The ROI of Ellie Mae’s Encompass All-In-One Mortgage Management Solution

MAY 2017

Legal Disclaimer All information contained within this study is for informational purposes only. Neither Ellie Mae, Inc. nor

MarketWise Advisors, LLC provide any warranty, representation as to their accuracy or benefit. Both Ellie

Mae, Inc. and MarketWise Advisors, LLC disclaims any responsibility for the use of this information. All

information is subject to change.

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Executive SummaryAt the close of 2016, MarketWise Advisors, LLC, completed an intensive evaluation of

the return on investment (ROI) lenders could achieve from using Ellie Mae’s Encompass®

all-in-one mortgage management suite. The study, conducted from the second through

fourth quarters of 2016, is a follow-up to the first MarketWise ROI study of Encompass

conducted in 2014. The new study takes into account changing market dynamics and

new Ellie Mae functionality to provide an up-to-date picture of the economic impact of

Ellie Mae solutions on a lender’s cost of origination.

The Ellie Mae product offering was analyzed as a whole as well as by product,

including Encompass Product & Pricing Service™, Encompass Docs Solution™, Encompass

Compliance Service™, Encompass Flood Service™, and Encompass 4506-T Service™.

For the 2014 study, MarketWise developed an ROI calculator with the ability to

determine economic impact across a broad range of both qualitative and quantitative

factors. In 2016, the ROI calculator was updated to cover additional Ellie Mae products.

Based on a set of benchmark participants, the result is a five-year impact analysis that

can be used by both existing and prospective Ellie Mae clients to estimate potential

future cost savings.

Key Findings

MarketWise’s rigorous operational reviews and financial analysis provided important

insights into the benefits achieved through Ellie Mae’s Encompass all-in-one mortgage

management solution. The ROI study provides tangible results across lenders that reflect

the impact of Encompass on improved efficiency in loan origination processes and

improved loan asset quality.

n Total ROI — Participants investing in Ellie Mae solutions realized an average annual

ROI of 697% over five years, or nearly seven dollars in expected return for each

dollar invested.

n Operational Efficiency Gains — On average, study participants achieved gains in

operational efficiency of $5,817,860.

n Average ROI per Loan — The study participants realized an average ROI of $967.67

per loan for mortgage firms and $1,084.58 per loan for banks and credit unions.

Study participants

realized an average

ROI of $967.67 per

loan for mortgage

firms and $1,084.58

for banks and

credit unions.

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n Total Potential ROI per Loan — While there was an impressive increase in ROI

achieved with the study participants, the potential cost savings and operational

improvements vastly increased from $970.14 to $1,331.48 per loan between 2014

and 2016. This represents the total potential ROI, which grew as Ellie Mae rolled

out new products, features and options, effectively increasing the “size of the pie”

from which clients can draw value.

n Client Efficiency Curve — Study participants who were evaluated in 2014, and

again in 2016, realized a 68% higher ROI per closed loan on average. The increase

was attributable to increased productivity, level of feature/function use, and the

application of advanced workflow and audit rules that streamline processes.

n Acceleration Effect — Ellie Mae products and services working together create

an aggregate impact whereby the combination of product offerings accelerates

productivity and efficiency for lenders. This is a critical finding that underscores the

effectiveness of a best-in-class, all-in-one system to manage mortgage functions.

n Break-Even Point — The average annual breakeven point is 1.91 months per year

in each of the first five years after implementation of Ellie Mae solutions.

n Profit Advantage — The study provides empirical evidence of a profit advantage

(lower cost of origination) relative to the competition in the range of 5–10%

The Client Efficiency Curve

For Ellie Mae clients, the total impact for all services and products reviewed was

$1,331.48 per closed loan. This represents the total potential ROI assuming a perfect

understanding and complete utilization of the solution’s features and functions. The

total potential is constrained by various factors including the time to implement and

productivity metrics.

In 2016, the efficiency level among benchmark clients was 90%, up from 85% in 2014.

This metric demonstrates the lenders’ increased system experience, embrace of new Ellie

Mae products, and staff knowledge of Know Before You Owe rules and other industry

best practices.

Study participants

achieved an

annual average

of $5,817,860 in improved

efficiency and

operational gains.

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The Cost of Origination and Impact of Ellie Mae

This study provided clear evidence that the compliance capabilities, process automation,

third-party service integrations, and interaction of a single system have a marked impact

on cost of origination. This impact is quantified so lenders can gain a clear view of

anticipated annual benefits. During the course of both the 2014 and 2016 studies, it was

apparent that participating clients accrued a substantial amount of incremental revenue

through the use of Ellie Mae solutions. In many cases it was the difference between

profit and loss for the mortgage lending operation.

The study clearly shows that an investment in technology produces an average annual

return of 697%. So for each dollar invested in Ellie Mae products and services, the

benchmark clients achieved a return of nearly seven dollars.

