In 1997 the residential mortgage market reached a milestone that many brokers, correspondents, and originators never thought would be exceeded. These residential mortgages jumped to nearly $4 trillion in unpaid valuation. In 2006 this same market, depending upon the research organization selected, approached $10 trillion in outstanding loans with projections in another 10 to 12 years reaching $20 trillion.
Furthermore, the mortgage banking industry now materially impacts the national economy not just with the estimated 600,000 jobs, but a holistic sourcing value chain that encompasses builders, county governments, Silicon Valley startups, home-improvement retail distributors, and even the largest of the Wall Street broker-dealers. Impressive? Without a doubt! A driver for the national economy? Just look at the latest concerns from the Federal Reserve chairman regarding interest rates. Efficient and adaptable? Not really.
As the volume of new originated and refinanced mortgages hovered around historical highs of $3 trillion per year during the early part of this decade, mortgage banking and operational executives were strictly concerned with volumes and keeping the pipelines full. Driven by an easing of credit standards, the number of primary and secondary homes paid for using exotic finance instruments continued to expand with national home ownership exceeding 70 percent. Like the “dot.com” adjustment in the equity markets, mortgage bankers are now having a reassessment of the drivers that have promoted their firms and employees into the national eyes.
When the markets began their current steady decline in late 2005, back-office origination, settlement, servicing, and customer service were adopting primary technology improvements – staying away from robust process improvements and globalization of personnel. With 2006 origination volumes now around $2.4 trillion, new home starts are at a six-year low and delinquencies and foreclosures rapidly rising, mortgage leaders throughout the sourcing cycle are seriously examining operations and divisions that were once considered “core processes,” including the widespread use of global personnel and e-mortgage adoption.
Even though the globalization of mortgage workforces has been on-going since 2000, the extent of these efforts has been fragmented and the results mixed. In general, industry leaders have struggled with five major classifications of adoption:
- Evaluation and Business Case: What are the business drivers? Can a proper feasibility analysis be constructed and validated that the organization not only agrees with, but will continue to support after it is executed? Where will these skills come from to ensure an objective analysis?
- Feasibility and Strategy: What risks will be assumed and how with the real or perceived lack of control be integrated into our governance of the remote or improved processes? Will the organization be able to be disciplined and rigorous in the deployment and sustainability of best-in-class functionality?
- Selection and Service Management: Can the organization clearly delineate the service models and levels needed to promote delivery and regulatory conformance? How will adjustments be made as the business changes when the processes are onshore, offshore, captive, or outsourced? What model or models should be adopted for improved margins and profits? What organizations are best prepared and proven for our needs? Can quality be maintained and improved while achieving productivity enhancements?
- Governance and On-going Management: How will our organization manage a “vendor” relationship that is often times described as adversarial if outsourced relationships are adopted? What is the best approach for conflict management, collaborative delivery, and governance oversight?
- Transition and Monitoring: Who will handle the transition from our current “As-Is” state to a more efficient “To-Be” set of processes capable of growth and continuous improvement? What are the realistic set of expectations, measurements, and monitoring arrangements that must be adhered to for verifiable results – not just theoretical targets?
For unsure or even jaded mortgage personnel, the good news is that the industry is not the first to struggle with this uncertainty (i.e., risks). Many of these questions have been answered by cross-industry professionals and organizations since the early 1970’s. The foundational challenge remains our ability to ask the right question to those with the relevant experience and indisputable independence.
Uncovering the Lessons Learned
Historically, mortgage organizations employed two generic strategies for their realization of global workforces (e.g., offshore, onshore, captive, or outsourced) – 1) utilize their existing, large vendor relationships to decrease workforce costs, or 2) conduct a “lift and reestablishment” operation with company owned centers in remote locations like India, China, and the Philippines. A third option began to gain acceptance in 2001 with the outsourcing of non-core functions to traditional providers that included IBM, EDS, ACS, CSC, and Accenture. Yet, the five major classifications of questions for the mortgage industry generally remained unanswered, non-optimized, or from the post-implementation results achieved, unimpressive.
