The mortgage industry is and will always be cyclical – interest rates fluctuate, creating challenges to manage a compliant and profitable business. In fact, the last several years have proven to be incredibly challenging, testing even the most experienced mortgage bankers. In this ever-changing industry, lenders are searching for ways to gain greater agility to better flex with market conditions while maintaining profitability. The answer: outsourcing.
Today, we continue to face the aftermath of the mortgage crisis, forcing the industry to transform. Rising interest rates coupled with a new and heightened regulatory environment have created arguably one of the most challenging businesses in recent history. But there are opportunities.
Quantitative easing is coming to an end as the mortgage industry recovers, largely due to the government taking significant measures and spending billions of dollars to add liquidity to the market. The result has been rising interest rates and a shrinking refinance market.
Also, housing starts and purchases are increasing. After a 40-year low in construction, we are now seeing a strong return. In fact, the National Association of Home Builders (NAHB) estimates that total housing construction over the next few years should return to just under 1.7 million combined single-family and multifamily starts on an annual basis. New-home sales are also expected to climb 29 percent from 431,000 in 2013 to 557,000 this year. Despite these improvements, the overall decline in refinance originations has shrunk the market significantly.
In addition to the government taking measures to add liquidity, it also created the Consumer Financial Protection Bureau (CFPB), which resulted in significant costs to origination and servicing from substantial regulatory changes.
As a result of these drastic changes, the industry has completely transformed. What the industry looked like before the crisis, including the competitive landscape, has changed. Most of the major banks have exited wholesale lending and the top five wholesale lenders before the mortgage crisis are completely different than the top five wholesale lenders today. Additionally, those top five only control just over 30 percent of the market versus more than half before the crisis.
Correspondent lending has also faced significant changes. Over the last two years, a number of non-bank correspondent lenders have made significant gains in market share. In addition, the top five correspondent lenders controlled nearly 70 percent of the market before the crisis. Today, it has fallen to just slightly over half.
But servicing has endured the hardest blow. Before the crisis, the top five servicers controlled more than 65 percent of the market. Today, that number has fallen to 45 percent as market share has spread throughout the top 15 servicers.
These challenges have greatly impacted originators and servicers, but outsourcing can help them deal with the ever-changing demands as well as offer a highly relevant method to gain a competitive advantage.
Why Outsourcing is Critical
In such a volatile environment, outsourcing is quickly becoming critical for capacity management, compliance and profitability.
Because the mortgage industry is cyclical, organizations must be able to quickly grow as well as minimize resources as necessary. The industry is constantly shifting, and originators and servicers must be able to shift with it.
Compliance has also become a top priority. According to Thomson Reuters’ Cost of Compliance Survey 2013, more than half of the 800 compliance professionals surveyed at financial institutions cited that their compliance budget will substantially increase this year. As a result, many of these organizations are heavily investing in technology and staff to remain compliant.
Finally, organizations are facing profitability challenges due to industry hurdles including compression on revenue and increased compliance costs.Currently, the mortgage industry has little profitability. The solution will require systemic transformation using technology, analytics and a cost-effective outsourcing model.
Selecting the Right Partner
While it is clear outsourcing can effectively and efficiently support originators and servicers through a volatile market, the challenge now is selecting the right partner.
Historically, outsourcing was leveraged to lower costs only, but no improvements to the process were made. Today, outsourcing providers have realized that in order to differentiate themselves, process improvements paired with cost savings is critical. The result has been a new wave of providers to choose from. With new outsourcing providers appearing every day, originators and servicers must be aware of vendor selection best practices and management. The reality is that not all vendors are created equal.
First, originators and servicers must look for an outsourcing partner that has a vision for the industry. The provider must also have an ability to execute and the structure to provide transparency into its services. Equally important, never rely on vendors that cannot show you success. If they cannot illustrate results, they are likely not a good choice.
Second, look for a partner that has strong industry expertise and proven experience in providing the service. The changing regulatory environment has proven that the mortgage industry is not for amateurs, and the ability to transform a business model requires expertise. In addition, never rely on a provider that relies on one individual to deliver results. You must have a strong team.
Third, look for vendors that offer a suite of services rather than selecting multiple vendors. Working with fewer vendors who can provide more services is key to mitigating vendor risk.
Fourth, do not work with vendors that put you at risk for compliance. Select a partner that can demonstrate their qualifications and clearly show how they manage quality and compliance on an ongoing basis.
Finally, look for partners that can quickly adapt to an ever-changing market. With an industry that is constantly evolving, your partner should be able to adjust to allow you to provide the right service.
Working with “Specialty” Providers
Outsourcing with a “specialty” provider – one defined by the value they provide and the expertise they deliver to bring transformation to create a competitive advantage – has become a common strategy to help originators and servicers manage through a volatile market. With a strict regulatory environment that continues to evolve, executing a process requires licensing. As such, these specialty providers tend to have both a domestic and global presence because of the significant level of expertise required. With a domestic presence, originators and servicers benefit from highly experienced U.S.-based talent. With a global presence, they benefit from cost-savings and around-the-clock support.
These providers focus on strategic business outcomes, including: creating new business capabilities; enhancing change management capabilities; expanding operating capacity; improving lock to fund cycle times; improving quality and compliance; increasing customer retention; optimizing working capital; and transforming cost models. But the overall goal is to gain efficiencies while remaining compliant.
In addition, specialty providers leverage data and analytics to provide recommendations to enable process improvement. An example would be reducing lock to fund cycle times by gathering data downstream that can be used to improve origination times and avoid costly and time-consuming delays. This is typically done by leveraging BPM technology to capture data and identify areas of improvement. Industry experts then analyze the data and ensure that the recommended improvements are compliant.
Outsourcing Mistakes to Avoid
In an industry that is both dynamic and complex, outsourcing can be a highly effective solution. By leveraging the right outsourcing partner, originators and servicers can better manage change and move towards a more flexible operating environment necessary to remain competitive.
But select your vendor carefully. Stay away from those that focus solely on cost and execution. Instead, look for a specialty provider that can demonstrate their mortgage credentials and provide collaborative solutions that drive efficiencies and strategic outcomes. A specialty provider will have expertise across multiple business verticals and can create complex, custom solutions to support your changing business needs – critical in today’s marketplace.
About The Author
Anne Politis is Executive Vice President of Mortgage Fulfillment at ISGN. She joined ISGN in 2009 through its acquisition of Fiserv’s Fulfillment Service division, where she spent 11 years. Politis was the executive responsible for operations, including valuation services, title, closing, outsourced mortgage processing and home retention. With the completion of the Fiserv integration into ISGN, Politis is focused on providing consultative support to sales, solutions architecture and product development. With more than 28 years in the mortgage industry, she has experience across origination, servicing and secondary markets.