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Mortgage performance indicators in a rapidly changing lending market

A key task for lenders in 2016 will be to respond to and address the evolving mortgage market

Overview

A mortgage market dominated by purchase lending in a complex compliance environment is giving rise to a new era. Lenders should therefore look at the entire mortgage market in new ways.

Forces that are marking the dawn of a new mortgage era

Cost-to-close is rising and productivity is dropping. Three factors indicate the reason behind this:

  • Mortgage volume, on a unit basis, dropped 25 percent in 2014 while mortgage employment, in absolute terms, remained relatively constant. As a result, overhead costs are unbalanced, leading to increased costs across the board.

  • Purchase loans are now 50 percent of the mix for the first time in many years. These types of loans are harder to make than refinance loans—they take longer and are not as abundant.

  • The compliance environment, which is still evolving, also plays a vital role.

Identifying lending metrics amid these market forces will be key for lenders in 2016. This paper identifies six distinct mortgage performance indicators (MPIs) that are simple to explain, calculate and compare.

DOWNLOAD HIGH PERFORMANCE MORTGAGE LENDING [PDF, 564 KB]

Key Findings

Potential keys to a successful 2016 lie in identifying lending metrics. The six distinct MPIs we have identified are the perfect starting place.

  • Velocity—number of days between application and closing. Faster the close, better the mortgage operation.

  • Pull-through—the ratio of closed loans to submitted applications, including To Be Determines (TBDs), because they represent real opportunity.

  • Productivity—closed mortgage loans per mortgage employee per month. This is the most important performance metric in the industry.

  • Cost-to-close—the sum of costs such as mortgage labor, direct and indirect mortgage and mortgage technology, divided by the number of closed loans for a 12-month period. The lower the cost-to-close, the more competitive the deal.

  • Customer share—the ratio of closed loans in a calendar year to the number in that same calendar year.

  • Employees per thousand closed loans—the total number of mortgage employees divided by total loans closed annually, multiplied by 1,000. It shares an inverse relationship with productivity.

Lenders must react in light of these market forces. Potential keys to a successful 2016 lies in identifying lending metrics.

Recommendations

  • Apply the high-level metrics to suit your operation: The six MPIs are intentionally designed to be simple, directional and diagnostics-oriented. Every mortgage lender can calculate these metrics in-house using a more detailed level of financial and statistical data, and address questions arising out of the study’s results.

  • Focus on opportunity by building market share: Retaining and gaining more customers means more mortgage opportunity, which means the chance to increase productivity.

  • Seize the millennial opportunity: Mortgage is often the gateway transaction to many other financial service needs. Seizing the opportunity of the millennial homeowners’ financial needs is important.

  • Work on mortgage lending productivity by concentrating on closed loan volume: Increasing productivity decreases cost-to-close. This is because labor accounts for more than 50 percent of the cost side of the equation. The key is to use labor more efficiently and save money.

DOWNLOAD HIGH PERFORMANCE MORTGAGE LENDING [PDF, 564 KB]