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Margin Compression: What Is It, Why Is It Happening, and What Can We Do About It?

Margin Compression

As business conditions tighten for most mortgage originators, technology is offering ways to increase efficiency, drive customer satisfaction, and maintain profit share.

The momentum for originating new loans and mortgages has been trending away from traditional banks to more focused fintech companies. As traditional banks cut back on originating loans, non-banks have been servicing more loans than ever before. According to Bloomberg Week, “non-banks now service about 51 percent of all loans packaged into new Freddie Mac securities, according to mortgage analytics firm Recursion Co. That’s more than double the share of just five years ago.”

With that kind of explosive growth comes a need for tighter regulation as well as more capital requirements, and the result is often higher origination costs. It’s wonderful that better and more accessible technology solutions have given smaller players more confidence in their underwriting abilities, but this has come with the significant caveat that they “might not have the capacity to withstand losses or deal with the servicing burden created by widespread delinquencies,” writes Richard Koss for Bloomberg.

The Results of Market Fragmentation

Since 2010, companies have been seeing increased competition in the lending solution. This competition has made operating conditions more competitive forever. Widespread access to sophisticated technologies and to capital, deregulation, and the opening up of global markets have enticed more and more companies to enter the space.

The market as a whole is not expecting much growth in 2019, and along with increased competition, this has seen the top 20 originators’ market share drop from a high of 83% in 2010 to just over 57% today.

In short, the conditions that firms are currently operating under are tougher than they have been for many years. Returns have been great in the space, and there has been a lot of investment in new technologies and systems planning. The next few years are going to determine how well a company’s plans for digital transformation were laid.

The Digital Solution

As margin compression begins to take hold and become the new reality, many firms are looking to technology to help them decrease their costs, enhance those aspects of the process that are relatively inefficient, and improve the customer experience.

The Boston Consulting Group white paper studied a number of initiatives put in place and reported some very positive results. On a relatively small investment of only 2% of the cost base, expectations have risen to include:

  • An increase in application completion rates of up to 20%
  • An improvement in loan officer productivity of almost 10%
  • A reduction in application turnaround time of between 6 and 10 days
  • Back-end process efficiencies of 2 - 5%
  • Enhanced customer experience

With increased application rates and productivity as well as a decrease in the time it takes to process a loan, there is a growing realization that digital mortgages are the best tool fintech firms have at their disposal for dealing with margin compression.

The Power of a Digital Mortgage

Image Credit: Boston Consulting Group

A digital-first approach for lenders has proven to be enormously popular with consumers and is attracting a generation that has grown up in a mobile-first environment. The above features were identified by BCG as the most popular. From easy onboarding to fast document management and the ability to manage expectations on behalf of a potential buyer, an agile mortgage application is changing the ways that firms approach their work and offering scalability that they can use to adapt to the conditions that they find in the market.

To request a demo and find out how your company can decisively tackle margin compression, get in touch with AI Foundry today.

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Sources:

https://www.linkedin.com/pulse/how-digital-mortgage-solutions-can-help-win-war-against-micah-jindal/

https://www.aifoundry.com/agile-solutions/mortgages

https://www.bloomberg.com/opinion/articles/2018-02-23/mortgage-loans-the-market-is-moving-into-the-shadows