This month, Steve Abreu, the president of GMAC Inc.'s mortgage operations, warned 150 loan officers that wasting the back office's time would cost them.
He told the sales representatives at a Fort Washington, Pa., branch that from now on part of their compensation would be tied to pull-through rates — the percentage of applications that end up being converted to closed loans. GMAC wanted to cut the costs of having processors and underwriters work on loans that don't get funded. So it gave the loan officers an incentive to do better up-front screening.
"The whole reason we did this was just to lower our costs to originate and make sure our loan officers were taking good applications so we would have a better close ratio," Abreu said in an interview. "If they don't hit a certain threshold, they get dinged."
While GMAC's move is unusual, it underscores one of the industry's less-obvious problems today. Tightened underwriting guidelines have increased the risk that a loan will not make it all the way through the pipeline. Aside from the man-hours spent in the back office, lenders stand to waste money on hedging future secondary-market sales of loans that never materialize.
"Loans just aren't getting approved," said John Walsh, the president of Total Mortgage Services LLC, a Milford, Conn., lender. "The fallout rate has trended up in the past few years, which is an industrywide problem."
Though retail originators' pull-through rates have improved since the nadir of the crisis, they are still lower than they were most of the past decade. Retail loan officers had an average pull-through rate of 64% in the first half of 2009, the most recent period for which data is available from the Mortgage Bankers Association.
That means a full 36% of loan applications were not getting funded. Lenders say the problem persists today. "It's a constant battle," Walsh said.
Chris Bennett, the president and chief executive of Vice Capital Markets, a Novi, Mich., hedging and interest rate risk management firm, said loan officers often hold out hope that a loan will be funded "even if they know the deal is dead."
"You could have a loan that is locked for 45 days and it gets extended and the lender ends up hedging the loan for 90 days and it may never be closing," Bennett said. "So lenders end up hedging what amounts to [nothing], and it's expensive."
Keith Gumbinger, a vice president at the mortgage research firm HSH Associates, said it may be hard for lenders to penalize loan officers for customers' shortcomings. Everyone wants to improve their pull-through rate, but I don't know if that's something that's controllable up front," he said.
But they are trying. Many lenders monitor pull-through rates at least monthly, and more so during periods when interest rates are volatile. Rate gyrations increase the risk that a loan applicant will drop out to take a better offer from another lender.
Kevin Marconi, the chief operating officer of United Fidelity Funding, a wholesale and retail lender in Kansas City, Mo., said he monitors pull-through rates closely and has a third-party firm prepare a detailed report every quarter. "The key to maintaining good pull-through is to give quick loan decisioning and communicate a decline very quickly so you don't have to hedge that loan in your portfolio," he said.
Many lenders have hired more quality-control and compliance officers to examine loan files before an interest rate can be locked down, in an effort to raise pull-through rates. Some lenders penalize loan officers for failing to notify their institution when a loan falls through.
"The second a loan officer knows a borrower is pulling out and a deal isn't a go, we have to know," Walsh said. "We give our loan officers fallout reports and it helps them police themselves because if someone has a high fallout rate, then everyone gets on them for it."
Several big banking companies, including SunTrust Banks Inc. and Wells Fargo & Co., that buy loans from correspondent lenders (and resell them to secondary-market investors), got ahead of the problem more than a year ago, when rates were far more volatile.
These aggregators began requiring their correspondents to maintain minimum pull-through rates, typically around 70%, several lenders said.
Correspondents that fell short of the minimum could receive inferior pricing for their loans — or, if their pull-through rates were consistently low enough, they could be kicked off the list of approved loan sellers. SunTrust and Wells did not return calls seeking comment.
Despite the turmoil of the past few years, lenders complain that many loan officers have not changed with the times.
"The subprime days lasted for so long and so many people got in the business when all you did was collect a Social Security number and an address and the deal miraculously closed," said Chris Thomas, the owner of Mortgage Support Services, a Westminster, Colo., lender. Today, most real estate deals fall apart at the last minute because loan officers "haven't read the guidelines," Thomas said.
Though lenders typically run loan applications through automated underwriting engines, such software may not catch tighter restrictions added by mortgage insurers, such as higher total debt-to-income ratios, he said. "The reason loan officers are not up to speed is that they don't know how to process a loan."
Loan officers need to do a better job of collecting data from potential borrowers, so lenders are not spending money out-of-pocket underwriting and processing loans that ultimately fail, several executives said.
"It's a different world," GMAC's Abreu said. "You really need to gather as much information as possible before you hand off the loan so you have a clearer picture of the credit profile of the borrower."
Walsh agreed. "Some loan officers really didn't learn the business," he said. "The business was always, 'Just take loans, just take loans,' and there was no ramification for high fallout."