The first signs of a shifting market cycle are already here. Purchase volume has caught up with, and will likely soon eclipse, refinance volume. And the whispers of margin compression are again being heard across the mortgage industry.
The refinance explosion of 2020 wasn’t going to last forever. But it’s been a while since mortgage lenders had to really focus on being competitive in a more challenging purchase market. Already, the traditional cost-cutting strategies of staff reduction or attrition and the introduction of additional tech and automation to the process are being implemented widely.
Another way to maintain profit margins, even when volume and revenue tail off a bit, is by thoroughly revisiting the lender’s traditional service providers. That network of back-office services, title and appraisal providers and others tasked with important (and often costly) elements of the lender’s operation aren’t always as easy to evaluate to ensure top-flight efficiency and productivity. But it can be done, and should, by lenders serious about finding 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 those cases, usually the biggest providers with the widest geographical footprints and best throughput emerge as the “winners.” But size and volume capabilities don’t always guarantee maximum efficiency.
The most adaptable mortgage lenders evaluate their provider network, asking core questions that aren’t 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 during short-term market dips or hiccups, which can impact the lender in multiple ways.
At the same time, is the service provider able to manage the volume currently being processed by multiple providers without losing the ability to offer more granular service in key local markets? Especially when it comes to purchase transactions, there are hundreds of local details, customs and requirements that can be lost by a “central office” provider model, and when it comes to purchase transactions, those missed details can impact the lender’s fallout rate negatively.
Another element of provider service to evaluate is versatility. If a service provider can manage amazing amounts of refinance volume, but can’t also assist the lender with the same level of efficiency and effectiveness when it comes to purchase, the lender essentially has a different service provider on its hands. The costs and time associated with swapping out such vendors, especially when unanticipated, only add to a lender’s expense.
So as they’re evaluating their service network, lenders should assign bonus points to providers who not only check the boxes for a specific kind of transaction, but who can manage purchase and home equity transactions just as effectively. Even providers who can assist with things like commercial or REO transactions or issues can be an asset to lenders with a wide product mixes.
The next point of evaluation seems intuitive, but is often sacrificed when lenders consolidate their networks based upon bandwidth alone. How well does a service provider march to the lender’s tune, rather than dictating elements of the workflow, as some of the largest providers can do? Does the providers technology align with the lender’s process? Are communications between provider and lender easy and secure? Does the vendor maintain or even accelerate the process, or slow it down because of an incompatibility?
Most importantly, how well does the service provider respond where glitches or errors take place? Even the very best third-party providers run into the occasional mistake or mix-up, but only the best providers own those issues and rectify them at even a systemic level if the need is there.
A good service network also makes it as easy as possible for lenders to oversee and monitor them. This is true from a compliance as well as performance standpoint. All indications are that a more aggressive regulatory enforcement trend is swiftly approaching our industry. Now is not the time to have a service provider which handles large volumes of transactions, but has a reporting process that is anything but transparent. It’s been said a thousand times before, but it’s almost past time for lenders to revisit their third-party partners’ compliance programs as well. The failure to do so could lead to an unanticipated cost of catastrophic proportions.
Finally, while it may not need to be a requirement to be a part of a streamlined vendor network in competitive markets, it’s certainly a major bonus when a service provider can provide additional value, such as services beyond their core services that lenders can lean on while cutting other costs.
The title insurance industry, regulated at the state level, is a grand example. Mortgage lenders can expend incredible resources simply monitoring changes at the state, county and municipal level that could impact their TRID expenses and more. But a provider that is accurately and continuously monitoring and reporting on regulatory changes that can impact clients can be an extremely valuable resource itself.
Not sure if a provider that otherwise meets the requirements can help with specialized monitoring, training or other non-core services? Just ask! Usually, the best service providers are more than willing to provide additional value when asked by their core clients, and often at their own expense.
Re-evaluating the compatibility of a lender’s service network is a bit like a homeowner faced with rising energy costs as winter sets in. The homeowner could completely replace the furnace with something newer and more efficient. She could also run it less often or at a lower temperature. Both could be effective. But a significant long-term savings could also be realized by evaluating the adequacy of the insulation in the attic and possibly adding more, at much less time and cost.
To apply the analogy to our industry, mortgage lenders are likely sitting on unrealized and potentially extraordinary savings in the form of reevaluating and properly aligning their service network.
While the merits can be debated, the fact is that ours is an industry based upon multiple participants managing multiple elements of the home-buying transaction. The word “silo” is thrown around quite a bit in that discussion. Much of the time, it’s the mortgage lenders who carefully choose the participants they’ll allow to manage their volume — with particular attention not just to throughput, but how well a potential provider aligns with those lenders — that find significant cost savings on the production side.
Regina Braga is COO at Res/Title.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Regina Braga at [email protected]
To contact the editor responsible for this story:
Sarah Wheeler at [email protected]