Outsourcing the Back-Office Brings
Unexpected Rewards for Mortgage Lenders

By Doug Thorpe, Industry Consultant

Long heralded by many industries as a way to reduce overhead and improve efficiency, outsourcing still remains a relatively new practice for the mortgage industry. Oddly enough, many of the industry’s process-oriented operations represent the ideal business model to benefit from enlisting outside resources. From its beginning, the real estate mortgage industry has been plagued by piles of paper and complicated procedures. Even with the introduction of automation, the industry’s advancements continue to lag behind other business sectors.

It took the 1980s S&L crisis to finally woo lenders into forging relationships with outside players. The S&L fallout formed a new economic climate within the industry, changing the lending landscape forever. Mortgage companies once fiercely opposed to implementing new methodologies were suddenly scrambling to adopt the latest technology systems and business practices to slash costs and sustain profits.

During the early 90s, new buzz words and technology products began to pop onto the scene. Concepts like ‘paperless’ and ‘electronic mortgage’ took center stage at every industry trade show and convention. From front office to back, the industry began the painful task of thoroughly examining its internal processes—all in the hopes of streamlining and ultimately shortening the mortgage cycle.

During this same period, management’s attitudes toward employees within the industry also began to change. With the new push to cut costs, the focus was shifting from personnel to the bottom line. Suddenly, outsourcing was in.  

As more and more financial institutions realized the value of outsourcing, a new breed of service provider emerged. Vendor Management Companies (VMCs) offered lenders emancipation from rising costs and staffing concerns by managing the title insurance, appraisal and settlement process for them. For many lenders, outsourcing the origination side of the business is a logical choice due to the transactional and refined nature of the tasks involved. With the burden of managing multiple vendors gone, lenders are now free to focus on growing their business and improving their service offerings.

Currently, there are more than 30 vendor management companies throughout the United States serving approximately 7,800 U.S. lenders. However, until recently, lenders’ love affair with outsourcing remained at the front end of the business, stopping just short of the back door.

Changing Times, New Rules

The impact of September 11^th and the uncertain business climate it created are forcing lenders and investors once again to reexamine how they do business. As the market shrinks, industry players have to adjust to keep their profits from doing the same. Shortening the mortgage cycle is fundamental to retaining economic balance.

One way investors are reducing cycle time is by changing their own requirements on how they will accept loan data. Instead of waiting for the original loan file to be mailed for review, lenders can now e-mail images of the documents to investors. All the pieces of the loan package (rate, terms, escrow detail, arm parameters, etc.) are still necessary, just the method of delivery is changing. The result means loan pools can be bought and sold more quickly, improving liquidity for investors and lenders alike.

However, the challenge for many lenders lies in developing and maintaining the technology systems necessary to deliver data in this new medium. So how can lenders take advantage of these changes without investing in costly hardware and software platforms?  Lenders are once again looking to outsourcing to provide the answer.

Hidden Assets

A recent study by the Mortgage Banker’s of America Association revealed that the average cost to process a loan into the secondary market ranges from $700 to $1,400 per loan. Based on these numbers, by outsourcing the post close portion of their business, lenders can save between $400 to $1,200 per loan. For a lender with 500 units per month, this cost savings can be $2.4 to $7.2 million per year.

Here’s how.

• Increases  liquidity-The sale of a loan into the secondary market is what fuels lenders’ profits. If not executed properly and within the required timeframe, investors are less likely to purchase the loan, leaving the lender with less money to loan new customers. On average, investors reject more than 30 percent of the loans lenders deliver to the secondary market due to missing documents or errors in the file. The cost to reprocess a file can run into hundreds of dollars per loan, cutting deeply into a lender’s bottom line.

Post close service providers offer a solution to these pitfalls. Well versed in secondary market guidelines and investor requirements, these companies are also equipped with the necessary technology to process loan files quickly and with the highest degree of accuracy. A solid provider can reduce loan delivery into the secondary market from 25-40 days to 6-10 days, increasing a lender’s liquidity and potential for growth.

