As mortgage lending volumes decline and regulatory costs climb, potential cost savings are tempting lenders and servicers to outsource more of their operations.
Lenders remain reluctant to outsource for control and liability reasons. But with volumes down and compliance expenditures up, more have, particularly among midsized firms with limited resources.
"Midtier players are willing to look at anything that might save them money right now. This cycle is one of the worst. Companies are looking at it out of necessity. If it means keeping the door open, they will do it more than ever," says Brian Koss, EVP at Mortgage Network, a retail lender that outsources post-close quality control.
The trend marks a shift in lenders' motivation to use business process outsourcing. Traditionally, lenders farmed out overflow work during busy periods, such as refinancing booms.
"The mortgage industry compared to other industries has been rather slow to embrace outsourcing. However, there is now a growing trend toward lenders looking for ways to cut costs," says Judy Wheatley, SVP, compliance, Indecomm Global Services.
Now, lenders are contracting out different functions to save money, even as they bring back in-house certain work previously handed off for capacity reasons.
"It really has changed in terms of why people do it. Over the past couple of years, and historically, we've seen people expand outsourcing based on how much business they can do. It was a lever point," says Jeff McGuiness, CEO of the Lenders One mortgage cooperative, a group which has a fulfillment services arm. "However, most recently it really has been done to make sure all compliance components are administered as efficiently as possible to control cost variables."
Outsourced compliance systems lenders can use on a per-transaction basis have become particularly crucial for the midtier market, says John Robbins, who is one of the executives working on launching Mortgage Collaborative, a separate mortgage cooperative that lacks an outsourcing affiliate.
Use of outsourcers' compliance systems may fall short of offering overall costs savings, but they will prevent what might otherwise be an unmanageable increase in costs related to new regulations and associated repurchase risks, Robbins says.
Lenders "can't afford to save money by cutting the compliance side," he says, noting that the volume of information involved simply is too large to handle manually, and the midtier's loan origination systems alone generally lack the compliance functions to handle new rules, except through integrations with third-party compliance software.
Exceptions may be companies like loanDepot that have enough of their own technology to handle today's operational demands efficiently. "We're trying to create a conveyor belt so services can flow through faster," says Anthony Hsieh, CEO of loanDepot, and a mortgage industry veteran with a lot of experience with online lending.
"We really don't see a ton of cost savings yet [from outsourcing]. Maybe we're just blinded, but we'd rather have the control," he says.
Outsourcing is "not right for everybody, but it makes sense for companies that are trying to decrease their fixed costs in a down market. I've never seen the mortgage industry more inefficient than how I see it now," says Hsieh, noting that full-time employee efficiency is "the worst I've ever seen it, particularly when it comes to underwriting."
One particularly costly task that some lenders are considering outsourcing is underwriting. But given underwriting's close ties to revenue, lenders that can afford to keep it in-house tend to refrain from outsourcing underwriting for control and liability reasons, says Koss, who works for a retail-only lender.
"As desperate as everyone is to save money, sales come first," he says.
Other types of loan reviews are increasingly being outsourced, though, particularly in third-party channels where companies buy correspondent loans or fund wholesale ones. Some lenders have grown more interested in developing these channels as volumes have waned.
"Everybody's out there scrambling for a larger market share," says Wheatley, noting that this is driving an increased lender interest in outsourcing certain correspondent functions.
Third-party origination channel reviews are easier to outsource because they are "more an audit function than an underwriting function," and they are noncustomer facing, says Stan Middleman, CEO of Freedom Mortgage, Mt. Laurel, N.J., a national lender that operates direct lending retail, correspondent purchase and wholesale channels.
Freedom outsources some of its functions like file review for loans it purchases through its correspondent channel, but it also has begun providing its own outsource services along the value chain "from origination to servicing" for external clients.
The tasks that get outsourced vary between lenders, but generally reflects a lot of change in one direction or another, he says. Some midsized lenders are seeking to move away from servicing because of increased regulation in this area. But others, including Freedom's first outsourcing client, continue to service their own loans and contract out the origination process from funding to closing, for customer retention reasons.
"We see a lot of folks pulling things like underwriting back in-house, but anything that is…a commodity is outsourced," says Deb Aydelotte, president of Lenders One affiliate Altisource Fulfillment Operations (parent company Altisource Portfolio Solutions also owns Lenders One).
Lenders are often finding outsourcers have the automation or offshore staff to handle certain processes more efficiently than they can, but there is a limit to what is effective to outsource. Koss finds it helpful to have a third party handle its post-closing quality control on a checklist basis, but prefers to keep all decision-making roles in-house.
The processes that can save lenders money via outsourcing vary depending on the company. "I can't say it's underwriting or quality control, it depends on the client and function," Aydelotte says.
"There are those that would say underwriting is your highest expense and it generally is the highest paid in an operation, but that cookie-cutter response just doesn't work for everyone," adds McGuiness.