This week I want to discuss about Performance Metrics that matter for mortgage lenders. Irrespective of what business you are in, you need a set of metrics a.k.a. key performance indicators (KPIs) that tell you about the health of your business. In my previous job as a consultant, I helped clients define the metrics at overall business level, at a department level and at an individual role level. Here we will just talk about business metrics. If you are a mortgage lender or if you are the mortgage division of a bank, and if you are not tracking the metrics here, then you are driving blind.
1. Average Cycle Time (Time to Close)
(Total of Days from Application to Funding for All Loans) / (Number of Loans Funded in the same period)
Average Cycle Time is a very important performance metric to track for the simple reason that it is a measure of the overall efficiency of your business. Longer cycle time leads to poor borrower experience and lower loan profitability. Not only that, you can fall out of favour with your business partners (brokers, correspondent channel etc) when loans do not close on time.
2. Cost Per Loan Originated (Cost to Close)
(Total Business Expenses) / (Number of Loans Funded)
Cost per loan is the total cost incurrent in originating and closing a loan. This measures the efficiency of your business relative to factors like sales commissions, processing costs, vendor payments etc. It would make sense to break this cost into underlying components so that you can measure and adjust each cost.
People costs are typically the largest component. The challenge with people costs is it is difficult to quickly scale up and down. If you hire too soon and your cost per unit goes up. If you hire too late, your cycle time lags and you lose market share.
Keeping costs in line with expected performance is critical to maintaining profitability.
3. Pull-Through Rate
(Number of Funded Loans) / (Number of Applications Submitted)
This is the ratio of closed loans to applications taken. This is an indication of how well you defined your target customer and how targeted your marketing and sales efforts are. More than half of the total cost to close is already spent by the time the application is taken, in the form of advertising, marketing, sales to prospect, sell and close a full application for a new loan. If that loan is not closed, those funds are lost and the cost to close ratio increases for all other loans. On the other hand, the more loans the lender can pull through to close, the lower the cost to close and the higher the profitability.
(Number of Funded Loans) / (Number of staff in loan production)
Typically measured as Loans per month, Productivity is the measure of closed loans per loan production employee. This tells you how many loans an employee is able to close in a month. Lenders that have a high level of automation tend to have a high productivity as well.
5. Profit Per Loan
(Total Business Revenue – Total Business Expense) / (Number of Loans Funded )
While most often news headlines focus on total loan volume, the profit per loan is a far more important metric while assessing the health of a mortgage business. Profit per loan is a factor of your operational efficiency and the target segment you are going after. So while comparing your profit per loan with peers, select the companies that are selling to similar customers.
This could easily be the single most important metric for any mortgage lender and it is the primary driver of profit. If you want to invest or partner with a lender and there is just one metric you can look at, then this would be the one.
6. Average Mortgage Loan Value
(Total Loan Volume Originated) / (Number of Loans Funded in Same Period)
Average mortgage loan value is an indicator of loan profitability. The typical workload for a loan (if it does not fall in special situation) does not change whether it is $200K or $400K, but the revenue and profit you generate greatly differ between the two. You always want to make sure that the average loan value is in the range you planned for.
You may be wondering, why Total Loan Volume is not here. It is because Total Loan Volume is largely a lagging indicator.
You may ask - What is a leading indicator vs a lagging indicator. That is a topic for another post.
Those are the most important metrics. You can always go overboard and measure a lot more. But then, you will end up like this :)