The first signs of a changing market cycle are already there. The volume of purchases has caught up with the volume of refinancing and will likely soon overshadow it. And the whispers about margin compression can be heard again in the mortgage industry.
The refinancing explosion of 2020 would not last forever. But it’s been a while since mortgage lenders really needed to focus on competing in a tougher buying market. The traditional cost-cutting strategies of downsizing or downsizing as well as the introduction of additional technology and automation into the process are already being implemented to a large extent.
Another way to maintain profit margins even if the volume and sales drop a little is to do a thorough review of the lender’s traditional service providers. This network of back office services, title and review providers, and others tasked with key (and often costly) elements of lender operations is not always that easy to evaluate to ensure world-class efficiency and productivity. But it can and should be done by serious lenders to find every way to alleviate the pain of shrinking margins.
Traditionally, many lenders consolidate their service network in times of market change or even decline. In these cases, the largest providers with the largest geographic presence and the best throughput usually emerge as “winners”. But size and volume functions don’t always guarantee maximum efficiency.
The most adaptable mortgage lenders evaluate their network of providers and ask key questions that are not always defined by size. Is the provider able to handle large volumes, but are they also flexible and adaptable to changing conditions? Some of the largest providers show decreased efficiency in the event of short-term market downturns or problems, which can affect the lender in a number of ways.
At the same time, is the service provider able to manage the volume currently being processed by multiple vendors without losing the ability to offer a more detailed service in the main local markets? Particularly in purchase transactions, hundreds of local details, customs, and requirements can be lost through a “head office” vendor model, and in purchase transactions these missed details can negatively impact the lender’s fallout rate.
Another element of vendor service to be assessed is versatility. If a service provider can handle astonishing refinancing volumes, but cannot support the lender with the same efficiency and effectiveness when making purchases, the lender basically has another service provider in hand. The cost and time involved in replacing such providers, especially if they are unforeseen, only add to the cost of the lender.
Therefore, when evaluating their service network, lenders should award bonus points to providers who can not only tick the boxes for a particular type of transaction, but also manage purchase and home ownership transactions just as effectively. Even vendors who can assist with business or REO transactions or problems can benefit lenders with a broad mix of products.
The next rating point seems intuitive, but it is often sacrificed when lenders consolidate their networks on the basis of bandwidth alone. How well does a service provider adapt to the voice of the lender rather than dictating elements of the workflow like some of the largest providers can? Does the vendor’s technology match the lender’s process? Is communication between provider and lender easy and secure? Is the provider keeping the process going or is it even speeding it up or is it slowing it down due to an incompatibility?
Most importantly, how well does the service provider react if there are any glitches or errors? Even the best third-party vendors occasionally make mistakes or mix-ups, but only the best vendors have these problems and fix them on a systemic level when necessary.
A good service network also makes it as easy as possible for lenders to monitor and monitor them. This applies from both a compliance and a performance perspective. All indications are that our industry is rapidly approaching a more aggressive regulatory enforcement trend. Now is not the time for a service provider who processes large transaction volumes, but a anything but transparent reporting process. It’s been said a thousand times, but it’s almost time lenders rethink their third-party partners’ compliance programs too. Failure to do so could result in catastrophic unforeseen costs.
While being part of an optimized network of providers may not be a requirement in competitive markets, it is certainly a great advantage when a service provider can offer added value, such as services that go beyond its core services that lenders rely on can be reduced while other costs.
The state-regulated title insurance industry is a great example. Mortgage lenders can expend incredible resources simply by monitoring changes at the state, county, and township level that could affect their TRID spending and more. But a vendor who closely and continuously monitors and reports on regulatory changes that can affect customers can be an extremely valuable resource in and of itself.
Are you not sure whether a provider who otherwise meets the requirements can help with specialized monitoring, training or other services that are not part of the core business? Just ask! Usually the best service providers are more than willing to add value to their core customers’ request, often at their own expense.
Re-evaluating the compatibility of a lender’s service network is a bit like having a homeowner faced with soaring energy bills during the winter. The homeowner could completely replace the oven with something newer and more efficient. You could also run it less often or at a lower temperature. Both could be effective. But also by evaluating the adequacy of the insulation of the attic and by possible additions with significantly lower expenditure of time and money, considerable savings could be achieved in the long term.
To apply the analogy to our industry, mortgage lenders are likely sitting on unrealized and potentially extraordinary savings in the form of re-evaluating and properly targeting their service network.
While the merits can be discussed, our industry is one based on multiple participants managing multiple elements of the property purchase transaction. The word “silo” gets thrown around a lot in this discussion. More often than not, it is the mortgage lenders who carefully select the participants they allow to manage their volume – with particular attention not only to throughput but also to how well a prospective vendor works with these lenders – that provide significant cost savings in production achieve side.
Regina Braga is COO at Res / Title.
This column does not necessarily reflect the views of the editors of HousingWire or its owners.
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