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Holding down costs: lenders' lean production margins need beefing up - and cutting costs is the first step toward a healthy bottom line.

HOLDING DOWN COSTS

Mortgage lenders have long deplored the difficulty of originating mortgage loans at a profit. They rely on the sale of servicing rights to provide profits, but seldom view the origination process as a profit-making operation. More often than not, origination is perceived as a necessary evil to acquire servicing or servicing-release fees.

Whether you're an institutional lender, mortgage banker or mortgage broker, it may make sense to view the mortgage origination process in terms of a manufacturing operation, as well as a service business. Prices of mortgages in terms of points and origination fees are relatively inelastic in any given market because of strong competition among originators seeking a greater share of the business. The lowest cost manufacturer of mortgage loan product will enjoy a strong competitive advantage, given relative equivalency of loan types and levels of service.

Mortgage production can be analogous to a custom manufacturing operation. The originator establishes an assembly line (processing department), purchases components from outside suppliers (credit reports, title insurance, mortgage insurance, appraisals, etc.), performs in-house manufacturing with these components and others that he supplies (underwriting, packaging), and creates a finished product in the form executed mortgage documents representing security interests in real property (a stack of documents of several sorts).

If mortgage production consists mainly of document processing, these expenses can be considered a primary cost of doing business. Assuredly, statutes, customs and regulations prescribe the types, formats and volumes of necessary documents, but the actual process of preparing those documents comprises much of the day-to-day business of a mortgage lender at any level.

Originators should focus their efforts on providing a manufacturing plant that can produce each individual loan product as quickly and inexpensively as possible. Two production methods are available: build your own production facility; or, contract with a service provider to perform the document manufacturing process for you. Both have merits. The choice depends on many factors, including expected annual volumes, growth patterns, availability of technical personnel at reasonable wage rates, investment in equipment and training, production control and service. Your choice of either alternative should be driven by bottom line cost-per-loan and quality standards that you set for your organization.

Several service organizations, including attorneys, insurance companies and independent document preparation firms, offer these services on a cost-per-loan or scheduled fee basis. Service firms charge fees from $50 to more than $250 per loan for document production, depending upon the number and complexity of documents created and additional ancillary services provided.

Fortunately, the costs of building your own production facility today have decreased dramatically in the past two years. Document production systems based on personal computers (PCs) and laser printers can produce mortgage documents at a fraction of the cost of their larger minicomputer and main frame brethren. Because fees for service providers are easily obtainable for comparison, this article will concentrate on the costs associated with producing these documents internally. The results may surprise you.

William E. Boyle, president of Mortgage Capital Corporation in Allison Park, Pennsylvania, has taken a hard look at automation in his mortgage originations. According to Boyle, "Automation has been significantly important because it has ensured greater accuracy, improved uniformity of product and minimized personnel costs. I suggest, when considering software products, have the vendors bring it in-house and include your operations staff in the purchasing decision. Have the people who use it - choose it."

Boyle offers a few cautions as well. "When considering automation you need to integrate the system into your operation rather than tailoring the way you do business to fit the system," he warns. "When choosing a vendor, pay particular attention to the customer service policy, the updating policy and performance. Also look for a module-type system that permits purchase of only what you need now, and as your needs change, additional modules will be available." As far as Boyle's operations are concerned, he says, "Automation is not the future. It is here now, and maintaining your company's competitive advantage demands it."

One technique for producing mortgage loans involves the use of pre-printed loan documents filled-in either with typewriters or by means of computer systems that transfer data entries to these forms. Typical costs for an FHA loan document package produced by these methods follows. Basic assumptions include: Personnel costs - one person at $15 per hour. Document production times - disclosure: 20 minutes; application documents: two hours; closing documents, including settlement statements: 2.75 hours. Substitute your own assumptions for wage rates and processing times if they vary. A loan production level of 600 loans per year (50 per month) and office equipment amortization over three years has been assumed as well as the use of trained personnel with minimum errors requiring corrections. High error rates would dramatically increase the costs shown.

Disclosure:

Personnel: $5; forms: $.18 each/average four per customer, $.72; mail costs, including envelop, time for preparing cover letter, HUD booklets and postage, $2.75; Subtotal: $8.47. Add: amortized cost of equipment to produce disclosure, $2; Total: $10.47 per loan X 600 loans = $6,282 per year.

Application processing:

Personnel: $30; forms: $.23 each/average 15 per loan, $3.45; FHA 2900, VA 1805, one each $2; mailing costs and return postage $2; Subtotal: $38.45; amortized cost of equipment to produce application package: $2; Total: $40.45 per loan X 600 loans = $24,270 per year.

