As lender concerns about margin compression rise, why aren’t we seeking to better understand our mortgage application fallout rates to increase revenue?

For mortgage originators of all sizes, “fallout” is a word that induces headaches and nausea at roughly the same level as terms like “repurchase demand” or “regulatory audit.” We don’t often talk about it, but it’s a fact of mortgage lending. Far too many loan applications never make it to closing, falling out of a lender’s pipeline even after rate lock. And far too often, the response is a shrug of the shoulders and back to work finding new leads.

The MBA’s Quarterly Mortgage Bankers Performance Report for the first quarter of 2021 tells us that “the average pull-through rate (loan closings to applications) was 76% in the first quarter, down from 78% in the fourth quarter [of 2020].” So, mortgage lenders saw 24% of loan applications received fall out of their pipelines before closing.

The same report tells us that “total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – increased to $7,964 per loan in the first quarter, up from $7,938 per loan in the fourth quarter. From the third quarter of 2008 to last quarter, loan production expenses have averaged $6,621 per loan.”

It remains expensive to produce a loan, and it’s even getting more expensive.

As the overall mortgage market begins to shift from one dominated by refinance volume to one dominated by purchase mortgage volume — especially with some decline in overall volume expected —we’re already hearing about margin compression. Discussion will revolve around how lenders can better compete for market share; or how lenders can use technology or other strategies to attack the production costs seemingly rising to meet declining revenue. All of this is merited and even prudent.

Are you analyzing and attacking fallout rates

Why aren’t more lenders seriously considering more systemic and consistent ways to analyze and attack mortgage application fallout rates, perhaps even finding ways to recapture (or never lose in the first place) their wayward applicants? Wouldn’t this be a productive and effective way to nudge volume and revenue upward?

There is no warmer sales lead than a loan application. For the thousands (or even millions) lenders spend on creating new leads through lists, marketing campaigns and networking, there’s obviously no greater sign of interest in a lender’s product than a loan application. And yet, most lenders know little to nothing about why applicants are bailing out on their products before closing. Instead, they go back to the start, casting new nets for colder leads.

As an industry, we’ve upped our game (although there’s more to be done) in two areas of the transactional process. First, it’s admittedly much easier for a potential borrower to apply in the first place. Any number of online solutions allow borrowers to shop rates and lenders online, not to mention adding lending marketers and loan originators (LOs) to identify solid leads.

Second, although the overall mortgage process has a long way to go, loan origination systems (LOS) technology has advanced rapidly in just a few years, better integrating with other elements of the tech stack and automating a number of functions that not long ago were manual or shopped out to third-party providers. The result has been a better overall mortgage lending process.

We have a long way to go

One of the glaring shortfalls in terms of technology adoption in our industry is the use of technology to support the consumer experience. While other industries push forward to make closing a transaction as easy as the initial shopping, our industry still tends to rely on telephones, emails, letters and third parties to attend to the consumer as they wade through the complexities of closing a loan.

One extension of that shortfall applies directly to mortgage application fallout rates. We tend to assume that when an applicant drops out of the process, that applicant has either found a better rate or decided not to pursue the transaction at this time. But more lenders than not don’t actually verify that systematically. No survey. No follow-up. No solution to automatically measure variables indicating any kind of pattern in the type of applicant that tends to fall out, and where in the process that happens.

While it’s likely that market movement or changed life circumstances could make up a significant number of lost applications, many lenders don’t take the time or effort to find out, choosing instead to apply their marketing dollars and investments to procuring and converting cold leads. This would seem to fly in the face of an avalanche of existing research that it’s easier and more profitable to keep an existing client (or a lead familiar with your brand) than to find a new one.

We know, for example, that increasing customer retention rates by 5% increases profits by 25% to 95%, according to research done by Frederick Reichheld of Bain & Company. It wouldn’t be a stretch to apply that same principle to loan applicants who fall out of the mortgage pipeline if the lender better understood why that fall out occurred.

All indications are that the mortgage industry will be a far more competitive space in 2022. Many lenders are already gearing up their marketing machines to win new borrowers as origination volume leans more toward purchase mortgages. Competition often drives innovation, and in this purchase market, it would seem that comprehensively addressing lenders’ fallout rates would be as worthy as any other marketing investment, if not more so.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

Jim Paolino is CEO and Co-Founder of LodeStar Software Solutions.

To contact the author of this story:
Jim Paolino at [email protected]

To contact the editor responsible for this story:
Sarah Wheeler at [email protected]