• Cuts technology expenses—Keeping up with the latest hardware and software products is an endless and costly struggle for many mortgage lenders. Building and maintaining these systems can deplete a lender’s personnel and financial resources. By outsourcing to a reputable vendor, lenders can almost completely eliminate their back-office technology expenses. Outsource providers have the expertise and the components to build the technical bridges necessary to improve document delivery to institutional investors. Recent technology advances are simplifying integration between once incompatible systems, opening new channels to exchange data between business partners.
• Reduces Overhead—Combating the cyclical nature of the real estate market is one of the biggest challenges lenders face today.  Outsource providers can help reduce these adverse effects by eliminating the cost and headache of balancing order volume and payroll. For example, a lender may employ seven or eight professionals to handle the company’s back-office operations. If their volume suddenly doubles, the lender would not have adequate resources to process the influx of orders. Outsourcing eliminates the need to adjust staffing levels, giving mortgage lenders the ability to react quickly to market shifts. Lenders’ fixed costs now become true variable costs.

• Streamlines and Improves Operations—Enlisting an outsource provider can also help uncover internal problems within a lender’s back-office. Often, an employee may perform a certain procedure or process incorrectly due to improper training or inadequate supervision. If not corrected, the problem can negatively impact customer service, ultimately affecting profits. Outsourcing helps lenders examine and streamline their internal processes, improving work flow and efficiency.

So, why are some mortgage lenders still hesitant to outsource their back office?  Some fear they will lose control by relinquishing command of the loan file. Others are uncomfortable relying on a third party to meet critical deadlines. These fears are valid and should be addressed by your service provider. Processing loan pools to the secondary market is a lender’s life blood. If the file is not examined properly or delivered on time, the investor may decline to purchase the loan package, leaving the lender burdened with the note and without cash to fund. Establishing a relationship built on trust with your vendor will diminish potential anxieties that may occur initially. Successful partnerships stem from collaboration, communication and a common vision.

Is Outsourcing Right for your Organization?

The first step is to determine if outsourcing is right for your organization. Start-up companies will realize the most benefits. Outsourcing streamlines ramp up and gets a lender’s business up and running faster than once thought possible. Expenses such as office space, technology systems and even personnel can be eliminated upfront.

Existing mortgage lenders and brokers should examine opportunities for growth within their local market to weigh the benefits of outsourcing. What’s the climate like? Is the market expanding or contracting?  Because market shifts usually last from 12-18 months, it’s important to plan accordingly to weather the economic impact. Outsourcing gives lenders the ability to react quickly to market pressures by streamlining their operations.  

What to Look for in a Outsource Provider

To achieve the best results, select a service provider that understands your organization and how you do business. When choosing between several vendors, examine each company’s financial strength and reputation within the industry. Review the bios of the principals. The Dotcom phenomenon proved great ideas do not always come to fruition.  You need the support of experienced leadership to realize success.

Make sure you sign a service contract and that you are pleased with the deliverables, turn times and remedies to potential problems. Have your legal counsel review all contracts before committing to any outside party.

Be cautious of vendors that dictate process requirements and information technology (IT) standards. Ask about their flexibility. Are they willing to customize their solutions to fit your organization? Vendors should understand how your organization works and your niche in the marketplace.

Most importantly, do you like the people you will be doing business with? A good relationship is the foundation for a successful and long-lasting partnership.

Implementation: What you Should Expect

Once you have selected a provider you are comfortable with, it’s time to devise your implementation plan. This is a crucial part of the process and should not be rushed. It’s important to think though the impact of the conversion on your business to make sure it’s as smooth as possible. You can avoid potential problems by keeping your back-office open until testing is complete. A beta test of at least one month will uncover any bugs or kinks in the process and give you time to examine the process to ensure your investors are pleased with the product and its delivery. During this period, your initial expenses may be higher due to doubling up resources. However, a well-planned and thorough test phase will bring greater rewards in the end.