Closing documents:

Personnel: $41.25; simple forms: $.15 each/average 21 per loan, $3.15; mortgages, DTs, notes at $.62 each (average with corrections) $3.72; Subtotal: $48.12; amortized cost of equipment to produce closing package: $2; Total: $51.12 per loan X 600 loans = $30,072 per year.

Grand total: $101.04 per loan X 600 loans = $60,624 annually.

Implications? A mortgage operation producing 50 loans per month will have a minimum of $60,000 invested in direct document production costs on an annual basis using traditional methods. This analysis shows only the direct costs of producing required documents, and does not attempt to incorporate other costs. You may not agree with the assumptions provided, or you may have other items to add. Regardless, you may wish to perform a similar analysis of your own production methods and determine your actual cost of manufacturing one loan today. A production cost reduction of 40 percent per loan would add about $25,000 to this company's bottom line every year. If you're 10 times this size, $250,000 per year or more is probably being left on the table.

PC alternative

Today personal computers, office laser printers and PC software can reduce manufacturing costs. Extremely fast PCs with Intel 80386 processors, 40 megabyte or larger hard disks and several brands of laser printer can be obtained at approximately $4,000 to $5,000 in equipment costs. PC software from several companies offer the capability to produce laser-printed mortgage documents on plain paper for disclosure, application processing and closing instruments, eliminating pre-printed forms. These packages are priced from under $3,000 to more than $10,000 and have a variety of features and capabilities. Most of these packages offer network versions to allow several workstations to share data files, and most reduce the actual personnel time required to produce documents by 50 percent or more. On some of these efficient systems, document production is almost as simple as producing a letter on a word processor.

Paul Careaga, division manager for 1st University Mortgage Corporation in Federal Way, Washington, described his company's experiences. "The [automated] mortgage system has brought loan processing, a tedious ritual of repeated tasks, into perspective. The elimination of excessive typing has increased our loan processors' efficiency and accuracy on all loan packages. The relatively minimal cost for such a system provides the smaller mortgage banker the ability to perform as effectively and professionally as the larger mortgage banker."

Not only has automation brought 1st University tangible operation benefits, but successful implementation of automated processing has equipped them to compete effectively in a tough market.

The following "manufacturing" cost analysis depicts actual cost reductions that can be achieved by utilizing PC-based systems. Assumptions: One PC workstation, one Hewlett-Packard Laserjet II-D or compatible laser printer, PC software for disclosure, application processing and closing documents. Total equipment costs: hardware, $4,700; software, $3,300 - $8,000 amortized over three years. Personnel: $15 per hour; Production time: disclosure: 10 minutes; application: 1.25 hours; closing: 1.5 hours. Amortized cost of equipment/software at 6000 loans per year: $.44 ($1.48 per each of three functions listed). Equipment costs may vary depending upon your choices of equipment, as well as current market prices. The PC workstation assumed here is an 80386 CPU system with color monitor, a 40 mb hard drive and standard keyboard. The printer assumed is a Hewlett-Packard Model II-D.

Disclosure:

Personnel: $2.50; forms: laser printing and paper at $0.9 cents each/average 4 per customer, $.36; mailing costs including envelop, cover letter, HUD booklets and postage, $1.75; (this cost was adjusted to reflect the fact that with PC programs, many disclosures can be produced on-site and handed to the customer instead of being mailed and do not require a prepared cover letter); Subtotal: $4.61. Amortized equipment/software costs, $1.48; Total: $6.09 per loan X 600 loans = $3,654.

Application processing:

Personnel: $18.75; forms: laser printing at $.09 each/average 25 per loan, $2.25; reprints for corrections, 6 at $.09, $.54; mailing costs and return postage $3; Subtotal: $24.54. Amortized equipment/software costs, $1.48; Total: $26.02 per loan X 600 loans = $15,612.

Closing documents:

Personnel: $22.50; forms: laser printing at $.09 each/average 21 per loan, $1.89; corrections printing, $.54; Subtotal: $24.93; Amortized equipment/software costs, $1.48; Total: $26.41 per loan X 600 loans = $15,846.

Grand total: $58.52 per loan X 600 loans = $35,112 annually.

If these two analyses are even close, the firm in the second example could obtain annual savings (profits) of about $25,000 by utilizing faster, more efficient and lower cost PC processing systems. Large organizations could magnify these results over increased volumes. Therefore, originators at every level can reduce costs and increase processing efficiency, to help make the origination process.

