The boom in originations continued unabated, but as the prospect of lower volumes became apparent, lenders evaluated changes to their business processes and their technology investment strategies. * The results of Fannie Mae's fifth annual Mortgage Focus benchmarking study (Mortgage Focus 2004), conducted among 150 Fannie Mae seller/servicers, provide an inside look at the cost, productivity and technology investment trends driven by these challenges. * Wholesale lenders faced a highly competitive environment, which drove up their loan acquisition costs and limited their productivity and efficiency. In response, they focused their limited resources on the aggressive pursuit of market share and loan volume, while delaying technology investments. * Retail and Internet/call-center lenders refined their eCommerce and eMortgage strategies to tie together their technology investments under a single umbrella. And lenders in all channels, increasingly concerned with mortgage fraud, made efforts to combat the problem through technology solutions.

Mortgage Focus facts

Mortgage Focus 2004 covered calendar year 2003. The study included results from participating lenders segmented into four loan origination channels: retail, Internet/call center, wholesale and correspondent. Participating lenders represented more than 20 percent of the total mortgage loan volume originated in the United States in 2003, and nearly 40 of the top 100 U.S. lenders by production volume.

For participating lenders, the yearly study helps identify origination cost, productivity, technology adoption and other trends, and serves as a planning tool. "Technological advances in the mortgage industry continue to provide dividends, and the Mortgage Focus study serves as an excellent benchmarking tool to ensure that lenders are taking advantage of the potential cost savings," says Michael J. Winks, vice president in the Grand Rapids, Michigan, office of Ionia, Michigan-based Independent Bank Corporation.

Wholesale channel lenders work to stay ahead in a challenging market

Wholesale lenders faced a difficult market in 2003, resulting in lower productivity and higher origination costs. Because wholesale lenders

depend on brokers for loan volume; they face an origination process that is fragmented and susceptible to external market factors that are often beyond their control.

In 2003, the market was characterized by aggressive pricing, as lenders competed to capture broker-generated loans. As a result, wholesale lenders paid an average of 33 percent more in fees to brokers than in 2002, which helped drive up their average cost to originate per closed loan by 30 percent--from an average of $2,502 in last year's study to $3,261 this year (see Figures 1 and 2).

As a result of market conditions, wholesale channel lenders prioritized immediate loan volume and revenue generation above cost and efficiency improvements. Many wholesale lenders hired new processors and underwriters to manage the unprecedented loan volumes being originated by inexperienced brokers who submitted incomplete or inaccurate loan files, which required additional review by lender staff. This resulted in lower productivity and higher origination costs.

However, some wholesale lenders fared well, even amid the difficult market conditions of 2003. Low-cost/high-productivity (LCHP) lenders (see sidebar, "Top-Performing Lenders Focus on Core Goals") adopted business strategies that helped them become more productive and better able to buffer the impact of rising costs driven by external factors. Their strategies included:

* Careful management of broker relationships to ensure loan quality;

* Specialization in a limited product mix to contain origination costs (see Figure 3); and

* Investment in "self-service" Web portals to improve their interaction with brokers.

Union Bank of California, a San Francisco-based wholesale LCHP lender and the third-largest bank headquartered in the state, credits its high productivity to a combination of strategies. "Our high productivity can be directly linked to the...

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