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Top cost-effective retail lenders produce loans at half the industry average: Freddie Mac

The average cost for a retail mortgage lender to originate a loan reached $11,600 in the third quarter of 2023, up 35% — or nearly $3,000 per loan — when compared to fourth-quarter 2020, a period of low interest rates and high sales volume, according to a study published Tuesday by Freddie Mac.    

But the study also shows that top cost-effective retail lenders can produce loans at nearly half the cost of the industry average. Across the top 25% most efficient lenders, the average cost to originate a loan was $6,900 in Q3 2023. That’s 2.4 times less than the average cost of $16,500 for the companies in the bottom 25%. 

The average cost to originate a loan at large-sized retail lenders (quarterly loan volumes of more than $500 million) was $11,000 in Q3 2023, compared to $11,700 at medium-sized lenders (quarterly volumes of $150 million to $500 million) and $11,900 at small lenders (less than $150 million). 

Freddie Mac’s study is based on financial information from 203 lending institutions. In partnership with Ipsos Public Affairs, the enterprise also conducted 13 virtual interviews with representatives at lending institutions, as well as an online survey with 500 loan officers, originators and underwriters in November and December 2023. 

“We are involved in a lot of conversations with lenders, and the biggest issue is just increasing costs,” Kevin Kauffman, vice president of Freddie Mac’s single-family client engagement division, said in an interview with HousingWire.

The study shows that one reason for rising costs is inflation, which mainly affects vendor technology expenses and fees, including credit reports and third-party verifications. Meanwhile, lower mortgage production makes economies of scale — or per-loan allocations of total costs — more difficult. 

Kauffman added that the higher costs are also because “over the three-year period, we have transitioned from a refinance market into a purchase market,” which he explained as a more complex, labor-intensive and time-consuming mortgage process.

Mortgage professionals said that cost increases are evident across the entire spectrum of origination functions. But many lenders report administration and operations, digital tools and customer support are having more impacts than other categories.

Technology aspects

Kauffman said that despite being relevant to improving efficiency and reducing risk, new technologies have also put pressure on retail lenders’ costs. That’s because lenders are often implementing new tech tools alongside their existing processes. 

“The example I’ll give is, if you pay for a report that verifies employment and income, and you still ask for pay stubs and W2s, why did you pay for that report? Why are you still having somebody manually and verbally doing these things?” he said. “So, our view is that there’s a great opportunity for the industry to leverage these tools in the market. And they don’t know how to get started.”

Freddie Mac’s study shows that personnel expenses represent 67% of lenders’ total production costs. Some parts of the process, mainly underwriting, remain fairly manual. Meanwhile, the analysis noted that technology-related expenses per loan have risen from 2% to 4% in the past three years. 

Kauffman said that some lenders have considered removing these solutions from their portfolios, but the ones that are adopting them are creating savings and mitigating risks. He noted that lenders that leverage these tools have a 40% lower defect rate. 

During interviews, executives told Freddie Mac that they estimate a fully digitized mortgage process can help them save up to 40% in costs. Leading tech adopters are interested in artificial intelligence, blockchain and predictive analytics. 

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