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National Mortgage Professional
Oct 21, 2007

Outsourcing: Managing outside the boxDoug Thorpebudget, post-close outsourcing, secondary market loan delivery All the troubling mortgage news these days sent a wave of reaction throughout the industry. As was predicted, the sub-prime bubble absolutely blew apart. Lenders of all sizes scrambled to assess the impact and perform some damage control. But what else is new? More importantly, what are you doing now? Despite the direct earnings impact that comes with such a volume decrease in so short a period of time, some lenders are viewing the slowdown as a welcome pause. After all, many shops reported record high peaks just two years ago, when systems and people were stretched to the max. So, now is the time to dig in and regroup. With fewer loan applications running through the pipeline, many lenders have pulled out their strategic plans and capital budgets once again. Marketing plans that fell by the wayside with larger-than-ever expected volumes are now being re-evaluated for immediate implementation. The old axioms of Business 101 are back in vogue. Cost-conscious owners and executives have begun aggressively assessing their core competencies and identifying key staff members to retain in the face of shrinking profits. None of this should spell gloom, however. What it does suggest is simply a return to a more normalized business climate, where the mix of refinance and purchase money transactions are in better harmony. It also suggests a more consistent approach to business analysis and operating efficiencies. One recurring theme is service outsourcing. During the volume frenzy of the past, two interesting forces were running somewhat opposite one another inside the mortgage industry. First, the notion of post-close outsourcing was growing among vendor firms willing to develop and package a service bundle to support secondary market loan delivery. A number of reputable and viable firms have either opened new business units or added this package to their market offerings. However, with the huge increase in loan volumes over the same period, more and more originators found themselves simply too busy to consider a significant operational change to outsourcing. The old adage about not changing one's horse midstream made good business sense. Now, with the market settling back, managers are also reconsidering the outsourcing proposals that had formerly lain dormant on their desks. Modern managers tend to want to see bottom-line impact. Careful financial analysis is used to define the proposition and determine its potential return. However, the final analysis of operations outsourcing carries a special dimension, unlike other, more routine corporate decisions. There are several additional points to explore. Outsourcing still (and always will) represent a significant psycho-emotional decision for the senior executive. Once all the cost-benefit analysis is done and all the numbers have been crunched, the final decision will center on just a few key points. The business manager struggling to balance the proverbial "man-versus-mission" analysis will find himself asking the following: -Can I really afford to let go of some of the people who have carried this firm so far? Cutting fat in times of slim budgets is one thing, but I probably need to consider cutting some muscle to really make this outsource proposition work. -If I go through with the outsourcing, can I trust the vendor who has presented me with this opportunity? I do not want to lose control of my back office. I need to know where things are and what is being done. -How closely can I work with these people to be sure my loans are being handled properly and in a timely manner? Stuff happens, and everyone is human, so how will errors be handled? All of these questions deserve serious consideration and review. While some golden rule would be nice to have to get a guarantee on the answers to the above questions, the truth of the matter is that these questions become personal choices. Anyone entertaining the idea of outsourcing must be willing to make a committed decision whether or not to move forward. Any form of fence-sitting will doom the venture from the start. Also, consider the technological impact of outsourcing. Or, said another way, do not get caught in a situation where the technology seems to be the key driver. After all, outsourcing of the post-close process should be centered on getting the transaction done accurately and within prescribed timelines. Truthfully, there is only so much technology that can be applied to this equation. Under current and prevailing delivery guidelines by all of the major lenders, investors and correspondents, the proper handling of the loan file itself is more vital than any data exchange or other technological advancement. Yes, there are ongoing initiatives to enhance and streamline the flow of mortgage documents. Yes, there are efforts to make things less paper intensive. Yes, there are proposed standards. And yes, most of the industry will welcome electronic execution and delivery. But, reality suggests we are still some time away from all of these opportunities. More so, the adoption cycle of significant technological change has proven to be slow and cumbersome in the mortgage world. In addition, without a true standard of delivery, we are also subject to technological busts. The dot com frenzy in the financial markets helped prove that some great technological ideas might not survive without solid delivery of true benefit to the user and customer. So how can someone make an informed and prudent decision about selecting an outsourcing services company? First, of course, do your analysis. Make those careful calculations and evaluations. Next, perform some serious due diligence. Check out references and ask tough questions that cover your personal concerns about the matter. Interview the management and the key personnel from the vendor firm. Carefully review the outsource services agreement. If the vendor you are considering cannot or will not provide a true service-level agreement, select a firm who can and will. Lastly, a prudent management strategy would be to design a trial period from which a final decision could be made as to the vendor firm's capabilities. Using a subset of actual loan originations to forward to the outsource company for processing could prove invaluable to the long-term success of the relationship. For the last 150 years, economists and business academicians have studied business cycles. Interestingly, there is likely no one in today's world who understands the impact of cycles in business more than a mortgage banker. Walk up to a mortgage banker or broker, and the first few words out of his mouth will have something to do with interest rates and predictions of what is to come. The cycle we have just finished has brought us to a period of slower volume and fewer transactions. Management decisions will shift to cost control and ways to sustain the profit margin. Nothing can impact those decisions more than a true visit outside the box to consider outsourcing. Go bravely and cautiously, but also informed. Doug Thorpe is president and CEO of Post-Close America, a Houston-based operations solutions provider specializing in mortgage outsourcing. He may be reached at (281) 768-6100 or e-mail [email protected].
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