The biggest improvement a mortgage originator can make to its back office is bringing in the expertise needed to run an efficient back office, said an executive with one of the leading outsource providers of these services.
Mary Kladde, president and chief executive at Titan Lenders Corp., Denver, said that some of the problems of the past few years are a result of not putting “our best and most experienced people in the back office.”
This is particularly true of firms making the transition from mortgage broker to mortgage banker. Managers of these companies in many cases “don’t know what it is to run a back office until it is too late. And then they don’t know how to hire the best people,” she said.
So the first step in improving one’s back office is to have personnel that understand how to package and sell a mortgage loan to the secondary market investors. Those investors are looking at originator back offices in order to help them manage risk. They want the best practices in place to insure what they are being told they are buying is what they are buying. This is a change from the past, where investors didn’t care if the back office was up to the task.
Ruth Lee, Titan’ executive vice president, adds, empowering that staff to have authority and control in the office goes hand in hand with Kladde’s point.
The industry is having “cultural pangs” shifting from a sales and volume-driven business to one where operations has been given more of a leading role in the process.
Lee recalled when she and Kladde would speak at events for years about application quality and they would be “pooh-poohed.”
Now originators are asking them how to ensure compliance and quality. “When you are talking about protecting your business, you’re not talking about cash flow, you’re not talking about commissions, you’re not talking about sales.
“You’re talking about contingent liability and risk, and counterparty risk and repurchase demand and compliance failures. That shift has really created a time where operations needs to be—I don’t think on top of sales—but it needs to be considered on part with sales,” said Lee.
Rick Seehausen, CEO of LenderLive Network, Denver, added that with all of the changes in compliance, the back office has to “manage a lot more moving parts than it used to have to.”
The company is seeing a lot of demand from its community bank and credit union clients for it to be much more involved in the compliance aspects of the transaction.
Titan’s Kladde declared that sales and operations need to be “symbiotic.” The sales staff needs to realize that if you don’t produce quality loans, the repurchase risk could put the company out of business.
At the same time, operations find a way to get the deal done efficiently and quickly, without stifling sales, she said. Some organizations are so operations-oriented that it restricts sales activities; those businesses can’t survive, Kladde said.
Lee added that for many years people at the point of sale “did not feel any connection with our end product.” Now, with the new regulatory rules, “the point of sale is now going to be intimately tied” to the performance of the loans they create. And for this you need a strong back office.
Besides expertise, the next requirement to improve the back office is the use and understanding of technology, she said. This helps to create transparency and credibility and nothing falls through the cracks.
Part of the problem, Lee said, is “Frankenware”—much of the back office technology is aimed at only one function and so lenders have to cobble systems together. This could result in mismatched data between the system and end loan as errors compound as the information is passed between systems.
Asked if lenders are now willing to invest in the back office, Kladde said she is seeing a cultural shift, one akin to being in a car wreck; after surviving, most people are more willing to pay for a safer car. The same is now true regarding spending on the back office.
Capacity and scale are going to important drivers to keep the cost of producing a loan down, Seehausen said. This impacts the smaller shops, and more difficult for them to manage the technology changes and compliance issues necessary to be a low-cost producer. So for those firms, the cost of the back office will be a focus.
LenderLive’s executive vice president of strategic implementation, Linda Naylor, added one of the problems originators are seeing is the ability to scale up quickly when the market changes. A three-quarter of a point drop in interest rates could spur refinance applications. One of the strategies lenders are adopting is to run a parallel path, she said.
Previously they would completely outsource or completely have an internal staff. Now, with all of the ups and downs, lenders are looking to engage an outsource provider to run a parallel path with their internal team so that when they have to scale up, they can use the outsourcer provider’s capabilities to move quicker and take advantage of market opportunities.
LenderLive recently met with one originator which had commented that it (the originator) could not hire quick enough to handle the volume it wanted to handle when interest rates fell last fall.
There are other opportunities by having a parallel path during slower times, Naylor said. These include that the provider allows the lender to leverage technologies that the outsourcers been able to develop, especially when it comes to the loan quality and appraisal data initiatives being undertaken by the secondary market. In many cases, the smaller firms do not have the resources and so parallel paths give them the IT capacity and expertise they are looking for.
Firms like LenderLive, she said, “make sure we are on top of, and ahead of the game in terms of compliance and regulatory issues.” The changes in regulatory rules are now coming fast and furious. Even with the small product set of today, putting a loan through from an operations standpoint is more complex than ever, Naylor said.
In a parallel path environment, LenderLive becomes “an extension, another operations team within their larger environment,” she said. Any and all changes a company makes in its operational workflow, LenderLive is treated as part of the in-house environment.
“We’re on your distribution lists for all your updates. We’re on your operational calls to identify what are the challenges you are facing from a sales perspective,” Naylor said.
There are those lenders who are stepping up and looking to expand. One of those is Titan client Alpine Mortgage LLC of Bedford, N.H. Managing partner Scott Reid detailed some of the issues in the firm’s conversion from a mortgage broker to a mortgage banker, which took place in April 2010. The company is also adding offices in New England.
The transition was a lot more challenging than Reid anticipated, with one of the biggest challenges being the back office. As a mortgage broker, much of the back office function is taken care of by the wholesale investor.
Initially during the transition, Alpine worked exclusively with Flagstar and that company was very helpful, Reid noted.
But one of the things he discovered is that the back office for a mortgage banker has to deal with “additional moving parts” that a broker is not concerned with. These include underwriting, closing, post-closing, secondary marketing and warehouse line management.
The biggest challenge for Alpine was identifying where its risks were in the mortgage banker model, Reid said. “You don’t originate any differently. The sales side stays the same for the most part.
“But from a back office standpoint, it’s a whole different ballgame,” with finding where Alpine’s risk was and then taking steps to mitigate it as quickly as it is identified. “As they say, 'you don’t know what you don’t know until you know it,’ and in the broker-to-banker transition, there is a certain amount of that,” he explained.
There is stuff that is old hat for a seasoned mortgage banker that the new mortgage banker has never dealt with.
He sees two kinds of risk. The first is the financial risk, including things like buybacks and warehouse line interest costs (especially if a loan gets stuck on the line). Alpine has not had a buyback, Reid said.
The other risk is scale and how the back office is affected as the company tries to expand. That is what Alpine struggled with, because as its volume grew, it had stressors on internal systems and staff. These added to the company’s costs.
Alpine was looking to grow in a “strong and controlled manner” and it is important to Reid that its back office is able to operate smoothly and offer a high level of service to its customers, referral partners and loan officers.
This scaling risk does not occur for mortgage brokers, because the investor is handling of the back office function. It ends up taking management’s eye off of other areas it needs to watch, Reid said. All this occurred while Alpine went from one office to four (and a fifth soon to open).
After some trial and error, Alpine became a client of Titan.
Titan’s Lee summed it up: “Mortgage bankers are going to have to invest in their back office. They’re going to have to invest in personnel, they are going to have to invest in technology.”
