[ad_1] Lenders continue to face tightening profit margins as interest rates stay substantially higher than they were last year. In light of this, HousingWire recently caught up with Teraverde Chief Technology & Innovation Officer Rob Peterson to learn more about the key to lender profitability in today’s lending environment. HousingWire: As businesses of all types begin to rely more heavily on automation, is the mortgage industry doing enough to keep pace? Rob Peterson: Most segments of the economy have effectively adopted technology to reduce their costs. For example, the Federal Reserve Bank of St. Louis computes a 34.7% increase in total labor productivity in the US from 2003 through 2022, largely through business process improvement and automation. In the overall process of residential lending, our industry has not used automation. As a CTO, I have to smile when some lending executives mention that the costs of technology in the mortgage industry are high. Nothing could be further from the truth. In fact, our industry spends thirty times more on labor than it spends on technology. No wonder residential mortgage lending has wild swings in profitability! Over the past ten years, our industry has increased the portion of costs spent on labor. The blue bar is compensation cost since 2012. Note that the compensation cost starts at a low of 64% of total origination cost in 2012 to 69% in 2021. Interestingly, technology spend as a portion of total origination cost was about 2% in 2012, and its about 2% in 2021. And total origination costs have increased from about $5,100 in 2012 to over $10,500 in the first quarter of 2022. All the while, origination volume has increased steadily and instead of adding a modest increase to a spending budget on technology to effectively manage the volume, hiring personnel became the norm. And these costs have a direct impact on lender profitability as you’d expect. If a lender were pitching their business on Shark Tank, I can imagine Kevin O’Leary blurting out, “You spend 30 times as much on labor than technology… Stop the madness!” HW: What challenges are lenders facing when it comes to adopting new technology solutions? RP: The first thing we need to differentiate is the difference between innovation with technology and adoption of technology. An industry that continues to increase its labor cost structure by failing to innovate is destined for a rough ride. We’ve surrendered lender profitability to waiting for the next refinance boom. We need to be actively innovating to manage costs to the point where the earn rate is always greater than the burn rate. Jonathan Corr, former CEO of Ellie Mae had a favorite saying: “Our industry solves its issues with “human spackle.” Instead of innovating business processes and adopting technology to automate all things automatable, we hire people to do the same tasks today that they did in 2012.” In fact, the overall dependence on labor goes back to TIL machines, carbon paper in typewriters for VOEs and VODs, and manually typed conditions on commitment letters. Jonathan stated that, “The typical lender used only a small fraction of the capability of Encompass to truly automate all that is automatable.” The reason is a lack of innovation from lenders in creating new improved business processes that are enhanced with technology. Lenders struggle with change and human spackle is easier than true innovation. One can see human spackle in the charts above. We doubled volume from 2019 to 2021, but our labor cost actually increased in absolute dollars and as a percentage of total cost to produce a loan. Two-thirds of the cost to produce is labor, so when volume and margin fall, industry profits fall very fast. The result: Many lenders will give back the profits they earned in the boom times through losses over the next years. Has there been innovation over the last 10 years? Absolutely. However, the majority of that innovation and technology spend as been focused on the front line – in origination. I’m not downplaying the great leaps that the industry has taken in the origination space, especially when coupled with increased regulation, compliance oversight, and the ever-changing landscape of the housing market. But I am more than certain of the significant deficit in the innovation and use of technology for lenders once the loan file comes in from their sales teams to the operational staff. The significance of not only innovating technologies for operations but actually adopting that technology will reap dividends many times over the amount spent on the investment of procurement, implementation and training needed to utilize it. It doesn’t have to be that way. The road to automation through innovation is one that starts with the senior executives. The C-suite has to recognize the importance of adoption by providing the catalyst. There is a principle created by U.S. Air Force Colonel John Boyd, that not only revolutionized the way the United States trains its combat pilots but has also been used in other branches of the military Special Forces, FBI, CIA and other foreign service agencies. This principle is “OODA loop:” Observe, Orient, Decide, Act. In the simplest of terms: Observe: collect the data; Orient: analyze the data; Decide: what should be done based on the analysis; Act: due what you’ve decided to do. During the Korean War, Boyd noted the U.S. Sabre pilots were more productive than their opponents piloting the Russian-made MiG. By comparison, the MiG was a better equipped, faster, and more versatile aircraft. What made the difference? Their agility. The Sabre was able to move in response to their adversaries much faster. In terms of the OODA loop, a pilot in the Sabre could observe their opponent, orient themselves in terms of their situational awareness in the fight theatre and then quickly move to decide their next course of action and act upon it. Clearly, those who act first win. Similarly, lenders that can quickly cycle the process for their OODA loop will surpass their peers – and
