REQUIRED READING: Over the last three years, we have witnessed a massive upheaval of the mortgage banking industry. Despite the turmoil, however, one fact seems to remain unchanged: People want to live in a home that they can call their own.
Mortgage lending will continue, of course, but in order to survive, the industry must be willing to re-examine its strengths and focus on them. This examination might reveal current internal processes that could be better handled by experienced business partners.
In fall 2008, the Peachtree, Ga.-based STRATMOR Group conducted a survey of senior executives from various mortgage lenders, with the intent of identifying the ‘usage, needs and attitudes of senior mortgage lending executives regarding mortgage origination outsourcing services.’ The survey found that the potential cost and cost-structure benefits of outsourcing became more compelling as the lending environment began to reflect sharply reduced origination volumes.
The survey also found that lenders believed that a large proportion of mortgage banking origination tasks or functions had the potential to be outsourced. In general, however, functions that typically involved direct contact with borrowers were not viewed as viable for outsourcing.
By and large, lenders looked to outsourcing as a means for lowering operational costs, making such costs more variable with origination volume and as a means for gaining access to advanced origination technologies without having to make capital investments and beef up their information technology infrastructure. Lenders also said that controlling costs, managing operational risks and improving efficiency and productivity were the primary reasons for outsourcing.
One might assume that lenders were concerned about quality-control problems relating to outsourcing, but this was not the case. Instead, lenders insisted that they were not inclined to outsource any function that they saw as a ‘core competency.’
But this raises a new question: What tasks are currently being performed within mortgage banking that cannot be classified as core competencies or revenue-generating functions? One category that should carefully be examined for alignment with company strengths is the activities associated with the post-closing process.
Post-closing activities can be defined as those steps performed by an institution during the transition from loan funding to servicing. These activities differ from company to company, based on upstream tasks and the final destination of the loan, but they generally include the following aspects of business operations:Â
- Timely receipt of the settlement package from the settlement agent;
- Review to ensure that the loan package is complete;
- Creation of the collateral package;
- Imaging of all signed disclosures;
- Investor delivery of the collateral file;
- Physical or electronic delivery of the credit file;
- Loan insuring, where applicable; and
- Delivery of the trailing documents to the final custodian.
While these steps are important enough to warrant in-house control, they can be successfully moved from within your organization to a business partner if they are structured correctly. After all, today's technology allows for these steps – and almost all the steps in the back-office process – to be performed from anywhere.
What is at stake?
So what are the immediate advantages of outsourcing the post-closing process? For starters, company core competencies can be emphasized by allowing institutions to more clearly focus on their current competitive advantages (e.g., underwriting, pricing, loan approval) in the loan origination process, instead of being distracted by work functions that are not revenue generating.
Company cost efficiencies also are improved through the reduction of fixed costs. Outsourcing is an effective way to remove many of the fixed costs associated with this process and convert them to a variable cost. Post-closing expenses can then be budgeted as a per-loan charge, and savings are also gained when mortgage companies take advantage of fully trained business partners who specialize in post-closing services.
Operational efficiencies can also be realized as a result of diverting the tedious and labor intensive tasks involved in the post-closing process to a business partner. Outsourcing a post-closing process can temporarily introduce a higher level of anxiety throughout the organization. This anxiety is generally the result of limited process documentation and an unclear execution plan – in other words, not having enough accurate data on the current process to know what needs improvement.Â Â
But this is not an easy endeavor – there are critical steps that should be followed when outsourcing a post-closing process. Perhaps the two most critical steps are to accurately define the current post-closing process and to engage the right outsourcing company.Â
Making this decision could be as simple as reviewing the standard operating procedures that govern the actions and processes of the current post-closing process. One common mistake of mortgage company personnel make in determining the scope to be outsourced is to overlook or omit the smaller details that are still very critical in moving loan files through the entire process.
If these standard operating procedures are well documented, they should be utilized throughout the contracted processes. But if the standard operating procedures are outdated or not well documented, time should be allocated to outline the desired process.Â
Additional steps that should be considered include the following:
- Identify what you are trying to achieve (e.g., improve operational efficiencies);
- Map out your current process;
- Identify elements in your current process that are essential and non-essential;
- Identify essential elements; and
- Define the appropriate tasks with desired time elements.
Once the essential elements are identified and organized, it is important to outline the process in its entirety. The outline should flow in chronological order with all of the activities included. And once the outline is completed, it is crucial to observe the process again to identify any missing details. Then, the observation and documentation should be repeated until all items have been confirmed.
Next, take a moment to evaluate the reasons behind each item in the step. This analysis often reveals one or two steps that are being performed – perhaps, out of habit – that can be eliminated. This outline should then be used creating a measurement metric between the lending organization and the prospective business partner.
An outsourced post-closing process can bring many benefits to an organization, ranging from a significant reduction in technology investment costs, to an easier absorption of volume fluctuations, to the better utilization of trained and knowledgeable staff. The transition period would also be easier when mortgage production volumes are low, as they are in today's lending environment.Â
Of course, there is no one-size-fits-all strategy, and any pursuit of the outsourcing of the post-closing process or any other aspect of daily operations should be the subject of a serious due-diligence review. But if the fit is more than satisfactory, then this is a good time to realign current processes with corporate strategies by shedding those activities that are not in line with company goals and objectives.Â Â
Jon Maughan is vice president of Security Connections, based in Idaho Falls, Idaho. He can be reached at firstname.lastname@example.org.