Let’s admit it. The closing process, that time between underwriting approval and the actual closing, is the mortgage industry’s not-so-secret Achilles heel. That’s not a knock on the good professionals who enact minor miracles choreographing the multi-faceted ballet that is a typical closing. Blame it on the patchwork of regulatory requirements and sheer number of different parties who need to touch the transaction to get it done.
It’s a process requiring exquisite collaboration and pristine information exchange. But the fact is that it takes an average of 47 days to close a mortgage (according to Ellie Mae as of September 2020). Much of that is, from the Realtor’s or consumer’s perspective, the “dead time” between the excitement of getting approved for the loan and the additional excitement of getting the keys.
The process in between is, for them, quiet and mysterious. The wait seems tedious. Information and updates do not flow freely. Like it or not, the most nerve-wracking part of buying or selling a home comes when the “file” heads out to the title and escrow company.
We haven’t had to really focus on that much for the past 18 months. Instead, the mortgage industry has been focused on its production pipeline as a historic wave of refinances engulfed lenders. But now that it’s all but certain we are coming into a true purchase market, the unknown and uncertainty that is the period prior to close will once again come under more scrutiny.
With a purchase market, of course, comes higher production costs and weaker margins. There’s just a lot more to a purchase mortgage. More emotion. More players. More opportunity for things to go sideways…or at least, hit a chokepoint in the process. And all of that means more expense. More cost. More time.
Mortgage lenders, at least before the jaw-dropping volume of 2020, have redoubled their efforts to stave off margin compression in recent years. We’ve seen the thought of eMortgages start to be accepted and embraced by lenders as the way of not just the future, but the present.
But, to date, most of the streamlining has happened at the point of marketing and sales. It’s much more efficient to reach a loan officer and input an application into the pipeline than ever before. Some investment has also gone into the underwriting process. These investments will really begin to pay off in a purchase market that will foster greater competition for less volume.
But about those fulfillment, production and closing costs…
In 2019, The MBA estimated that for depositories, 46% of retail origination costs were used to cover sales functions. (Source: MBA and STRATMOR Peer Group Roundtables, July, 2019). For non-depositories, it was 58%. Depository or not, that still means almost half of the cost to originate a loan comes from the production element.
It makes perfect sense, then, that the first priority for streamlining and improved efficiency would be sales. We’ve seen great advances in LOS technology in the just the past two years. But while there’s been some talk about using things like artificial intelligence to streamline and better automate the production side of things, the hard truth is that we’re just not there yet.
It doesn’t help the lender that much of that closing process lies in the hands of its third-party service providers. But it still remains that too much of that phase of the transaction — especially the period between underwriting approval and closing date, an area where things like TRID rule the day — involves patchwork technologies, multi-business collaboration using archaic tools like email, the telephone or even, unbelievably, fax machines.
This is where the mortgage process grinds to a near halt and begins to hemorrhage costs as well as time. It’s where phone tag and emails lost in spam filters mean duplicated tasks, needless delays and even errors. It’s where professionals who would be more effective attacking the more complex elements of production and closing, instead, spend hours on the phone with the Realtor, answering the question “How are things going?”
It’s been that way for decades. It’s where what is becoming a relatively efficient part of the mortgage transaction, the origination phase, bogs down into a grind virtually powered by manual labor.
Now, look more closely at the title, escrow and closing process itself, which is usually (mostly) in the hands of the title agent and title underwriter. During a purchase transaction, most title agency professionals are focused on getting the file to the closing. That includes procuring the underwriting policy, managing the title search, curative, TRID requirements and so forth.
However, especially during a purchase transaction, many title professionals are frequently forced into double duty — spending countless hours on the phone or in their email updating one of the parties to the transaction status (“When will closing be? How long until the title search is complete?”) or seeking information. These are tasks that could easily be automated without sacrificing too much of the personal element.
Most agencies, which also operate on razor-thin margins, cannot afford deep staffing to begin with. So the more time that the escrow officer, or closer, or other staff member spends on mundane tasks such as answering routine questions, updating status or chasing down a driver’s license or social security number, the more time it takes to clear an HOA lien or finalize the C.D.
Although we can all agree that communications with the borrower or Realtor are important, the bulk of these interactions tend to be status-based — something that doesn’t necessarily require a phone call or email to convey. Yet, it usually is. And the inefficiency is only amplified by the use of 20th century tools to do it.
That inefficiency is further reflected in the third party’s costs, which in turn, are passed on to the lender.
With the arrival of a purchase market, these issues will be exacerbated. Just as pipeline and production challenges flared as refinance volume surged, lenders will quickly notice as the increased number of purchase transactions spotlights weaknesses in the closing and production process.
They’ll be dealing with more consumers and more Realtors, all with questions about status or who can’t be reached for needed information. They’ll be dealing with more complex appraisal and title issues. And they’ll be doing it with, most of the time, an ad hoc collection of proprietary technologies and good old-fashioned shoe leather. Lenders will quickly notice their margins shrinking. And they’ll know why.
It’s time for us to accelerate our attack on the costs and inefficiencies inherent to the closing process and production. There are solutions out there, with many more coming. It starts with decision-makers thinking globally about all of their processes. Not just their sales processes.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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