By cutting individual processing time from an average of about five hours per loan to a more reasonable three hours per loan, and by eliminating the costs of pre-printed or handtyped forms, this originator would be able to decrease its cost per loan significantly and process more loans with fewer personnel. At the same time, its level of customer service would improve by providing speedier, more accurate processing. Acquiring modern processing tools will have ancillary benefits as well, because this equipment can be used for normal word processing, accounting, tracking and spreadsheet functions.

Making choices

Once you've decided that PC-based processing may make sense for your organization, the next step should be to request information and demonstration materials from appropriate vendors to evaluate the cost/performance capabilities of the various systems. Because more than a dozer vendors offer PC systems, a review of industry publication advertisements can provide a starting point.

Richard Warren, president of Premier Mortgage Corporation, Durham, North Carolina, has found that, "As a new company, with a staff of two originators and two processors, efficiency through automation is essential. The use of automated processing has enabled us to skip one of the [former] processing steps. By taking the application on the computer, we are able to eliminate the handwritten application by the processor. Automation is essential for last-minute changes as well as day-to-day efficiency."

Warren said his company was fortunate because "we found the [system] to provide the most for the dollars spent. We could not function without [it] unless we added additional processing staff." He further recommends: "Excellent software on a slow computer does not provide the service you need. [Fast] 386 computers and laser printers are important for maximization of software capabilities."

Whether you write for information or telephone vendors, lenders should be sure to convey specific interests and requirements. Expect to receive follow-up calls from vendors to close the sale of their software. Utilize these vendor contacts to learn about the features and benefits of their products. Ask for the names of current users and check with them to confirm their experiences in using the software. Because your objective is to acquire a system that will help you maximize profits, evaluate each system based upon your real needs; not on the various bells and whistles that a salesperson tries to convince you to buy. Above all, confirm that the software system is flexible enough to grow with your company, and that the software company has an excellent reputation for customer service and for providing timely updates when required.

Basic software approaches

All computer-based processing systems have a data input interface, a file system for storing information and a printing mechanism for producing documents. You should examine the data input mechanism carefully to assure that your processing personnel will find it relatively simple to operate each day without frustration. The data storage mechanism should provide easy file saving, retrieval and deletion functions. If either the input or file system is too complex, you will spend many hours training personnel and your staff may end up hating the software. In the end, the product gains you sought may not materialize. Although most data input systems are very comprehensive and collect the majority of the data required in processing, the ability to add your own data input fields can be important as your needs change.

Most systems provide two basic approaches to printing documents: proprietary printing mechanisms (drivers) and the incorporation of a word processor to produce documents. Some systems will combine these approaches. Be wary of any system that requires or promotes the use of pre-printed, fill-in-the-blank forms or requires you to purchase either paper or electronic forms from the vendor. One of your objectives should be to eliminate the costs of purchasing printed forms and to control the costs of all forms, paper or electronic. The software should be capable of producing a completed form using industry standard Hewlett-Packard or HP-compatible standard laser printers. You will not want the headaches or costs that are associated with single-purpose specialized printing equipment.

Many of us can remember the not-too-distant past when personal computer systems were called "cute," "toy computers" or "those funny new machines that nobody can operate." It is unfortunate that the latest crop of PCs are still considered "personal" computers rather than what they really are - very capable, high performance business machines. The flexibility of PCs provide the advantages of individual-use machines as well as the speed and power of a system of mini and mainframe computers. A case in point is the law firm of Baker, Glast and Middleton in Dallas.

Marcia Ann King, systems administrator of mortgage banking services, lists key factors that influenced this law firm in its search for processing solutions. "When we first evaluated the use of mortgage banking software in 1987, we focused on the following factors: single-data entry; merged printing of forms and variable loan data accuracy of truth-in-lending calculations; ability to create and modify forms; multi-user capability; simplicity in use; and reasonable cost. While each factor was of equal importance, we delayed merged printing in order to obtain reasonably priced software. It was clear at that time that a number of companies were on the verge of solving the problem of pre-printed forms. So, a reasonably priced software package would not preclude a change in 12 or 24 months."

In searching for the right cost/benefit solution, King found that, "a quality mortgage banking software package, clone personal computer and laser printer were available for the price of some memory typewriters, so that automated loan document production was easily within reach of any size operation."

As King evaluated the systems, she discovered some quite remarkable time savings. "I found that an experienced mortgage data entry operator, utilizing software that merged form and variable loan data, was able to produce an initial disclosure package comprised of truth-in-lending documents a good faith estimate and a cover letter within three to five minutes. Each additional document, such as the Fannie Mae loan application, internal processing forms and government required forms could be printed at eight pages per minute. The same operator using a memory typewriter and financial calculator required at least 15 minutes, assuming no errors were made in hand calculations," she said.

