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

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

February 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
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
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
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