[ad_1] 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. 2015 2016 2017 2018 2019 2020 2021 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
