Transport yourself back to 2019. It’s 9 a.m. You are suited, showered and seated behind a desk in a bustling office. Industry newsletters are reporting that mortgage lenders are tightening their belts as the cost to manufacture a loan peaks at a decade high of $9,299. Then boom! In March 2020 all of that changed. Lenders’ focus on tightly managing margins was replaced by the need to triage an unprecedented surge in refinance volume, which led to a record-shattering $4.3 trillion in U.S. mortgage loan originations, the largest annual volume on record since 2005.
Now, after two years of drinking from a firehose, mortgage lenders must pivot once again to succeed in the vastly different lending landscape that lies ahead. In its December 2021 Mortgage Finance Forecast, the Mortgage Bankers Association (MBA) predicted total mortgage originations will fall 33.6% in 2022, representing a decline in volume from $3.9 trillion in 2021 to $2.6 trillion in 2022. This precipitous drop in originations is grounded in forecasts that higher interest rates will result in a 62.5% year-over-year decrease in refinance volume and the rise of a purchase market.
Amid our industry’s only constant — variability — it should come as no surprise that mortgage lenders are craving ways to more tightly measure, monitor and optimize business and employee performance. Fannie Mae’s Q2 2021 Mortgage Lender Sentiment Survey found that lenders’ top-two business concerns are process streamlining and talent management.
These concerns were echoed in a survey conducted by The Mortgage Collaborative, in which mortgage lenders indicated that two of their top-five concerns are “scaling and modernizing the loan manufacturing process to better insulate against volume fluctuations” and “measuring operations and employee productivity.”
Data-based performance management is critical to ensuring that each area of an organization is operating in tandem to meet the needs of its customers and is staying profitable. To succeed in a purchase market, lenders should track the following 10 metrics.
Important lead metrics
- Top referral sources: Purchase mortgage loan transactions require a village compared to their refinance counterparts. And this village of referral partners is a vital source of lead generation. Now is the time for lenders to take inventory of businesses that have referred borrowers and also evaluate the landscape of the prospective real estate agents, builders, insurance agents, financial advisers and settlement partners operating in the local market. Setting networking goals and strategically pursuing relationships with partners can generate a steady stream of business that is especially important in a purchase market.
- Referral source lead-to-fund conversion rates: That said, not all referral partners are created equal. If you are putting a lot of energy into nurturing a referral partner who sends you business, but those loans rarely make it to funding, then perhaps it is time to reallocate that energy to building inroads with different connections. Similarly, tracking referral source lead-to-fund conversion rates may uncover types of businesses that are more reliable sources of qualified leads. In this case, it may be prudent to strengthen existing connections with successful partners or network with similar businesses.
Important pipeline metrics
- New applications by purpose type (purchase and refinance): Keeping a pulse on how purchase and refinance applications are trending is the single best indicator of near-term volume. If refinances are waning and purchase applications are not gaining steam, this can indicate a need for more lead generation activity, which can take many forms. Lenders may want to increase advertising, deploy marketing campaigns to past customers or encourage loan originators to get in the field and drum up new relationships.
- Expiring locks trends: If the number of loans with locks expiring is trending up, this is a key indicator worth digging into. There are a multitude of reasons for increased lock expirations, some of which are internal, some of which are external to the organization and all of which need to be managed accordingly. When lock expirations trend up, it usually indicates an opportunity for stronger pipeline management. A common culprit of lock expirations is longer appraisal turnaround. Whereas refinance transactions frequently receive appraisal waivers, appraisals are required for the majority of purchase loans. Markets with insufficient appraisers may see lengthy or variable appraisal timelines and LOs should be coached to monitor loans accordingly. If lengthy processing or underwriting times are the cause of lock expirations, this is also worth drilling into. Perhaps there is a staffing, process or operational bottleneck that needs to be addressed. Whatever the cause — to ensure an organization is meeting customer expectations, maintaining positive investor relationships and running profitably — an uptick in lock expirations should always be addressed.
- Pull-through, app-to-lock: Tracking app-to-lock pull-through provides insight into the number of borrowers who have committed to finishing the loan process and is one of the first two metrics that should be examined if volume is trending down (the other metric that should be examined is application volume). Low app-to-lock pull-through may have a number of causes. For instance, a branch may be pricing itself out of its market. Or perhaps borrowers are not being offered the loan programs they need, such as down payment assistance. If a branch is staffed with LOs whose sole or primary experience is refinance loans, lenders should consider offering training to ensure staff is equipped with the knowledge to sell loan programs relevant to their local market.
Important production metrics
- Average days in pipeline: The average number of days it takes to go from application to funding provides insight into how well the loan manufacturing process is performing. Variances that cannot be explained by a shift in loan purpose type should be investigated to ensure that commitments to borrowers are upheld and staff has sufficient resources. By examining your loan pipeline by channel, loan purpose, loan program, position and individual, problem areas can quickly be identified. For instance, if portfolio loans are stalling at the ‘approved with conditions’ milestone, digging deeper can reveal why those particular loan programs are getting stuck. Perhaps underwriters are responding to the loan programs’ complexity by over-applying conditions, which in turn creates a lot of clean-up work before portfolio loans can be resubmitted and cleared to close.
- Pull-through, lock to fund: Pull-through and fallout data are essential to help identify where lenders are losing business, why it is happening and what steps can be taken to prevent future losses. Take, for instance, a common lender predicament last year: volume is high, but fallout has increased. A lender that is satisfied to simply attribute unusually high fallout to the COVID-19 market and wash their hands of it could be losing a large swath of good loans. On the other hand, a savvy lender may be able to dig deeper and save hundreds of millions of dollars in loan volume. Fallout after lock can put a major dent in profitability, therefore it is imperative that locked loans close and fund.
- Average turn times, status-to-status: The average business days it takes to move between benchmark statuses in the lending process, such as application-to-processing and processing-to-approval, indicates that a manager should take a deeper dive to see if there is a problem. For instance, if a processor’s times are longer than average, a look into her files may reveal a problem or it may show that she works exclusively on down payment assistance programs, which typically take 45-60 days. Ultimately, the data is important because it reveals where lenders should dig deeper.
- Customer satisfaction score: Most lenders measure performance based on volume and profitability metrics alone. But customer satisfaction scores provide a more well-rounded view into organizational and individual performance through customer feedback. It goes without saying that having happy borrowers is key to longevity and word-of-mouth referrals. Watching for low customer satisfaction scores and weeding out any bad actors will help strengthen the brand and grow production.
- Average compensation paid per loan: Incentive compensation plans are a powerful tool for inspiring sales practices beneficial to business. Now that lenders are ramping up for a purchase market, compensation and bonus plans should be reviewed to ensure they are both competitive and drive the desired performance.
Given that LOs have not had many opportunities to network and nurture industry relationships over the last two years, lenders could help them transition to a purchase market by incentivizing them to work with referral partners. This could be done by paying LOs additional bps when they do business with a real estate agent or builder over the next six months.
At the end of the day, tracking the right metrics can help lenders intelligently trim the fat in the face of shrinking margins by running a more lean, efficient organization. From personnel management strategies to process optimization and beyond, data tells the story of daily business performance and enables management to take proactive steps to improve performance.
This was originally featured in the March Issue of HousingWire Magazine. To read the full issue, click here.
Lori Brewer is the executive vice president and general manager at SimpleNexus.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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Brena Nath at email@example.com