Navigating the Headwinds: A Strategic Path Forward for Community Bank Mortgage Lending

By WBA Associate Member Mady Arndt, mortgage loan officer at BANK NMLS

Community banks today are navigating one of the most challenging mortgage markets in recent history. Elevated interest rates have slowed loan origination volumes, squeezed margins, and forced institutions to re-examine their operating models. According to the 2024 Fannie Mae Mortgage Lender Survey, lenders are most concerned about (1) talent retention, (2) controlling costs and (3) streamlining business process. While many see a choice between staying the course or getting out of the game, a more strategic approach is emerging: leveraging shared resource models to build a more resilient and cost-effective operation.

The Talent Dilemma: Retaining Mortgage Loan Officers (MLOs) in a Tight Market

The mortgage industry is currently facing a significant talent drain. With low origination volume, many mortgage loan officers (MLOs) are struggling to sustain a living. Recent data shows that the number of active, producing MLOs has fallen by as much as 43% since its 2021 peak, prompting what some are calling a “talent crisis”. For a small bank, the cost of retaining an in-house team of experienced originators, underwriters, and closers through lean times is immense.

One increasingly attractive solution is outsourcing through shared resource models. Rather than bearing the full cost salaries and benefits, a community bank can access highly skilled professionals on a per-transaction basis. By leveraging this model, banks can rely on seasoned MLOs, underwriters, and processors, freeing their in-house team to focus on strategic, relationship-driven tasks that support long-term success.

The Rising Costs of Origination

Mortgage lending is resource-intensive business, especially for a smaller operation with low volume. It requires experienced staff, complex technology, and a deep understanding of ever-changing compliance regulations.  The Mortgage Bankers Association (MBA) reported that in 2023, the average cost to originate a loan for non-bank lenders exceeded $8,000. Roughly half of that, over $4,000 per loan, stems from underwriting, processing, compliance, and technology costs alone.  For smaller institutions, this cost can be prohibitive, particularly when faced with just a handful of new loans each month.

Outsourcing these critical mortgage functions can dramatically reduce expenses. By partnering with a trusted provider, a bank can offload these labor-intensive and time-consuming processes while ensuring accuracy and compliance. This leaner model enables institutions to maintain profitability, ensure high service quality, and redirect staff toward higher-value or customer-facing activities.

Bridging Operations with Technology Without the Hefty Price Tag

Today’s borrowers expect a seamless digital experience: online applications, secure document portals, real-time updates, and more. For a small bank, developing and maintaining this technology stack on its own is often cost-prohibitive.

Through shared resource models or strategic partnerships, banks can gain immediate access to sophisticated technology platforms, tools that rival those of national lenders, without the massive investment. This approach allows community banks to:

• deliver a modern, competitive borrower experience,
• streamline operations and ensure compliance, and
• maintain their unique brand and personal touch.

Preparing for Future Growth

Market conditions will not remain static. When interest rates decline, the industry expects a surge in refinancing activity. Community banks that fail to prepare now risk being overwhelmed, potentially losing customers to larger lenders with greater capacity.

The key is implementing a scalable strategy today. And here’s the crucial point: outsourcing doesn’t have to be an all-or-nothing proposition. You can build a hybrid model. For instance, banks may choose to retain their in-house team for conventional purchase loans while outsourcing higher-volume products, like jumbo loans or refinancing applications, to a trusted partner. This strategy allows banks to scale up as needed without risking their reputation or losing customers to a national competitor that can handle the volume.

References:

1. Mortgage Bankers Association (MBA) Report on Mortgage Production Costs, 2023.
2. Fannie Mae’s Mortgage Lender Survey, 2024.
3. National Association of Mortgage Brokers (NAMB), industry reports on costs and origination efficiency.