“Right now, the way the market has shifted to being a more purchase environment from a refinance environment, that increases [lenders’] costs because purchase loans cost about $900 more to originate than a refinance loan,” she said. “Looking at margins shrinking, what is really prevalent in the members’ minds is keeping an eye on their costs, so they really need to manage their expenses in order to maintain revenues while they are…trying to capture more market share.”
In trying to achieve these goals, Malpocker said lenders have been “trying to figure out, looking at their expenses…how they can move some of their fixed costs into a variable situation so that they can reduce their overhead and be more scalable as values fluctuate.
She said many members are “more open now to outsourcing pieces of the process” such as the quality control function or the underwriting function, or generally “certain processes where they do not have to maintain staff as volumes fluctuate.”
When asked about the compliance challenge in doing this, Malpocker said, “Right now, especially with the CFPB guidelines that came out last year it is very pertinent to make sure you do your proper due diligence in selecting an outsourced provider so…we are looking at providing services to help our lenders to properly manage those vendors appropriately.”
When asked about what the transition to outsourcing is like in the current market, she said, “starting an outsource piece is really a matter of a quick orientation which we walk our members through and then in a matter that is really helpful.
“We suggest to originators is that they have staff…separate from the business units who can ensure that they can execute on their strategic initiative to make sure that a project it gets completed from beginning to end…to get them over that hump from having something where they are doing it in-house to outsourcing it to another provider,” Malpocker said.
Clearly the possibility of layoffs in developing an outsourced business process is a challenge, but whether they have to occur “really depends on your model,” she said, when asked about this. Whether layoffs are necessary generally is “based on their volumes and where they can reallocate staff,” Malpocker said.
For many independent mortgage bankers and community bankers, “The last thing they want to do is to reduce their staff,” so they might consider reallocating staff members with cross-functional skills to areas they feel should be kept in-house, she said.
“If you have cross-functional staff, you can reallocate them to different parts of the organization,” Malpocker said.
She stresses that developing a better business process is not only about reducing costs but also about at the same time achieving incremental growth. So this may include developing new strategies for growing volume in a shrinking market, such as a focus on social media or Internet outreach to borrowers.
Malpocker said another example might be a focus on how to stay relevant given changing demographics of consumers in a particular market.
Although strategies vary by company, she said her organization helps members share best practices. It also aggregates and shares with its membership benchmarking data in various areas and offers some outsourced services internally but also some through business partners.
Malpocker said the most common areas outsourced tend to be underwriting, quality control and appraisal management, depending each individual lenders’ needs, finances and business philosophies.
“The whole goal is to help them build a better business process so that they can better navigate current market conditions,” she said.
This includes making sure they are compliant with new regulations, Malpocker stressed, noting that this “drives a lot of the decision-making.
“Whether it is loan officer compensation or due diligence on outsourced providers, all of that can affect their process, as well as how they need to decide where they are going to put internal resources and where they can outsource,” she said. “When you are looking at redesigning your process to be compliant, you have to look at your resource management and it gets back to what I mentioned before, ensuring that you have someone that has their eye on the ball in executing strategic initiatives.
“You want to make sure you have your eye on who you are outsourcing to but you also want to have your eye on your business model and controlling your costs. It is more costly to do a purchase transaction. The main focus is managing your costs right now, but you have to have a strategy balancing that with the compliance requirements.”
When asked if lenders are being crunched and the combination of shrinking margins due to the shift to a purchase market and new regulations coming down, she said it depends on the lender’s model.
“A lot of our members were always purchase focused. They do refis for existing customers, but they didn’t take their eye off the ball when it came to purchases,” said Malpocker.
Lenders have seen regulations coming and knew there was eventually going to be a cyclical shift in the market, but they did not know exactly when the latter would occur. “That is why we talk to members about being prepared, so when it happens they have an actual plan.”