The housing industry is once again playing its traditional, and significant, role in the overall economic recovery. In 2013, it accounted for 15% of total GDP. But housing price gains and new home starts don't immediately translate into new business for mortgage lenders. With interest rates rising, it is unclear how quickly purchase business can replace rapidly shrinking refinance volumes. Moreover, lenders have seen their costs rise steadily since the mortgage crisis, and they now face even greater challenges as new rules, like the qualified mortgage and ability to repay regulations, take effect this year and beyond.
So how can lenders nimbly adapt to this new, less-forgiving, less-predictable environment? The right approaches to staffing and training are obviously key components, but these have both become more of a moving target as volumes fluctuate and compliance standards keep ratcheting up.
Fighting The Last War?
There's a famous saying that ‘generals are always fighting the last war’ or, put another way, by the time strategy, technology and resources are in place, the challenge has morphed into something else. That certainly has been the case for originators and servicers over the past few years. In fact, in many cases, just as new strategies have been implemented, resources reallocated and staff retrained, the quickly evolving mortgage market and regulatory environment has changed again.
During the most recent recession, default servicing saw an unprecedented spike in activity that sparked a need for new foreclosure processing strategies, technology to better manage demand and the means to address a slew of new regulatory requirements. For example, the early servicing system redesigns made to keep pace with the unprecedented spike are, in many respects, now out of date as a result of the attorneys general settlements and new servicing standards.
Similarly, the skills needed to deal successfully with various stages of the mortgage crisis also kept changing. When modifications became the order of the day, many servicers found themselves scrambling to hire or re-deploy staffers with the underwriting skills needed to determine the appropriate candidates for and levels of modifications.
Sometimes new rules can cause confusion and false starts. Case in point: New default servicing regulations called for single point of contact (SPOC) controls for consumer interactions. The industry scrambled to meet that and several other new requirements.
Just a few short years later, SPOC and the positive intention behind it is now largely viewed as a recommended approach by Freddie Mac and the Servicing Alignment Initiative, as opposed to a formal necessity, leaving servicers frustrated by the sudden changes in policy implementation and scrambling to preserve resources already spent on developing those systems.
What Skills Are You Looking For?
At the height of the foreclosure activity, asset managers were in great demand to handle the large volumes of REO and to price and execute short sales. But fast forward to today. Defaults are down. Distressed assets and shadow inventory have been reduced to the point where investors are engaging in bidding wars. And large servicers are laying off staff.
While no one is suggesting that servicers will go back to the very lean staffing ratios that were commonplace before the crash, the servicing industry, despite new rules, is contracting. The staffers who remain will need to be current on the latest best practices, standards and regulatory requirements.
Right-Sizing For A Smaller, Shifting Market
In 2012, mortgage originations were $1.75 trillion, with refinances making up approximately 70% of the volume. The latest estimates for this year call for a 3% decrease to $1.7 trillion. Over the summer, the mix between refinances and purchases began to shift sharply after mortgage rates jumped by one percentage point – the first time this has happened in nearly 20 years. 2014 could see refinances drop by about 32% compared to 2013, and by 2015, purchase activity could significantly outpace refinances.Â
This dynamic shift in both the size and mix of the market will certainly create staffing and timing challenges for originators. For example, as the market contracts, lenders will most likely widen their marketing nets and relax their credit standards to attract and qualify less-than-perfect candidates. In a purchase environment, underwriting skills will be at a premium.
With most of the easy refinances already complete, and locked in at historically low rates, the new refinance candidates will be more challenging and time-consuming. Many will be previously underwater borrowers who are slowly seeing their homes appreciate to the point where they can qualify for Home Affordable Refinance Program. Again, this will demand underwriting and collateral valuation expertise.
But at what point in the cycle do you begin investing in this kind of talent? Keep in mind that unlike the previous refinance boom, the purchase market is more likely to be seasonal.
The High Cost Of Compliance
In 2008, the Mortgage Bankers Association (MBA) estimated that the fully loaded cost of origination was $2,291 per loan. By the second quarter of 2013, that cost had jumped to $4,207. Complying with the plethora of new federal and state regulations was one reason for this spike. Fear that even a small error might result in a put-back demand from investors was another.
This, of course, has created demand for staffers with compliance and/or quality control backgrounds. Most experts believe that the current zero-tolerance environment isn't going away anytime soon. But this creates yet another hurdle for originators: How do you balance the higher cost of staffing for compliance with a fluctuating market?
Variable Costs For A Variable Market
Achieving a delicate balance of adaptation, compliance and efficiency can often prove burdensome for originators and servicers, especially when facing mandatory implementation deadlines. For that reason, maintaining a permanent, albeit flexible, footprint of cross-trained outsourced professionals may be the best way to meet these expectations and requirements, even as areas of need sometimes change on a quarterly basis. Implementing a skilled outside rapid deployment team can not only resolve volume-based pain points that result from being understaffed, but also provide a host of other tactical advantages. The biggest is that it turns fixed staffing costs into variable ones.
At our company, we work with clients to identify their specific needs and then develop rapid deployment teams for their situation. Typically, these teams are made of experienced industry veterans with specialized skills. These specialists are then expertly cross-trained on a variety of job roles integral to that organization's day-to-day operations. These functions can range from originations and default servicing, to quality control and risk management. While maintaining a consistent presence within the organization, the team can immediately put their cross-trained skills to work alleviating various choke points as they appear within the company.
An outsourced rapid deployment team eliminates the need to "train the trainers" when deploying new practices and staff, maintaining a more predictable cost structure and, perhaps most importantly, ensuring the ability to respond fluidly to dynamic market environment changes.Â
Turning On A Dime
The outsourced rapid deployment team approach also possesses an inherent flexibility to scale swiftly and effectively, as needed, within the company segments experiencing the most pressure. It increases productivity without increasing formal headcounts and provides a team equipped to hit the ground running as new initiatives and requirements are implemented. As staff that maintains a permanent footprint, albeit one that varies in size, rapid deployment teams are never disconnected from company systems and can seamlessly integrate into new segments as market demand shifts and resources are reshuffled in response.
New Environment, New Approach
The past decade has demonstrated that the housing market and its demands on originators and servicers are anything but predictable. To deal with that unpredictability, as loan volumes fluctuate in response to policy changes, market conditions and economic trends, staffing designs must not only flexibly expand and contract, but also must nimbly shift between phases of the loan lifecycle. Staffers need the capacity to soak in new knowledge to execute on new demands. This need for continuous reshuffling of priorities and employee areas of expertise has become expensive and burdensome on internal resources.
Implementing a rapid deployment team to meet new challenges will alleviate the pressures and stresses of market volatility. Though the battle lines continue to be re-drawn, and the weapons of choice keep changing, these specially trained industry veterans will be ready to tackle an evolving industry with ever-changing needs.
Dan Hoppes is senior vice president of asset management & processing solutions at CoreLogic. He can be reached at dhoppes@corelogic.com.
