More than ever, lender profitability requires maintaining pace with innovation

By Housing News

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 quickly. We’ve all made the observation: Technology spend and innovation is low. We now have to orient: What are the current technologies available to push innovation in my origination process? Once the technology is found, the decision and action must quickly follow.  Those who choose indecisively or not at all have to reset their loop and get back to square one. 

HW: Is the cost of investing in innovative tech and automation ultimately worth it in terms of profit and productivity?

RP: Refer the chart below. In 2003, the typical underwriter achieved 115 closed loans per month. In 2021, the typical underwriter achieved 28 closed loans per month.  Said another way, underwriter productivity fell by a factor of five. 

Teraverde Intelligence (TVI), Teraverde’s proprietary method for evaluating business process and productivity confirms these numbers. Interestingly, within a specific lender, TVI indicates that underwriter productivity varies by a factor of three among the most productive and least productive underwriters, after controlling for loan degree of difficulty. 

So, the answer to the question, “Is innovation and automation worth it?” is unequivocally, “yes!”   But herein lies the rub. It’s not about spending money to acquire more shiny objects within a lender’s tech stack. You don’t have to have your technology teams build new shiny objects.  In a lot of cases, you don’t even need new shiny objects.

The key to productivity is innovating the business process to actually take advantage of the existing tech stack elements, and then driving adoption throughout the organization. 

Again, driving adoption starts with C-level executives. It means that the CEO has to push their senior executives to follow the directive. It’s now time to leverage the technology and innovations that are available today. And here’s why it’s important. If an organization innovated to increase underwriter productivity to 100 closed loans a month, it would reduce underwriting cost by 75%. Overall, if operational labor efficiency were increased by 25%, the lender would reduce its cost per loan by over $1,500. That’s $1,500 that drops right to the bottom line.  $1,500. Per. Loan. That is more than significant – that’s monumental – that’s $1.8 million per year! 

Want to see innovation in action? Spend two hours watching the movie, “The Founder.” It’s the story of Ray Kroc and innovation in the fast-food industry.  Watch the movie with an eye on how Kroc and McDonald’s created business process innovation, controlled labor cost, reduced cycle time, drove adoption within each store and improved product quality all while earning outsized profits. Do you see any parallels to the residential lending business? 

HW: How is Teraverde helping lenders improve productivity with automation and how can businesses measure tech efficiency?

RP: My business partners have developed “TopTiering by Teraverde.” In short, about 30% of a lender’s employees produce 80% of the profit. Identifying the specific 30% is hard. TopTiering is identifying the 30% and then finding opportunities to boost the productivity of the remaining team to the point the lender is profitable in all market scenarios.

Teraverde calls this a resilient business model that is profit (not volume) driven. It’s a different mental model, and it’s not for everyone. It requires a commitment to examine the basic assumptions of the residential lending business and changing the productivity of employees.  Productivity is increased by innovating in the business process, focusing on low-hanging fruit, continuous improvement, and a commitment to being profitable in all business conditions.  We’re not talking about just your origination team – we’re looking at each individual in the loan life cycle. 

It’s amazing to me that the same employee who has completely adopted a smart mobile device, changing their buying, travel and free time behaviors fiercely fights mortgage technology. Why is that? The reason is the employee doesn’t see the advantage of adopting mortgage technology because the technology is not deployed with a simultaneous upgrade of the basic business processes. Technology is deployed as an add-on, not an improvement of their role and responsibility to make their job less manual and more enriching.  In the words of one employee, “It’s just another shiny object that doesn’t really help me or my customers.”

To combat the two elements of human nature when implementing technology, wanting the easiest way and having an aversion to change, there has to be an immediate and beneficial lift of the technology. 

As an example, an underwriter that is proficient in self-employed borrower income computations may have a backlog of files to review if they are the ”go to” underwriter. Why create the backlog in the first place? Utilize technology that is available to be able to capture the necessary data and perform the calculations. Not just for that underwriter but for all of your underwriters. The significance of the technology utilize is three-fold: increased speed for the calculations (faster individual underwriting times), expanding the workload across the department (not all self-employed have to go to a select few) and increased data integrity and resiliency.

The TopTiering approach requires adopting a business process that uses employees to spend their time on the work that requires true analysis, problem-solving and customer-centric activities. It designs out the variations in process, checkers checking checkers, duplication of work, bad data quality and hindrances that block the automation that could be achieved in a lender’s existing tech stack. Once an employee has a business process and tech stack that makes their lives truly easier, adoption will follow and those employees that don’t adopt – you can release them to your competitors.

It requires an open mind, the adaptability to change and a willingness to say, “Stop the madness!” Also, leveraging industry experts that are solely focused on specialized products and services that quickly enhance their tech stack. The reward is more productive employees, profitability and increased customer satisfaction. It’s hard work, but it provides a significant business advantage in the difficult times that are imminent.

To learn more about how Teraverde is helping lenders improve productivity with automation, visit


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