Last year’s unique market conditions created unprecedented profitability for most lenders. But now, as the strong refinance volume of 2020 and 2021 drops industry-wide, lending businesses find themselves at a crossroads: How will they manage the impact of fixed expenses until the next injection of loan volume?
While all lenders confront this question, smaller players that don’t have other resources, scale or channels to offset losses bear the brunt of compression.
These lenders need to access nimbleness and scale while minimizing expenses to remain viable. As increasingly large, well-funded competition sets a new bar for resilience throughout market cycles, local lenders are forced to step up. Otherwise, they risk falling into an endless cycle of feast and famine, with no guarantee that the next market ebb won’t mean their demise.
So, what can local lenders do to maintain longevity in their loan fulfillment operations in 2022 and beyond?
Strengthen lead funnels in preparation for changing loan volume
First, these lenders need to double down on the basic elements of any successful loan manufacturing business: Creating a functioning funnel and nurturing leads through it reliably. Doing so will create business that perpetuates itself through market cycles.
Here, lenders need to identify opportunities for leads and then coach their salespeople to reliably capture those opportunities.
Specifically, lenders should create a market framework that offers lead flow. This could mean doubling down on community outreach, increasing spend in marketing and sales, or encouraging referral business through dedicated programs and top borrower service.
Regardless, a sustained increase in leads will insulate these lenders’ businesses as volume subsides.
Leverage a scalable, flexible loan fulfillment solution
Second, local lenders that lack flexibility and capacity should consider leveraging an outsourced loan fulfillment solution. By partnering with a provider like Maxwell Fulfillment, lenders gain access to industry talent when they need it and avoid the pains and brand damage of downsizing their staff when the market changes.
Plus, reputable fulfillment solutions offer high-caliber, experienced talent, which can be difficult and costly to access, especially during periods of increased demand.
This option also bulletproofs lending businesses against market cycles for another reason: the variable cost model it creates. By standardizing costs, a loan fulfillment solution helps smaller lenders create scalable economics and avoid the fixed costs that come with growing fulfillment staff internally.
In other words, because this strategy creates a variable cost model, it allows lenders to remain agile, scaling fulfillment expenses in proportion to loan volume availability.
Invest in transformative back-office technology
Finally, local lenders should consider the game-changing benefits technology offers within loan fulfillment. The technological revolution has already taken the mortgage front office by storm, with the pandemic only accelerating trends that had been rising for years.
What lenders may not realize is that technology is just beginning to transform the mortgage back office, with massive potential for the local lending segment. Deployed correctly, this technology increases efficiency and reduces fixed expenses throughout the loan fulfillment process, offering smaller players a major competitive advantage.
According to the MBA’s 2021 Q2 Quarterly Mortgage Bankers Performance Report, fulfillment personnel expenses in Q2 2021 grew to $1,252 per loan, up 26.7% from a year prior.
Similarly, the total cost of a loan grew to a near-record high of $8,668, reducing profit margins to an average of only 73 BPS. This increase puts stress on already thin margins, which are only projected to shrink into 2022.
Technology-powered fulfillment solutions, such as Maxwell’s latest solution, Maxwell Processor Edge, boost efficiency across lenders’ fulfillment teams, helping to combat these trends and sending improved margins straight to the bottom line.
Using automation and data-driven insights, fulfillment technology helps lending teams close loans more efficiently and equitably, changing the landscape for lenders and their borrowers.
As local lenders look towards 2022, their planning should hinge on strategies that build agility and resilience into their loan manufacturing process. Next year’s changing market conditions will test these lenders’ viability as large players continue to pursue leading technology that enables them to seamlessly flex with market highs and lows.
Still, if smaller lenders analyze their lead funnel and invest in strategic solutions and technology, they have a strong chance to thrive in years to come.
