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The evolving mortgage broker: Dissolution, revolution or evolution ... you choose!

National Mortgage Professional
Feb 28, 2007

Banks turning to mortgage BPO services to address market challenges: Effective internal delivery grows more difficult as market conditions continue to deteriorateAndy EfstathiouBPO Recent press reports have catalogued the continuing deterioration of market conditions in real estate markets and the mortgage industry. This has been a global phenomenon, as real estate markets have cooled in Europe, Australia and the United States. In response to this trend, mortgage banks have been considering options to control costs, manage risks and reduce the impact of large volume swings in their business. Increasingly, banks are looking at third-party service providers to see if there are credible benefits to be gained from externally provisioned services. Despite strengthening drivers for outsourcing, overall, it has shown a slowdown in activity during the past year. Customers are using a disciplined approach to service acquisition, which is not surprising, considering that industries such as banking, which has the highest propensity to outsource of all industries, have been outsourcing information technology and select processes for close to 40 years. Banks have also been early to offshoring, as evidenced by Citibank's outsourcing to India in 1986 and then setting up its own captive in 1991. The slowdown in contract signings this past year is the result of customers taking a considered approach to solving very complex business challenges using business process outsourcing (BPO) services. In contrast, mortgage BPO has shown strengthened activity during the past year. Challenges in banking Globally, the banking industry is facing great changes in regulatory oversight. Basel 2, SEPA, Check 21, SAS 70, to name a few of the key regulatory changes mandated, will necessitate that each bank redesign its core systems and operational delivery capabilities. These regulations change the underlying bank processes, such as payment processing. Reconfiguring systems will not be possible and system conversion will be necessary. This will be true regardless of whether banks do this in-house or not. These regulatory changes necessitate operational transformation; a lift-and-shift approach is not an option. Banks need to form a point of view on what the new operational bases of competition will be. NelsonHall's conversations with banks show that they understand that this is not a best-of-breed selection process and that execution cost take-outs matter less than time-to-market and flexibility. Unfortunately, years of cost competition and outsourcing have hollowed out banks' abilities to internally develop, maintain and operate custom systems. Given these constraints, outsourcing is a logical choice. However, many past outsourcing deals have not delivered the anticipated results. In most of those deals, the bank transferred an existing platform. Outsourcing as part of a system conversion is riskier and subject to more intense business review. Changing the mortgage process Mortgage banking is deteriorating, and many banks are exiting the market. The remaining players are trying to adapt to changed market conditions. Banks are looking to outsource to mortgage process providers that help them to meet the challenges of today's marketplace. NelsonHall's interviews with banks show they are looking for five key benefits from mortgage processors: 1. Conversion of fixed cost to variable cost through transaction-based pricing and rapid scaling of services; 2. Cost reductions of at least 20 percent with continuing cost reductions over the next five years; 3. Increased speed of execution - As lenders compete for a shrinking pool of business and conditions deteriorate, executing quickly is a key competitive advantage; 4. Re-engineered processes to enhance straight-through-processing and data access; and 5. Platform flexibility, compatibility and improvements - the ability to integrate legacy platforms, while adding functionality over time. To achieve these benefits, mortgage processors are developing and delivering new bundlings of processes, as well as new features and functionality. Instead of segmenting services by borrower type, vendors are creating offerings segmented by process type. For example: origination-sales, origination-fulfillment, administration-default management or administration-payment services. Not only are vendor offerings changing, but vendors are changing. Instead of remaining highly localized geographically, vendors are buying regional vendors and product type specialists to incorporate them into a globally delivered, industrially hardened set of service offerings to create the necessary enablers and benefits. In fact, for the past 24 months, merger and acquisition activity among third-party mortgage processors has spiked. At the same time, divestitures of mortgage processing operations by firms exiting the mortgage processing business has also spiked upward. These activities will ensure both consolidation and globalization for the industry over the next five years. Interestingly, despite high interest in offshoring, today's offshore delivery market remains very small (less than one percent of total global mortgage service delivery). The shift to image-based mortgage documentation and low telecommunication costs will drive the move to offshore delivery. The least pressure to offshore processing comes in origination-sales services, despite its high cost. However, demonstrated success in driving sales will move that process offshore, if pilot projects succeed. In banking, success depends on the ability to adapt to a changing environment. The mortgage market is changing and so must the processes that service that market change. Cost pressures and access to talent have made it imperative for banks to engage with third-party processors to deliver mortgage processes in a flexible and dependable manner, while reducing a banks time to market. This type of process change necessitates increased due diligence. After all, if you are going to bet the bank on new processes and partners, you had better be right. Andy Efstathiou is the director for NelsonHall's banking benchmarking and sourcing program. He may be reached at (617) 520-6699 or e-mail [email protected]
Feb 28, 2007
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