Few other industries must deal with the level of complexity of home finance. From mortgage origination to servicing, companies are constantly grappling with high volume and stringent regulatory oversight while managing a large cohort of vendor partners. Add to those challenges increased competition in a rising interest rate environment that is choking off refinance business, driving overall mortgage volume down significantly.
When the squeeze is on, lenders must offer higher levels of customer satisfaction, lower costs or both to remain competitive. That requires elevated efficiency to counter the growing complexities, which likely include a more aggressive Consumer Financial Protection Bureau (CFPB). Technology will be the most popular solution, but choosing to implement multi-million-dollar platforms to streamline operations introduces even more complexity before savings are realized.
Two data degrees of separation
All too often though, it’s not the lender’s operation that is the problem. For both mortgage originators and servicers, the aforementioned large cohort of vendors must rely on third-party partners that introduce friction and uncertainty into their process. And automation is only as good as the information flowing through, much of it coming from two data degrees of separation.
For example, a loan processor may use a modern LOS to order a flood certification, title report, AUS decision or data verifications, but once the order has been placed, what if the data doesn’t arrive? On the servicing side, a default servicer will work with a number of third-party vendors to gather collateral valuation, title information, property inspections and field services reports. The servicing platform can place the orders easily enough, but then what?
Lenders and servicers have focused a lot of attention on making their internal process as efficient as possible. Current LOS and servicing software can place orders and receive reports quite well, but they do a very poor job of managing the process in between those events. It’s where their internal process intersects with that of their third-party partners — and the lack of visibility there — that they encounter the failure points that waste time, increase costs and destroy borrower satisfaction.
The result is that they will be less competitive than their peers and run higher non-compliance risk in the current regulatory environment.
The companies that run the highest risk
No company is immune from this challenge, but the pain — and the benefits of solving this problem — are disproportionately higher for a certain class of lender/servicer.
Smaller mortgage originators often deal with this problem by throwing more people at it. If a manager inside the lender’s shop can ride herd on the vendors in process at any given time, the risk of lost or incorrect orders goes down. But as the lender grows, this becomes unmanageable.
Once the lender is operating in several states with multiple branches and a large cadre of vendors, the institution must either open and staff a number of separate centralized processing centers or find a better technology solution. Even then, they are often still operating in a binary environment: either the report they ordered was received on time or it was not.
Servicers of any size could benefit from a better solution, as even the smallest sub-servicers are holding tens of thousands of loans in their portfolio. We don’t have enough people in the industry today to throw at the problems that will result if defaults continue to trend upward in the wake of the end of forbearance.
Why institutions are having trouble solving this problem
You can’t solve a problem until you know exactly what the problem is. In our experience, these are the challenges that both lenders and servicers are facing today. They are hiding in the vendor management function.
Over the past few years, more financial institutions have staffed up their vendor management departments in response to the CFPB’s vendor risk management guidelines. It is reasonable to see these companies, after going to this expense, trying to manage this problem with their internal staff by managing the Service Level Agreements (SLAs) they have in place with their vendors. Unfortunately, there are three significant challenges that stand in their way:
Challenge 1: The time crunch
Both lenders and servicers are under constant time pressure to complete their work. Originators will lose out to quicker competitors, especially in a purchase money market. Servicers, especially those who service government-insured loan products, are under statutory time constraints that give them very little wiggle room.
Finding a problem may be possible for the vendor management staff, but getting it corrected quickly will be difficult. The more often it happens, the less likely the institution will have a favorable outcome as problems tend to multiply.
Challenge 2: Shrinking margins
Margins were tight prior to the COVID-19 crisis and long before the Fed decided to start raising interest rates. In a highly competitive market, margins are the first to be sacrificed, making the problem even worse. This will make it more difficult to afford vendor management staff and make manpower a solution with diminishing returns.
Cost savings aren’t possible when the solution involves throwing more people at a problem. Only increased automation can bring costs down and increase profit margins.
Challenge 3: The industry brain drain
Ask anyone in the HR department of a loan origination or servicing shop and they’ll tell you that a storm is coming. The industry’s workforce is made up primarily of professionals who are now in the later stages of their careers. We’re seeing mortgage executives and workers retiring at record rates.
On the other side, recruiting is a challenge after years of negative publicity that has painted our industry in a poor light. Automation continues to be the solution of choice for growing companies who cannot attract enough manpower to build out their teams.
But unless the automation is specifically designed to solve these problems, it stands little chance of being effective. Going into the lender’s next discussion with a prospective vendor with these challenges in mind will help them better evaluate any solutions that are offered.
Shamit Vohra is Vice-President of Strategic Accounts for Visionet Systems Inc., a New Jersey-based technology and mortgage-services organization.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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