How Automation Helps Banks Navigate the Rollercoaster of Mortgage Lending

Rising interest rates have led to a sharp decline in demand for home loans and refinancing, triggering a wave of layoffs in the mortgage divisions of major banks nationwide, including JPMorgan Chase and Wells Fargo. However, Suzanne Roth, director of mortgage products at Ocrolus, points out that the cyclical nature of the housing loan industry does not mean lenders must scale up hiring or layoffs in line with demand fluctuations. Ocrolus provides document processing automation services to fintech companies and banks.

Roth said: "Staffing up just to handle fluctuations in business volume is costly and damaging to the institution. Historically, humans were the only option for decision-making and certain mechanical tasks in mortgages, but that no longer needs to be the case. There are many solutions available to help break this cycle."

Analysts believe that integrating automation into the mortgage process, such as in review and verification, loan origination, document classification, and income calculation, can help lenders escape the cyclical dilemma.

Craig Martin, executive managing director and global head of wealth and lending intelligence at J.D. Power, said: "To avoid boom-and-bust cycles, lenders need to understand how to optimize the combination of human and digital engagement at different stages of the process to reduce costs and improve efficiency."

Breaking the Cycle

Roth said that volatility in the mortgage industry is nothing new, with loan application volumes fluctuating dramatically over the past two decades. However, she is surprised that banks still rely on a model of adding staff during peak periods and laying off during low-volume periods.

"We go through this cycle repeatedly, and it amazes me," Roth said. "If you look at a bar chart from 2000 to now, the peaks and valleys in volume are like the most thrilling roller coaster. Institutions currently experiencing a sudden drop in volume are forced to lay off staff. But the question is, how do we stop this cycle from now on?"

According to data released this week by the Mortgage Bankers Association, mortgage applications are at their lowest level since 2000. Joel Kan, the association's vice president of economics and industry forecasting, said in a statement: "Mortgage applications continue to sit at a 22-year low, dragged down by a significant reduction in refinance demand and weak home purchase activity."

The MBA report shows that the purchase index is down 21% from the same period in 2021, and refinance volume is down 83% year over year. Kan said: "Mortgage rates rose for all loan types last week, with the benchmark 30-year fixed rate rising 20 basis points to 5.65%, the highest in nearly a month."

The market is not expected to rebound in the short term, as the Federal Reserve continues to raise interest rates to curb high inflation. The sharp rise in rates has weakened refinance demand, and homeowners lack the incentive to change their existing repayment structures.

Martin said: "Interest rate changes can cause huge swings and require significant adjustments in staffing in a short period of time."

USAA, an insurance and financial services company headquartered in San Antonio, laid off 90 people in its mortgage division in March due to an expected 34% drop in real estate loan volume to about 25,000 loans. Wells Fargo also conducted at least two rounds of layoffs related to home loans this year. The San Francisco-based bank cut an undisclosed number of positions in its home lending division in April, a week after reporting a 33% decline in origination volume. Chief Financial Officer Mark Santomassimo said it was the largest quarterly drop in mortgage volume since 2003. According to a Worker Adjustment and Retraining Notification Act notice filed in June, the second round of layoffs affected 107 Iowa workers in the bank's Des Moines home mortgage division.

JPMorgan Chase has also conducted layoffs in its mortgage division due to the sharp drop in demand for home loans and refinancing. The bank let go of hundreds of employees in its home lending division in June and reassigned hundreds more, according to Bloomberg.

The market downturn has also hit non-bank mortgage specialists, which have adjusted their staffing. Mortgage technology company Blend announced in April that it would lay off 200 people, representing 10% of its total workforce. Better.com conducted its fourth round of layoffs since December, according to TechCrunch. The mortgage company has cut half or more of its staff since December, according to Fast Company.

'Twilight Zone'

Roth said: "The entire hiring and layoff practice is a knee-jerk reaction. I feel like the whole mortgage industry is in a twilight zone of constantly repeating the same mistakes."

Roth believes that when lenders expand for the next hot housing market, automation is the best option to avoid mass layoffs, costly onboarding training, and expensive errors caused by task reassignment. Banks should view signing bonuses, new hire training, and retention as costs that eat into the substantial profits that could otherwise be earned in a hot market.

"When volume drops and profit margins shrink, they don't have the spare cash or the funds they should have from high-volume environments," she said. "They are forced to lay off people, and severance costs are also huge."

She also noted that lenders face the risk of employees accumulating costly errors as they take on tasks left by laid-off colleagues. "This can lead to more compliance and calculation errors, potentially costing thousands of dollars."

Roth suggests that banks that have significantly reduced their mortgage divisions should integrate automation into their workflows to eliminate the repetitive mechanical tasks left by departing employees. "This way, remaining staff can still be effectively utilized, and the institution can retain them. When business volume increases in the future, they can scale up while maintaining employee retention and high morale."

Automation can also accelerate the loan origination process and keep banks competitive, said Michael Cole, CEO of document management services company VirPack: "Workflow and automation tools help employees process loans quickly, automating many steps, shortening closing times, reducing borrowers' 'shopping around' time, and ensuring your bank doesn't lose existing loans to other lenders."

Martin said banks that lose mortgage customers may also see fewer users of other products. "While some layoffs are inevitable, if the right balance is not struck, consumers may turn to other institutions for mortgages, increasing the risk that they will transfer their entire business relationship. Cutting costs in tough times is necessary, and short-term solvency is essential, but cutbacks can adversely affect key customers and harm the long-term health of the business, resulting in winning the battle but losing the war."

Perch, a Toronto-based home buying platform, has automated 65% of its mortgage broker process. CEO Alex Leduc said: "Layoffs in the mortgage industry are not cyclical but structural, reflecting the changing nature of the role." He added that automation has helped Perch free up employees to focus on where they add the most value: advising clients. "In the long run, this should mean that employees primarily in administrative and operational roles in the industry will be phased out through automation."

Roth advises companies interested in adopting automation to implement changes when mortgage volume is low. "Trying to implement technology in a high-volume environment is difficult."