Based on the expected productivity and performance demonstrated by the benchmark

clients, it is possible to project on an annual basis the impact of Ellie Mae on the cost of

origination. The chart below is a sample scenario output from the ROI calculator. It is

important to note:

n Implementing a new system takes time and effort, so the returns

and the impact to the cost of origination build over time.

n The most critical drivers to origination cost are productivity level,

application/system use level, and tenure post-implementation, that is,

the length of time after Ellie Mae systems are live and fully operational.

n Integration of various lender systems and process flows tends to bolster

the value of Encompass and the Ellie Mae network of services over time.

Benchmark clients

in this study realized

697% ROI

with a 1.91-month

annual break-even.

Reflects the average annual financial impact to the benchmark clients.

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Cost Analysis and Financial Planning

It is a solid business practice to establish a clear financial model that substantiates

any new investment in technology. Deploying a systematic, analytical approach helps

minimize subjective factors. The benchmark ROI establishes a performance expectation

that is aligned to internal goals and objectives.

Best practice is to establish annual metrics based on the original investment expectation. In

the chart below, the sample lender expects an 11.33% decrease in origination cost by year

five. While this is a sample lender with $1.2 billion in annual origination and all products

implemented, each scenario is unique, and it is important to leverage the cash-flow analysis

with your own assumptions to develop an independent view of what is your expected ROI.

The cost of origination is perhaps the single most important financial benchmark

discussed with Ellie Mae clients. By incorporating the level of expected productivity

gains by year, MarketWise Advisors projected the cost reduction impact over time.

In addition, the study revealed the following:

n Best-in-class results are achieved by lenders who incorporate

automated workflow and reporting into their loan processes.

n The elimination of repetitive steps, data entry, and difficult

or broken integration points is paramount.

n Improvements in data quality as a result of automated compliance and

integrated system document generation are essential. Participating lenders

drove ROI through better asset quality, pipeline visibility, and

lower post-closing error rates.

Reflects annual expected cost-of-origination decrease for sample lender scenario.

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n Elimination of process steps for loan locking, pricing, re-pricing,

and investor registration further improve efficiency.

n The adoption of additional Ellie Mae product offerings, such

as Encompass Product & Pricing Service, Encompass Docs Solution,

Encompass Compliance Service, Encompass Flood Service, and

Encompass 4506-T Service helps create significant ROI acceleration.

Profit Advantage vs. Competition

MarketWise benchmarked the expected financial performance for cost of origination

based on the average performance of the study participants. Using the cash-flow

model developed in the ROI calculator, the study measured the difference between

the expected ROI and the mortgage industry’s average over time.

The bottom line is that the study provides empirical evidence of a profit advantage

(lower cost of origination) relative to the competition in the range of 5–10%,

depending on the situation factors. While there are many factors that influence this

figure, such as implementation level, internal productivity, training and products

deployed, it is not unreasonable to expect a 5–10% decrease in origination cost per loan

over a period of three to five years.

Products and Markets

The 2014 and 2016 studies analyzed Ellie Mae’s Encompass, Encompass Product &

Pricing Service, Encompass Docs Solution, Encompass Compliance Service, Encompass

Flood Service, and Encompass 4506-T Service, as well as the credit ordering and eSign

capabilities of Encompass.

Productivity curves, discount rates and other advanced-model assumptions varied by

depository (banks or credit unions with mortgage lines of business) and non-depository

institutions (mortgage firms).

Industry cost of origination benchmarks were tied to the market segment (whether

banks, credit unions or mortgage firms), in order to more precisely identify the profit

advantage of Ellie Mae clients relative to industry cost of origination benchmarks.

Separate return on investment calculators were utilized for depositories and non-

depositories. For existing clients, the impact of additional product lines was projected so

incremental impact could be evaluated and isolated.

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Methodology

MarketWise established profiles to aid in participant selection and developed a standard

questionnaire to gather data. Interviews were conducted at the lenders’ locations and, in many

cases, included detailed reviews of financials dating back five years.

With this significant level of financial detail, MarketWise determined productivity gains and level

of use relative to the total potential ROI. The level of productivity by year after implementation

provides a clear view on how the Ellie Mae product line positively impacts a lender’s cost of

origination. Observed benefits were validated and all cost data assembled. After the ROI for

each of the individual lenders was determined, the benchmark performance level was developed

to capture expected benefits realized by Ellie Mae clients. The benchmark ROI was then used as a

baseline productivity assumption within the return on investment calculator.

Study Participant Profiles

The benchmark clients included independent mortgage firms, credit unions, and commercial

banks. The average annual origination production level of these clients was $1,315,863,809. The

clients averaged 379 Encompass users. The combination of existing and new study participants

added significant insight for tracing the operational gains, improved economic benefits, and

changes in cost of origination.

