When Erin Palmer joined Talmer Bank and Trust nearly five years ago, he was struck by how long it was taking mortgage officers to close loans.
Often it took two to three days for the underwriter to just determine a borrower's income. Loan files always had missing documents which had to be sent back to a loan officer and resubmitted to the underwriter. The back-and-forth delays would clog the bank's loan pipeline, often leaving the Troy, Mich., bank scrambling to approve a loan at the interest rate promised to the borrower.
Resubmitting a loan too many times "has all kinds of repercussions for how it affects not only one loan, but many others," said Palmer, the bank's executive managing director of mortgage operations. "If everybody has to rush to get the loan done at the last minute, it's like having a fire engine screaming down the road. All the other cars have to get out of the way, and then you have to get the other cars back on the road and moving again."
Palmer found a fix last year with LoanBeam, a technology from SurePrep, an Irvine, Calif., company that automates tax documents for accountants. The technology imports a borrower's tax information from various sources, saving highly paid underwriters from manually inputting the data themselves. It also flags missing documents so that loan processors can quickly track down what they need.
The result: Loans at Talmer might now close a week faster than they did a few years ago, significantly reducing its underwriting costs.
As banks look to cuts costs and improve efficiency, many are trying to reduce resubmission rates, or number of "touches" in industry parlance. The goal: get the application right the first time so it doesn't have to be sent back to the underwriter for time-consuming and costly fixes.
Resubmission rates vary by mortgage lender with most averaging between three to 3.5 touches per loan. Some have gone as high as nine touches per loan.
The measurement is used to identify which employees or retail branches may need more training. Some lenders even tie the bonuses of regional managers to a branch's resubmission rate.
"It is a benchmark for efficiency so that lenders can root out sources of inefficiency which are a company's expense," said Kevin Marconi, the chief operating officer of United Fidelity Funding, a wholesale and retail lender in Kansas City, Mo. "The logic is that you are only as efficient as your weakest link."
Resubmission rates were not an issue before the financial crisis, since many loans required no documentation and the government-sponsored enterprises did not have review processes in place to flag problem loans.
Then, two years ago, when Fannie Mae and Freddie Mac began pushing for "zero defects," in loan files, mortgage lenders had to hire more quality control and compliance officers to examine files. All the extra touches on a loan made the process far more expensive. Lenders have had to attack the problem piecemeal, automating as many functions as possible and focusing on getting all the documents from the borrower so a loan file is complete before it goes to an underwriter for review.
Fannie's and Freddie's strict requirements have forced lenders to identify and eliminate mistakes, both small and large, in home loans. On top of the man-hours spent in the back office, lenders stand to lose money on hedging future secondary-market sales of loans that never materialize. Even worse is the negative feedback from customers if a loan does not close on time.
Miscalculating a borrower's income routinely tops the list of loan defects cited by Fannie, Freddie and the Federal Housing Administration. A major problem has been inconsistencies in capturing data from self-employed borrowers, who typically are more difficult to underwrite compared to straight W-2 employees.
"Resubmissions are the death of underwriting because then the underwriter, the expensive talent, has to look at the file again and again," said Wes Lazear, a regional sales manager at LoanBeam. "It's like reading a book and constantly getting interrupted."
Roughly 50% of files that get resubmitted to an underwriter stem from problems documenting a borrower's income, said David Zugheri, an executive vice president and co-founder of Envoy Mortgage in Houston.
Zugheri estimates that at least seven different employees from the loan officer to the processor, the review underwriter to the underwriting manager will set eyes on the income and asset information in every loan file.
"The borrower's income, the income piece of any loan file, is filled with gray area and noise," said Zugheri. "A file that comes back clear with no resubmissions is like Moses parting the Red Sea. Bells and whistles go off and we're shooting off champagne bottles."
Zugheri set a target last year of having just 2.7 touches per loan. Envoy bested its target with an average of 2.5 touches.
"We've been working on how to get control over how often we touch a loan file, because you're not going to have the right amount of staffing and underwriting if you're touching a file a lot," said Christopher Cash, a senior operations manager at Envoy Mortgage.
Resubmission rates are also used to determine the bonuses of regional managers, Cash said, because it helps the lender identify weak processors and put training programs in place to improve branch processes.
"When the industry got turned upside down in 2008, everybody started paying a lot more attention to manufacturing quality," Cash said.
The weak market for home purchases in the past year has had an upside at least in giving lenders more time to focus on being more efficient. Any effort to reduce resubmission rates will also serve lenders well as new regulations add new requirements, lenders said.
"This is something you don't just fix and it works beautifully forever," said Talmer's Palmer. "As an industry, making sure you have a clean, robust and smooth manufacturing process is a timeless thing."