How lenders can improve business models in 2022

As 2022 proves to be a challenging year for the housing market, lenders are looking to take advantage of potential downtime by improving their internal processes. HousingWire recently spoke with James Deitch, CEO of Teraverde, about the changes lenders can make to their business models in order to remain profitable.

HousingWire: Between interest rate hikes, tight housing supply and geopolitical uncertainty, many industry professionals are feeling the pressure of a volatile housing market. Why is now a good time for lenders to focus on improving aspects of their business, such as customer experience and cost structure?


Jim Deitch: Lenders face constant competition for time and resources. The past two years were all about getting loans closed, shipped and funded. There was little time for customer experience or cost focus. Margins were wide and compensated for about every issue. And justifiably so.

Suddenly the brakes come on, really hard. Rates increase really fast. And most every issue that fat margins used to cover are exposed. Cost per loan and customer experience are two issues, both driven by a common denominator, the lender’s business model.

Every business model is defined by mission, process and technology. I’ll give an example outside of our industry. I spent two days in Dallas at Southwest Airlines Headquarters, just off Dallas Love Airport, for research on one of my books. Southwest’s mission is to “Connect people to what’s important in their lives through friendly, reliable, and low-cost air travel.” The two days at Southwest illustrated the connection of mission, process and technology to their business model. Above all other aspects, Southwest strives for simplicity.

Southwest flies the Boeing 737 platform. Every pilot, flight attendant and mechanic can work on every aircraft since every 737 is certificated (airline speak for licensed by the FAA) as a single aircraft type. American Airlines by contrast currently operates seven different aircraft types, meaning pilots and mechanics can only work on their aircraft ‘type’. Southwest flies point to point routes, not through major hubs. No seat assignments, so Southwest can turn an aircraft around from touchdown to take off in under an hour. Integrated technology speeds the flight and improves safety. Every aircraft has a heads-up display which allows for landing in zero visibility if required in an emergency. As a result, Southwest aircraft fly about 2 hours more per day than their competition. There’s a lot more to Southwest’s business model, and check out my book, “Strategically Transforming the Mortgage Banking Business” for a deep dive.

Southwest is the only major airline that operates this model. The standardized platform makes consistent process and performance possible. It also lets Southwest have a cost advantage of about 15% per revenue seat mile flown. That’s a competitive advantage over other airlines. It’s hard to duplicate their business model. So many interconnected elements that all strive for efficiency and simplicity. All aimed to “connect people to what’s important in their lives through friendly, reliable and low-cost air travel.”

Think about your lending business model. Does your technology harmonize together, or are there siloed systems that serve different employee groups? Are there common processes for efficiency? How many processes require manual intervention? How do you measure results that impact profitability, efficiency, and productivity? How is the customer experience engineered from first contact to boarding the file in servicing? When was the last time you examined the end-to-end process? Is now the time to address these issues? I think so. The landscape has changed dramatically, and what worked the last two years won’t work well going forward.

HW: Lenders are facing a brutal 2022 forecast following two great years for the housing market and are looking to build business models that will profit this year and beyond. What strategies can these lenders take now to prepare for sustainable profitability?

JD: Primarily, a business model should flex to provide profitability regardless of market conditions. This is hard to execute but is conceptually straightforward.

Compensation cost is the largest impediment to sustainable profitability and a flexible business model. According to the MBA Quarterly Mortgage Report, compensation is about two-thirds of the cost to originate and close a loan. Increasing labor productivity is the key to sustainable profitability.

Jonathan Corr, retired CEO of Ellie Mae (now ICE Mortgage) addressed lenders’ tendency to use labor rather than automation colorfully. Corr described it as, “Filling business process holes and leaks with ‘human spackle’ when automation and reengineering are more direct and efficient answers. Lenders tend to fill the holes and the leaks with human spackle, as it’s a quick band-aid. There’s no reason to have all that human spackle cost and inefficiency. Human spackle also adds to the timeline to close a loan. Eliminate human spackle and closing a loan is going to take a lot less time, a lot less cost, and a better customer experience. “

So how does a lender resolve the compensation issue? Many lenders are laying off employees to balance their workforce with the reduction of volume. That’s an unfortunate temporary solution to an inflexible business model that is overly reliant on human spackle.

How do I know the industry has an inflexible business model? Regardless of loan production levels over the past seven years, the labor component is 66-70% of total cost. That is the definition of inflexibility. One would expect investment in technology and rising volumes to reduce the labor component per loan. It hasn’t. Thus, lenders cannot flex their costs as volumes vary, nor harvest the efficiency that should accrue from the technology investment.