Just as front-line origination, settlement, and servicing professionals continue to be recognized for their increasingly specialized capabilities, mortgage organizations seeking to embrace lower cost process and resource returns must acknowledge the discrete knowledge specialization and delivery frameworks within mortgage business process and IT advisors. As the mortgage industry now faces an emerging profit crisis, executives are now faced with onshoring and offshoring for long-established core processes in an effort to gain efficiencies and flexibility. As a result, the sourcing techniques and methods previously utilized for non-core functions are insufficient for highly-visible and customer facing practices and procedures. A failure with competitively differentiable process transition minimally means unwanted media coverage, government oversight, and shareholder action.
To ensure that the decision to adopt higher margin operating models supported by global resources and processes is successful, industry executives will need to look to the lessons learned inside and outside the market niche being served. Vendors and consulting organizations have already recognized this delivery shift and are repositioning themselves using marketing and media campaigns. These campaigns are being offered as the experiential knowledge needed for core-process definition, selection, transition, and governance.
To discover those independent advisors that possess substantiated knowledge capital and personnel capable of delivering best-practices and not just best-in-class, mortgage professionals must methodically source the professional onshore /offshore organization before determining the specific global resource and process implementation. For the mortgage executive and buyer of services, this translates into a classic FUD (i.e., fear, uncertainty, and doubt) – “Who can help deliver measurable results versus those who want to assist?”
Realizing a Course of Action
Make no mistake about it; staying the steady-state course of domestic resources and established processes is not an option. If you have your doubts, just look at the continual and aggressive M&A expansions being undertaken by Wall Street firms into the mortgage industry. The result will be a more efficient, robust, highly scalable, and compartmentalized process delivery able to scale up or down to market shifts. An example of this trend can be witnessed with the rankings of the top 2006 underwriters for subprime MBS (mortgage backed securities) which show nine of the top 10 being traditional Wall Street firms leading this market niche in volume, share, and compounded growth. The collective GSE share of MBS’s has fallen from 70%+ prior to 2000, to under 40% this year. With the billions of dollars already spent on acquisitions in 2006 coupled with statements of future direction, 2007 looks to hold a great many more surprises for established mortgage insiders and firms.
Therefore to ensure the best advisors are enjoined to realize results while adjusting for proven competitors, several key macro principles must be adopted:
- Flexible Framework Supported by Preparation: A comprehensive but flexible framework must be available that promotes acceptance and collaboration from all corporate stakeholders. Using interviews, training sessions, and experiential research, organizational consensus is obtained quickly and with superior insight.
- Solution Definition with Strategic Options: With elements of the baseline established, a clear operating (including financial) model of the current and future state must be meticulously identified. Suppliers, their capabilities and offerings should be mapped against potential models and business case requirements. Using facilitated and structured confirmation processes, organizations incrementally achieve buy-in, understanding, and operating clarity.
- Clear Understanding of the End-State: To leverage the lessons learned and best practices, a pragmatic series of incremental designs must be completed and approved by not just the advisor, but by the stakeholders and operational personnel. Clear change management, service levels, and organizational migration techniques must be adopted as the organization readies for formalized evaluation methods with the previously identified suppliers. The goal of the selection effort must be a “win-win” effort as part of the negotiated operational contract – it’s not just about price but a long-term partnership.
- Changeover can ONLY be Accomplished with Holistic Governance: Without a robust and adaptable governance model lead by experienced and proven transition personnel, post-selection risks may significantly increase resulting in missed opportunities, delinquent milestones, cost overruns, and underperforming returns. Teams unfamiliar with managing complex, geographically diverse, and organizationally discrete efforts can impose too lax or too stringent practices thereby stifling productivity and innovation. The greatest risk implications (e.g., financial, operational, and systemic) interfering with results are not just in the determination and selection effort – it is post transaction.
Without a “rules of engagement” guiding set of principles, actions and changes can overwhelm ill-prepared organizations resulting in poorly performing captive and outsourcing relationships, unnecessary conflict, and expensive change orders. Advisors and pundits who lack a holistic approach for the sourcing customer and provider, will further hinder mortgage firms struggling with results, profits, and viability.
We’ve briefly covered a complex sourcing arrangement that can last years. A great deal of work for your organization must still be undertaken to determine the proper fit and essential criteria for advisor and sourcing selection. Keep in mind, if the status quo is no longer viable for business as usual processes and personnel, why would your vendor and sourcing relationships remain the same? You decide.
