Why Have Mortgage Origination Costs Increased?
It’s no secret that the cost to close a mortgage loan has increased in recent years. According to the Mortgage Bankers Association’s (MBA) Quarterly Mortgage Bankers Performance Reports, total loan production expenses in the fourth quarter of 2014 averaged $7,000 per loan. By the first quarter of 2021, they had risen to $7,964 per loan—an increase of nearly $1,000.
Mortgage companies are fully aware of this rise in expenses, but most aren’t aware of why expenses are rising.
What has contributed to the increase in origination costs? Find the answer to this question and so much more in this blog post.
Reason 1: Post-Financial Crisis Regulations
The great recession of 2007-2009, fueled by the sub-prime mortgage crisis, is a prime culprit for the increase in origination expenses. Several reforms directly impacting the mortgage industry were put into place as a result of the global financial crisis. While these reforms were introduced in an effort to prevent future crises, many created new obstacles for companies in the mortgage industry —particularly in terms of regulatory compliance costs.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (also referred to as the “Dodd-Frank Act”) was one of the most notable changes that came about in response to the crisis. Signed into law in July of 2010, the Dodd-Frank Act was meant to address and solve challenges that experts believed caused the credit crisis. However, the act significantly impacted U.S. lending and servicing regulatory compliance costs. As stated in a Rice University article, experts have found that banks’ total noninterest expenses (which are impacted by regulatory costs) increased by roughly $64.5 billion per year after 2010 as a consequence of the act’s passage.
Although many would argue that the Dodd-Frank Act has benefited the broader public and the mortgage industry through the institution of the Consumer Financial Protection Bureau (CFPB) and the addition of new laws and regulations, no one can deny that it has also negatively impacted overall origination and servicing expenses.
Reason 2: Rising Servicing Costs
In addition to regulatory compliance costs, direct costs related to servicing also attribute to mortgage origination expenses. According to the MBA’s 2021 Servicing Operations Study and Forum (SOSF), direct servicing costs rose in 2020, after four consecutive years of decline. The association’s data shows that total direct servicing costs increased from $143 per loan in 2019 to $160 per loan in 2020.
While this is the first time the industry has seen an increase in direct servicing costs in the last four years, it’s not the first time these costs have risen. According to the MBA’s data, before the credit crisis, the average per-loan servicing cost was just $55, over $100 cheaper than it is today. This makes it clear that the cost to service a loan has directly impacted, and increased, the overall cost of lending in recent years.
It’s also important to note that pandemic-related activities supporting foreclosure moratoriums and forbearance programs have resulted in increased servicing costs as well.
Reason 3: The Need for More Personnel
Furthermore, the need for more skilled personnel has significantly contributed to the rise in origination costs. The COVID-19 pandemic alone brought on an industry-wide need for additional resources—for both mortgage companies and their third-party vendors.
During the pandemic, the mortgage industry experienced record-low interest rates and an unprecedented surge in mortgage volume that resulted in a dire need for more staffing. As organizations brought on more employees, they also brought on additional expenses.
This is especially true when it comes to underwriters, who alone are significantly raising production costs. In 2020, the industry’s shortage of underwriters became blaringly apparent. As a result, underwriters’ salaries increased substantially, moving into the six-figure range and nearly doubling pay scales for underwriters with more than a couple years of experience.
So, rather than origination costs lowering, as they have historically done during periods of higher volumes, they increased in 2020-2021.
Once again, the MBA’s data provides proof. The association’s Quarterly Mortgage Bankers Performance Reports show that in the first quarter of 2015, personnel expenses averaged $4,675 per loan. Fast forward to the first quarter of 2021, and average personnel costs sat at $5,523 per loan—an increase of nearly $1,000 within 6 years despite the many technical advances to improve process efficiencies.
Your Solution: Technology and Expertise
At this point, you’re well aware of some of the main causes of mortgage origination costs increasing over the years. But now, you’re likely asking yourself another question: What can I do about it?
Your answer lies in technology and expertise provided by a trusted mortgage solutions partner.
For many mortgage companies, there is a factor that creates hesitation in adopting the solutions required to succeed, and that factor is, of course, cost. As origination costs have risen for mortgage companies, they’ve also risen for vendors. In turn, many industry-leading solution providers have been forced to increase their prices.
However, mortgage companies should carefully consider just how a slightly higher investment in technology and expertise can result in significantly higher productivity levels and cost savings in the future.
A Forbes article entitled “How Technology is Breathing Life Into The Mortgage Industry” references the increase in technology adoption since the COVID-19 pandemic first hit. The article explains the benefits of this adoption by stating, “Leveraging technology in the mortgage process prevents banks and lenders from lagging behind their competitors and supports increased efficiency, productivity and even financial inclusion in loan approvals.” These benefits are all factors that often lead to reduced expenses.
Consider this…What effectively implemented technology costs you today, it pays for multiple times over tomorrow.
Your Partner: MetaSource
The key to ensuring that your solutions drive results is to find the right partner. At MetaSource, we have years of experience in the mortgage industry and can undoubtedly deliver the technology and services you need to succeed. Through offerings like QC audit solutions, whole loan purchase review software, mortgage origination automation, and mortgage cloud document management software, MetaSource can help you thrive in today’s market.
Want to learn more about our solutions? Click on the link below!