Reducing mortgage costs in a turbulent market

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Costs to originate have gone up 35% in the last three years. Freddie Mac reveals how embracing digital tools and rethinking traditional processes can lead to cost savings and a better borrower experience

IN TODAY'S turbulent mortgage market, lenders are facing significant cost challenges. According to Freddie Mac’s 2024 Cost to Originate Study, average origination costs have surged by 35 percent over the last three years. The days of historically low rates and high production volumes are gone, and lenders are currently grappling with shrinking revenues, incomes, and margins. This tough environment has yielded a critical question: How can lenders stay competitive and meet consumer expectations while cutting spending? Kevin Kauffman, senior vice president of single-family seller engagement at Freddie Mac, offers a clear answer: lenders need to embrace digital solutions wholeheartedly. This means rethinking their approach and leaning into the consumer perspective, rather than just fitting new tools into existing business practices. “There’s been a bit of a digital mortgage boom over the last 15 years, but as an industry, we’re still ex-tremely paper-heavy,” Kauffman tells MPA. “Many lenders have been implementing new technology but maintaining the same behavior and business practices that they’ve always had. This means we’ve seen lenders with great success, but also those facing an increase in overall costs.”

Freddie Mac serves America’s homebuyers, homeowners, and renters by providing liquidity, stability, and affordability to the housing market through all economic cycles and in all communities nationwide. Freddie Mac operates in the US secondary mortgage mar-ket, buying loans that meet their standards from approved lenders. Those lenders are then, in turn, able to provide more loans to qualified borrowers and keep capital flowing into the housing market. Freddie Mac then pools the mortgages it buys into securities, which they sell to investors around the world.

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“Driving down costs means having a thoughtful approach to implementing new technology and optimizing existing technology”

Kevin Kauffman, Freddie Mac

For the typical borrower, a mortgage is the largest financial

It’s no secret that the market has shifted massively over the last four years, from historically low rates throughout the pandemic period to today’s cost-of-living pressures and decreased mortgage demand. This market shift has given Freddie Mac a unique vantage point from which to observe the best and worst in class when it comes to improving efficiency and driving down costs. According to the study, while the top 25 percent of performers incur an average of $6,900 per loan in costs, the bottom 25 percent incur an average of $16,500.

transaction they’ll ever make. While it’s easy to feel daunted by the long, detailed, and often archaic process, Kauffman says it’s up to lenders to make it more accessible. Creating opportunities for borrowers who haven’t yet entered the housing market is also key to sourcing more loans, and a large part of this is about eliminating the intimidation factor. This means creating a simple, straight-through process and passing any cost savings on to the borrower where possible. It also means eliminating the paper-heavy processes of the past, which do little except create more costs, frustration and inconvenience. “Capabilities like obtaining information on assets directly from banks via digital sources have a huge im-pact on the consumer’s experience,” Kauffman explains. “The alternative is a lender asking for every page of your bank statement, and if you leave out the last page because it was intentionally left blank, you have the mortgage company calling and asking what you’re not providing.” Kauffman notes that having the right tools in place is ultimately a win-win. Intimidation can be curbed very well by borrowers’ familiarity with digital tools in other types of transactions, including online shopping and personal banking. If a lender can see adequate cost savings, then everyone ends up with more money back in their pockets. “At the end of the day, who is a consumer more likely to do business with?” Kauffman asks. “Someone who’s made it easy and given them a discount, or someone who’s still requesting page thirteen of their bank statement? That outcome is really going to speak for itself.”

Freddie Mac’s purpose is clear: to serve America’s homebuyers and to provide stability and affordability. Working with lenders is a significant part of this mission, and tech tools like Loan Product Advisor® (LPA ), Freddie Mac’s automated underwriting system, have already helped lenders save up to $600 in personnel and funding costs per loan. Furthermore, lenders maximizing their use of LPA originate loans that are $1,500 less costly. Looking ahead, Freddie Mac will be increasing its focus on helping lenders evaluate their internal processes and

“Who is a consumer more likely to do business with? Someone who’s made it easy and given them a discount, or someone who’s still requesting page thirteen of their bank statement?”

Kevin Kauffman, Freddie Mac

attention to because we consider our data to be very important and not to be compromised,” she says. “We’re also going to be challenged as the nonprofit sector continues to grow. We see that the [commercial] insurance industry has generally been inconsistent in its willingness to provide the sort of coverage that nonprofits need and at the price that they can afford. So, I think our challenge is going to be to be there for the groups of nonprofits that will lead us to take up the coverage when others might fail them.” To that end, NIA has made a concerted effort to reach out to brokers to help them determine the right coverage for their nonprofit clients.

A thoughtful approach to digitization

Creating a win-win scenario

Published June 26, 2024

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Creating a win-win scenario

Average costs per loan

top 25% of performers

bottom 25% of performers

determine which tools will be most effective at increasing efficiency and convenience and driving down costs. The organization will also be looking at additional tools focusing on loan quality and risk management.

Creating cost-saving strategies

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With this in mind, a careful and considered perspective toward new investments is vital, as well as a will-ingness to ditch historical processes and adapt to current market conditions. “Driving down costs means having a thoughtful approach to how you implement new technology and optimize current technology,” Kauffman explains. “Your first thought shouldn’t be, ‘How can this fit into the exact way we do business today?’ It starts with a level of commitment to saying, ‘We believe this is the future of the lending industry, and we’re not going to let one branch or individual stray from what we want to be in the market.’” Kauffman notes that, while one of the biggest hurdles for lenders is resistance to change, turnover in mindset and buy-in from every level of the business are vital for any tech implementation to work. This is particularly important if you have a distributed retail operation with loan officers controlling the books of your business. If one loan officer doesn’t want to use a tool, then the entire mortgage company may not either, and your investment won’t yield the results you expect.

“Meeting the consumers where they are is critical,” Kauffman says. “Don’t just collect a document because you’ve historically collected a document, but instead think about what’s best for that consumer.” “Also, success breeds success,” he adds. “If you have loan officers who are making more money and originating more loans thanks to their straight-through processing, then others will follow. That’ll kick-start a cycle of success.”

$6,900

$16,500

Freddie Mac Loan Product Advisor® can save:

Up to $600 per loan in personnel/ funding costs

Up to $600 in closing costs per borrower

Up to 8 days in cycle time

Source: 2024 Cost to Originate Study

“We’re here to help solve problems and create opportunities for homeowners in a way that reduces costs.” To download Freddie Mac’s full 2024 Cost to Originate study, click here.

Maximize your use of LPA and boost the bottom line:

Originate loans that are $1,500 less costly

Increase net margins by 10%

Source: 2024 Cost to Originate Study

Creating a win-win scenario

“Our industry experts have intimate knowledge of the technology solutions in the market and how they are implemented. They understand what success and failure look like through that process,” Kauffman says. “We’re here to collaborate to help our stakeholders succeed.” “At the end of the day, we’re a mission-based company,” Kauffman concludes. “We’re here to help solve problems and create opportunities for homeowners in a way that reduces costs.” To download Freddie Mac’s full 2024 Cost to Originate study, click here.

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