a great question that just begs an answer: On a cost to originate basis, where
did the $800 go that credit unions save over all other retail lenders? This question
was prompted by Fannie Mae’s annual benchmarking Mortgage Focus 2004 Study
and the phenomenal results posted by our segment of the market.
See chart at bottom of page
With the numbers as a backdrop, it’s easy to take a big swipe at the
$800. Conservatively, we can deduct approximately $350 as a result of staff
productivity. Look at the number of closed loans per full-time employee (FTE).
The average lender closes 6.8 loans per FTE per month. Credit unions close 10.4.
Low Cost/High Productivity credit unions close 17.5.
This makes sense, given that staffing is the most expensive single cost lenders
incur. As proof, we need only look at the Mortgage Bankers Association of America’s
Annual Cost Study. Historically, employment expenses made up better almost 60%
of the cost-to-originate.
There’s another reason this is logical: the most efficient credit unions
have at least 50% of their members self-originate. Since these members are doing
the work formerly completed by loan officers, Internet loans are less expensive
The next bit of savings results most likely from the fact that these credit
unions close loans more quickly, and they close more of them. Having a loan
“sit” around is expensive. The longer a loan takes to close, the
more likely it is that it won’t close. Originating loans that don’t
close increases costs. Plus, since it’s still open, there’s a high
likelihood that more will be done to it. Nothing that adds value, of course,
and nothing that improves salability, either. Moreover, loans that hang around
awaiting delivery become expensive because of the holding cost. Closing loans
more quickly is a more efficient use of lendable funds.
What’s this cost? Assuming these credit unions can close loans ten days
faster than their counterparts, and, further assuming it cost about $20 per
day to let a loan sit, there’s another $200 in savings.
That leaves $300. Here’s a small item: space. Since these credit unions
are closing more loans per employee, then fewer employees are necessary to originate
an increasing number of loans. Conservatively, let’s assume that 25% less
space is needed for staff. At $15 per square foot per year, that amounts to
a savings of about $25 per loan. Storage costs decrease, too, since these credit
unions are relying more on systems, less on paper. Let’s assume mortgage
files are now half the size they once were. A reasonable savings estimate might
be $5 per loan.
Information systems costs should decrease, too. Traditional mortgage systems
rely on in-house architecture deployed using the client/server model. These
systems have to be maintained, upgraded and enhanced to be accessed from remote
locations. Efficient credit unions are relying more on web-based systems delivered
using the Application Service Provider (ASP) approach. As a result, less IT
effort is required which lowers costs. Let’s moderately estimate this
savings at $20 per loan.
At this point we’ve accounted for $600 of the $800 savings, or 75% of
the total. Where’s the other 25%? In a category called “other.”
Once again, harkening back to the MBAA Cost Study, “other” was a
category that often made up better than 30% of the average cost to originate.
It includes things like non-IT depreciation, supplies and other various and
a sundry items too small by themselves to warrant mention.
Since we’re talking about credit unions and their members, the more important
question is this: Where does the $800 go? That’s easier than dissecting
where it came from. It goes two places: member savings and increased credit
union margins. The exact proportions for divvying up the savings is a credit
union-by-credit union decision. But since members own their credit unions, the
exact ratios don’t matter, since members benefit regardless.
Mae’s annual benchmarking Mortgage Focus 2004 Study
Source: Mortgage Focus
2004, Mortgage Focus Overview and Credit Union Trends. Copyright 2004, Fannie