Personnel      4,699      4,802      5,347      5,524      5,094      5,272      5,866
Total Cost to Produce      7,046      7,208      8,083      8,278      7,578      7,535      8,565
Compensation %67%67%66%67%67%70%68%

So now what? Short term, right-size your employee count. Regrettable, yes. But simultaneously commit to fixing the business model and business process that brought you the 65-70% labor component to begin with. Decide to improve process, build in flexibility and reduce the likelihood of painful layoffs in the future.

HW: How can lenders adopt a data-driven business model that ensures profitability, liquidity and risk management today?

JD: Our team at Teraverde has created a way for a lender to assess and improve their business process. We call this the ‘EAOO’, which is an acronym for Eliminate, Automate, Outsource, Optimize.  EAOO is our proprietary data-driven disciplined method to evaluate the entire business process end to end. It is employed as follows:

Starting at the end of your process, identify the smallest definable component of your process and define that component as a task. Then consider if that task can be improved by taking the task through the EAOO regimen. Then move to the next smallest component and work forward until you reach the point of first customer contact.

The EAOO regimen is a waterfall to evaluate each task, as described below:

● First, can you eliminate the task by considering whether the task is necessary, or how the task could be consolidated into another task? If the task cannot be eliminated, consider the next step of automation.

● Can you Automate the task internally using robotics process automation, workflow management or similar automation tool? If the task cannot be automated internally, consider the next step of outsource.

● Can you outsource the task externally to a specialized outsourcer? Outsource doesn’t mean offshore. A lender can outsource to on-s. e or off-shore vendors. If the task cannot be outsourced, then consider optimization of the task.

● Can you optimize the task by finding the most efficient, least cost method to accomplish the task?

Once EAOO is completed for the first task, repeat the EAOO evaluation for each task within the overall end to end process. Invariably we find many opportunities to eliminate, automate, outsource and optimize the components of a lender’s process.

We speed this EAOO process up with some data-driven magic. That data driven magic includes an analysis of about 400 elements that produce ‘metrics that matter’. The data driven magic finds process variations, flaws and inefficiencies. It assesses the productivity of individual personnel and opportunities to improve individual performance. It uncovers hidden opportunities to increase pull-through. It assesses and improves the coordination between systems within your tech stack, and opportunities to better configure your tech stack.

EAOO is a data-driven intentional process to drive human spackle from your process, improve labor productivity, and build more flex into a lender’s business process. It improves the business process to be more flexible and productive. The EAOO process can’t be shortcut. One can’t achieve a sustainable profitable business model by tolerating bad process.

Here’s the key point from Jonathan Corr: Toleration of bad process leads to ‘human spackle’ being used to patch over fundamental deficiencies, with ‘checkers checking the checkers’, and multiple passes through manual process.

EAOO is a different approach to intentionally disrupt and improve your own business process. EAOO is an intentional walk-through of an entire business process, starting at the back end of the process and walking forward.

HW: What solutions does Teraverde offer to help lenders enhance their business models in preparation for a more profitable future?

JD: Our approach is not ‘best practice’ or selling you another technology solution to insert into your tech stack – it is helping you develop the right business processes with the tech stack that you have to deliver your desired customer experience to your customers.

We find that most lenders are using only a fraction of the capability of their existing tech stack. And human spackle is how the lender compensates for not exploiting the full capability of their technical systems.

Teraverde can help in two ways. The first is to achieve transparency and visibility into the opportunities to improve your business. That transparency and visibility arises from using metrics that matter to continuously evaluate your business. These metrics that matter constitute your single source of truth from the appropriate systems of record in your business.

Metrics that matter rarely come from static reports or dashboards. Metrics that matter identify the relationships of processes and systems that drive profitability, efficiency, and productivity. Our clients often describe “aha” moments when the association of processes, systems and data reveal actions that can meaningfully improve your results. The ability of senior leaders and managers to easily explore their data is the key difference of our Coheus® solution.

The second way we can help is to engage in an EAOO project with the lender. We use our data driven magic to analyze about 400 data elements that produce ‘metrics that matter’ together with an automated assessment of the DNA of your tech stack to speed the EAOO process.

The key differentiator of Teraverde is our people. We have experience as CEO, COO, CFO, CTO and CIO of actual lenders. We are not auditors or coders dispensing products or advice about lending. We are lenders with hundreds of years of extensive lending leadership experience. All focused on helping you get the right business process in place.

We help you continuously improve the process through transparency and visibility of metrics that matter from a single source of truth. No other firm offers such a focused and proven approach to a flexible, sustainable business model free of human spackle.

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