Baker, Glast and Middleton provides documentation services for more than 20 mortgage banking companies - from smaller firms to very large, high production firms - and prepares initial processing documents and closing document sets for loans closed in more than 30 different states. The firm recently installed a Novell PC network to connect more than a dozen workstations, and it plans to add additional workstations and laser printers this year. With extensive operations spanning the nation for its lender-clients, the firm is a stickler for quality control. King emphasized that, "the ability to utilize a single data entry system with a standard automated checklist has resulted in a 50 percent reduction in the amount of time allocated for checking a complete document package, with a similar reduction in the number of errors missed on individual documents."

King also reports on the savings that her firm has experienced. "We no longer store preprinted forms. We have approximately 2,500 documents available for retrieval on the mortgage banking network. Our entire space for forms storage occupies less than two square feet of floor space [the computer's hard disk system]. We incur the same cost if we use a form one time or 1,000 times. Prior to using computer-generated forms, we incurred monthly average charges of $300 to $500 to maintain an adequate supply of preprinted documents, a cost that was dwarfed by the need to discard out-of-date forms. A prime example occurred when the VA required assumption language to be added to the top of the note and mortgage/deed of trust. We accomplished the change in 30 minutes without needing to discard any preprinted documents."

Baker, Glast and Middleton needs to keep track of thousands of individual loan files during the year. "We currently have more than 1,000 loan files covering a 90-day period available for immediate retrieval by any operator," King said. "Files created for individual disclosures are easily accessible for additions and corrections when the loan is ready to close. In general, automating our operations with PC systems has worked out better than we initially expected."

Marcelle Molina, president of Honolulu-based Island Mortgage Corporation, has automated the company's brach operations on Maui, Oahu and the main island of Hawaii. She is a systems integration expert of the various software packages used in Island's three separate PC networks, all of which use an 80386-based CPU running at 33-mz as a file server.

According to Molina, "By computerizing our systems, we have become much more efficient in every aspect of our operations. Furthermore, we have a higher level of employee morale that is attributed to computerization. All our employees are much more productive and enjoy the ease of producing work that is neat and professional. The probability of error has greatly diminished, reducing the stress level in a business where tight timeliness prevail."

Island utilized its PCs for a wide variety of tasks including: modem transfer of document updates to each origination site; changes in company procedures posted on each network; word processing programs networked to allow file sharing and password encoding; systems compilation and generation of all trust and general account reports, financial statements, budgets, pipeline reports and a wide assortment of management reports.

Molina has developed a mental checklist of considerations for any mortgage originator interested in automation. "Research and select hardware that is distributed locally by a dealer physically located in your site area. There are some excellent computers that can be purchased through companies located outside your area as long as you have support in your area," she says. "Consider buying color monitors - they're more fun for employees and remove some of the tedium; buy LAN stations with small desktop footprints; look for postscript laser printers to take advantage of fonts; and network, network, network. Networking contributes greatly to team building efforts," she says.

Molina also touched upon some management considerations. "Executives should have laptop computers that will connect into any office network and will allow them to work at home and at the office. Consider hiring a systems manager [to assure your staff of] continual training. Always have a back-up manager, someone who may have other duties as well. Computerizing your systems always has glitches and you need to have someone on-hand that will troubleshoot all hardware and software problems. Your computers systems manager is a key employee." She adds one caveat. "As your systems are perfected, realize that you will not need to hire as many employees as you would normally to handle your volume of business. Some of your existing staff may [not understand, however, and may be] threatened [by this]. Have your employees participate in the dynamics of computerizing your company. Without their support, you'll be a lone wolf," she says.

What advice does Molina offer to originators considering upgrading or purchasing a new system? "As any executive knows, the key to the success of a company hinges on the quality of its employees. Any investment in a tool that helps our employees do a better job enhance the success of the company. You have to spend money to make money. Don't sacrifice quality for a few dollars. Plan into the future and design your system around that vision. Plan that you will probably upgrade your equipment within three to five years as technology improves. Don't wait for technology to improve before starting. Jump in now. Any mortgage company that is not considering computerizing their [operating] function is living in the dark ages and will become as extinct as the dinosaur," she says.

Carson A. Mullen is the president and COO of Wasatch Document Systems, Salt Lake City, which provides mortgage document production systems for lenders, attorneys and title firms and provides secondary market information services.
COPYRIGHT 1990 Mortgage Bankers Association of America
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Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Title Annotation:mortgage banks can cut costs by automating
Author:Mullen, Carson A.
Publication:Mortgage Banking
Article Type:Cover Story
Date:Sep 1, 1990
Words:3705
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