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Baumol’s Cost Disease is a well-known economic theory by economists William Baumol and William Bowen that explains the paradox: why do costs continue to rise in labor-intensive sectors even as manufacturing and technology become more efficient? As productivity increases or wages decrease across industries due to advancements in technology and productivity in other sectors, those industries that rely heavily on manual labor find themselves grappling with rising costs without corresponding increases in productivity.
This presents a unique challenge in the mortgage industry. Mortgage processing involves complex, manual tasks requiring significant time and attention to detail. As the industry evolves and the demand for efficient processing grows, so do the costs associated with these labor-intensive tasks. Addressing this challenge requires a careful, thoughtful approach that balances the need for accuracy and compliance with the ever-present pressure to control costs.
Understanding Baumol’s Cost Disease in the Mortgage Industry
The essence of Baumol’s Cost Disease lies in the disconnect between rising labor costs and stagnant productivity in specific sectors. This can be seen in the meticulous work required for income assessment, document validation, and compliance checks in mortgage processing. These tasks are essential, yet they do not easily lend themselves to productivity improvements seen in more automated industries.
As a result, mortgage lenders often face higher costs without a corresponding increase in output. This isn’t just a theoretical problem—it’s a practical one that impacts the bottom line for businesses and, ultimately, the affordability of mortgages for consumers. A fact highlighted in Freddie Mac’s 2024 “2024 Cost to Originate Study,” which revealed that the average loan expense is 26% more expensive than during the last downturn cycle (Q4, 2018) (A) despite the technological innovations that have been introduced in that same period.
How Thoughtful Automation Can Address the Challenge
The question, then, is how to address Baumol’s Cost Disease without compromising the quality of service or compliance. The answer lies in thoughtful automation—a way to enhance productivity in areas traditionally dominated by manual processes.
- Automating Income Assessment: One of the most labor-intensive parts of mortgage processing is accurately assessing borrower income. Traditionally, this involves manual calculations and a detailed review of financial documents. By automating these tasks, the time and effort required can be reduced, thereby increasing productivity without sacrificing accuracy.
- Streamlining Document/Data Validation: The mortgage process is built on accurate data and documentation. Automation tools can assist in extracting and validating this data, ensuring that every piece of information is correct and complete. This speeds up the process and reduces the potential for costly errors.
- Enhancing Compliance: Compliance is non-negotiable in the mortgage industry, but it’s also one of the most time-consuming aspects of the process. Automating compliance checks can help ensure that all regulatory requirements are met efficiently, reducing the burden on staff and the risk of non-compliance.
- Balancing Cost and Efficiency: The goal is to balance cost and efficiency. Automation offers a way to achieve this balance by taking on the repetitive, time-consuming tasks that drive up costs in labor-intensive processes. This allows mortgage professionals to focus on higher-value activities, contributing to overall efficiency without increasing costs.
The Path Forward: A Focus on Thoughtful Innovation
As the mortgage industry continues to navigate the challenges of Baumol’s Cost Disease, it’s clear that automation plays a role. But it’s not just about implementing technology for technology’s sake—it’s about finding thoughtful, strategic ways to apply automation to the areas where it can make the most difference.
Automating key areas such as income assessment, document validation, and compliance makes it possible to address the rising costs associated with mortgage processing without compromising on quality or compliance. This approach not only helps to counteract the effects of Baumol’s Cost Disease but also positions mortgage lenders to be more efficient and competitive in a rapidly evolving market.
Ultimately, the goal is not to replace the expertise and judgment of mortgage professionals but to amplify the decision-making ability of the most knowledgeable leaders of your organization. By carefully integrating automation into the mortgage process, it’s possible to decision at scale using the expertise of the most knowledgeable individuals, reducing costs and delivering better outcomes for your customers.
Breaking the Cost Barrier with LoanBeam Processing Automation
LoanBeam Processing Automation (LBPA) helps lenders tackle rising costs by streamlining income assessment and document validation. By automating these critical tasks, LBPA reduces manual workloads, improves accuracy, and ensures compliance—all while lowering operational expenses.
With intelligent automation, lenders can process loans faster and allocate resources more efficiently. This means fewer bottlenecks, reduced risk of errors, and a more scalable mortgage workflow.
Stay ahead of the competition and take control of costs with LBPA.
Explore our mortgage automation solutions and request a demo today.