ROI Calculator

MarketWise Advisors developed an ROI calculator that can provide new and existing clients a

clear understanding of the potential financial benefits of Ellie Mae product lines. The calculator

enables users to enter basic mortgage operations information, including origination level,

number of users, and use of products. The model then leverages the expected performance from

the benchmark productivity over time and completes a five-year financial projection for every

product and service combination. At a product level the financial impact, benefits, and costs are

evaluated, and then the net present value of the expected returns is calculated.

For a more detailed demonstration or discussion of the ROI calculator, please contact

your Ellie Mae account manager.

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ROI Calculator Features

n Four separate ROI model assumption sets were used based on different

institution types: prospective non-depository, prospective depository, existing

Ellie Mae client depository, and existing Ellie Mae non-depository.

n Basic and advanced model assumptions are available to customize

the inputs for particular lenders.

n The efficiency curve provides an empirically developed benchmark

of expected productivity.

n A detailed cash flow analysis is completed for each product line or

combination selected over a 60-month period.

n The cash flow is discounted by an appropriate discount rate by lender.

n Cash flow analysis illustrates the annual impact to cost of origination.

Using ROI to Improve Performance In our 2014 and 2016 studies, MarketWise Advisors developed a rigorous process to identify

costs, identify benefits, and calculate the potential return. The key for lenders is to apply this

process to everyday management and to incorporate ROI expectations into the budgetary

process. Within this framework the organization can improve its efficiency with products

and services designed to streamline operations and increase profitability.

Taking a best-practice approach, the following steps should be utilized to develop

and incorporate ROI into your decision-making process:

n Rank and justify technology investments by ROI level and returns.

n Understand total potential ROI.

n Evaluate actual results and establish departmental accountability.

n Use ROI to assess performance and identify areas to capture benefit.

n Create a feedback loop on how to capture additional returns.

By following these steps you will establish a solid decision-making process for evaluating

new products and services.

For more information on a custom in-depth ROI analysis for your organization, please

contact your Ellie Mae representative or contact Ellie Mae directly via email at sales@

elliemae.com or 888.955.9100.

For more information:

ninfo@elliemae.com

n888.955.9100

FAQ Concepts used in this study are outlined below to help clarify their use and definition:

What is ROI? Return on investment (ROI) is a performance metric used to understand the rate of return that a firm can

expect to receive in consideration for an investment. When applied to a technology investment, it is a

key indicator to help allocate resources and prioritize projects.

Why is ROI important for mortgage lenders? There are several reasons why ROI is a very important metric for mortgage lenders. First, it provides an

analytical basis to drive a purchase decision and compare options. If implemented correctly, expected ROI

sets the bar for organizational impact, performance measurement and budgets. Last, it provides a solid

methodology to analytically understand the impact that additional products, add-ons, upgrades, and

platform changes can make.

What is total potential ROI? The total potential ROI is the aggregate benefit that a firm can expect to achieve if all functions were

deployed and all products implemented with maximum efficiency. The total potential ROI is defined as

the implementation and full use of Ellie Mae’s Encompass all-in-one mortgage management solution,

Encompass Compliance Service, Total Quality Loan program, Encompass 4506-T Service, Encompass Docs

Solution, Encompass Flood Service, and Encompass Product & Pricing Service.

How does Total Potential ROI differ from Benchmark ROI? Benchmark ROI is the result achieved by the set of clients that participated in the study. This is different

than total potential ROI, which a client can potentially achieve with complete rollouts, maximum

utilization, and licensing the complete Encompass all-in-one mortgage management solution. Naturally,

every client in this study had different use cases and varying levels of training and products licensed,

which limits total potential ROI.

What is net present value? The net present value is a formula used to determine the present value of an investment by the

discounted sum of all cash flows received from a project.

What is a discount rate? The discount rate is the interest rate used to determine the present value of cash flows. Often, the

discount rate is the weighted average cost of capital for a firm that is risk-adjusted for project investments.

What is the acceleration effect? The acceleration effect occurs with the adoption and usage of a number of products and services that are

tightly integrated and working together. This creates an aggregate impact whereby the combination of

product/service offerings accelerates productivity and efficiency for lenders. The result is a higher return

on investment of the combination than the individual products/services.

What is the efficiency curve? The efficiency curve is the expected average productivity level achieved by participants after

implementing an Ellie Mae product or service. The return on investment calculation incorporates an

efficiency expectation based on the historical experience of study participants. Their input provides the

basis to develop an expected efficiency curve over a five-year period post-implementation.

Ellie Mae®, Encompass®, Total Quality Loan®, TQL®, Encompass 4506-T Service™, Encompass Compliance Service™, Encompass CRM™, Encompass Docs Solution™, Encompass Flood Service™, Encompass Product & Pricing Service™ are trademarks of Ellie Mae, Inc. 042817AB

MarketWise is a management consulting firm located in Jacksonville, Florida.

MarketWise provides consulting services for lenders to streamline technology operations

and increase productivity. MarketWise was founded in 2005 and has completed over one

hundred client engagements across the financial services sector. For more information,

visit us at www.marketwiseadvisors.com or 1-800-815-9494.