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Do Lenders Really 'Manufacture' a Loan?

Lenders often speak about ‘manufacturing’ a loan.  In fact, while traditional manufacturing has streamlined processes with much automation, the mortgage banking industry’s ‘manufacturing’ process has remained on trend to become even more complex and labor intensive.

As an example, consider the auto industry. About the time FHA and FNMA were created, General Motors spent 20% of each sales dollar on labor to manufacture a car. Today GM spends about $2,350 in labor per automobile, or about 6% of each sales dollar on labor to manufacture a car.  Amazingly, it costs about $2,600 labor to do the operational paperwork on a mortgage— in other words, more labor cost than it takes to make a car.


The MBA’s first quarter Mortgage Banking Performance Report is summarized below:


MBA Q1 2017 Mortgage Banking Performance Report


Q1 2017

Q1 2016

Total Loan Production Revenue






Sales Personnel



Fulfillment Personnel



Management and Directors



Total Compensation and Benefits Cost



All Other Costs, including Corp Alloc



Total Loan Production Expense






Average Loan Balance ($)



Avg. Pull‐Through (Closings/Applications #)



Avg. Operations Hours to Close a File ($75K salary/benefits)




Mortgage bankers spent 30% of each sales dollar on operational labor in the first quarter of 2017.  Mortgage bankers spent about 2% of revenue on technology.  By contrast, a typical credit card lender spends about 10% of first year revenue on labor, and about 65% of first year revenue on technology.  Since 2008, operational personnel went from 40% of total headcount to 60% of headcount in the typical mortgage banking operation.  According to Stratmor, fulfillment costs for loans increased 2.5 times from 2005 to 2015.  And that trend isn’t improving, based on the MBA data above.


Some may say that the mortgage banking process is too complex to build in a high degree of automation. That's precisely the problem with the Mortgage Banking industry. The industry allows great variation in processes that are not customer centric.  Many attempt to off-shore labor or automate segments of the process without asking the question “if we designed a process to create a loan, how could we do it at half the cost of our current process”?


Here are some thoughts we should consider to sharpen thinking around these issues:


- Lenders should focus on profit per loan, not just pursuing volume for volumes’ sake.  Strategy regarding revenue, costs and operational management is not well developed, and profit maximizing opportunities are underutilized.

- What loans produce the most revenue and profit, and why does loan mix really matter?  How can financial and operational planning improve profit?

- Why is the process so labor intensive and disorganized? 

- What are promising technologies?


Rethinking includes reducing the number of "check the checkers" personnel, and building quality and data integrity into the process so that data and calculations are correct from the very beginning of the process.  Is this hard?  Yes!  Is there an alternative?  GM plans to reduce the labor cost in 2020 to about $2,300 per car.  The current mortgage cost trends will have operational labor in 2020 at $3,300.  Can we as an industry spend 50% more to paper a loan than it costs to build a new car?


Finally, each of us needs to consider whether we can provide the level of granularity and detail needed to perform thoughtful analysis from our accounting systems.  Can you develop and map peer data to compare with published peer data? 


Now more than ever, clear thinking backed with factual financial and accounting analysis is the key to success.



About the author:


Jim Deitch CPA, CMB is co-founder and CEO of Teraverde, a technology and advisory firm with offices in Pennsylvania, Florida and Texas.  ©2017, TVMA Inc.

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