It may not be widely recognised, but a growth sector of the mortgage market is outsourcing by lenders of post-completion mortgage processing operations.
According to a recent report from Datamonitor – ‘Mortgage Processing Outsourcing: Feasibility for the UK Market’, the third party mortgage processing sector has grown at an average annual rate of 8.4 per cent since 2002. Starting from a modest base, Datamonitor reckons the sector was worth almost $219 million in 2006.
Datamonitor attributes the growth in mortgage processing outsourcing (MPO) to a number of factors. Chief among these is a drive by lenders to reduce costs while securing access to a ready-made servicing infrastructure with a non-fixed costs base. MPO, Datamonitor asserts, can also serve as a critical differentiator at a time of increasing coalescence among lenders’ offerings.
While this may be music to the ears of the MPO providers – which includes firms such as HML, Vertex, Scarborough and Crown – it isn’t all good news as MPO has not taken off substantially among mainstream lenders. Datamonitor attributes this to a perception among this group that outsourcing carries a number of disadvantages. It also cites recent relationship difficulties involving some big names, and a forthcoming investigation into overseas outsourcing by the Financial Services Authority as a further drain on confidence.
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On the flip side, Datamonitor acknowledges that MPO has proved popular in the fast-growing specialist sector where lenders – including many of the investment bank entrants – have been quick to embrace it. This group, with business models that rely on efficient securitisation-friendly processes, sees MPO as complementary to their other operations.
Datamonitor anticipates no early end to this polarisation in attitudes, and concludes that while expansion is likely, the MPO sector will remain a niche market in the short term.
Outsourcing connection
For intermediaries, the relevance of this may not be immediately clear. But there is a connection. The way in which a customer is treated by a lender may play a significant part in determining whether or not they return to the referring broker for advice. Given that brokers have limited influence over their clients’ post-completion experience, they should take an interest in their lenders’ choice of MPO provider.
Lenders considering MPO need to be clear as to their reasons, the potential benefits and the risks. Management must also have a clear understanding of the basis on which any outsourced arrangement will work, both at a relationship and service level. It is also important to recognise that outsourcing is perceived in different ways by distinct groups of internal and external stakeholders.
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Entering into an arrangement with an MPO provider means they assume responsibility for a range of important post-completion activities. These are likely to comprise mortgage account administration, payment processing, collections, litigation management and data reporting.
Each of these has the potential to impact a lender’s ongoing relationship with its customers and, particularly in the specialist arena, its intermediary partners. The basis of any MPO arrangement must therefore be clear from the start, as must the fundamental requirement to have in place strong management information reporting and a service level agreement to monitor performance.
Advantages
There are several measurable advantages to a lender outsourcing its mortgage processing functions. First, it helps reduce the business’ overall cost base through shared efficiencies and economies of scale. This is achieved by reducing operating overheads and by making more efficient use of fixed costs, such as releasing expensive office space. Further savings are achievable by other lenders using the same outsource provider.
Second, a good choice of MPO provider gives access to a proven centre of excellence for this type of specialised outsourced activity, allowing the lender to draw upon the experience, knowledge and expertise of its partner.
Third, the lender is able to concentrate on developing its core commercial competencies of product innovation and building distribution.
Fourth, it allows the lender to channel its investment in training and development programmes to employees in new business-focused functions. And fifth, it offers the lender the flexibility to respond to changing work flows and pressures. It is, after all, easier to scale up or down with an external provider than it is to adjust internal employee headcounts.
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Together, these benefits can add real value in both financial and operating terms. The flexibility delivered also offers great advantages – particularly to smaller lenders competing in an aggressive market – by allowing them to focus resource and expertise on core new business objectives.
Risks
A risk associated with outsourcing any function, but especially a lender’s mortgage processing facility, is the sense of loss of control or abrogation of responsibility. This can be felt equally by customers and employees, and management teams are well advised to treat it seriously when considering MPO.
There is also a danger that employees could be unsettled by thoughts of outsourcing ‘creep’, whereby no job or function is thought safe in what is often perceived as a ruthless pursuit of cost-cutting and improved business efficiency. Management can address these concerns by taking certain prudent steps.
Fundamental to any successful MPO arrangement is a well-drafted and robust service level agreement. This ensures that both parties clearly understand the operational and commercial basis of the relationship, and provides qualitative and quantitative benchmarks against which its performance can be measured and tracked. This can be enhanced through the use of tracking technology to provide real-time data on the performance of customer accounts.
Data and the flow of data are, of course, essential in any MPO arrangement. It is the fuel that powers the outsourcing engine. The lender must therefore ensure customer account information is complete and accurate. Simple but avoidable errors in data can seriously hamper the performance of the arrangement, and can cause unnecessary friction between the parties. For its part, the MPO provider must ensure it provides the lender with regular management information reporting of the highest quality.
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The relationship can be made more effective and further bolstered by the lender deploying employees with specialist skills onsite at the MPO provider’s offices. These do not have to be permanent appointments, and even short-term tactical deployments can significantly help improve efficiency and shared understanding.
Critically, both parties to the MPO arrangement must show and demonstrate absolute commitment to legal and regulatory requirements and obligations. But this should not be taken for granted. It must be systemised by embedding a rigorous audit programme in the operating rhythm of the arrangement. This will validate compliance with the prevailing rules and regulations, and will provide stakeholders with greater confidence.
An effective communication process is also essential. Regular dialogue between the management teams of the respective MPO partners will help keep problems containable and to a minimum. It also provides an opportunity for sharing ideas and ways to improve the arrangement.
Ongoing communication between the lender and its employees and customers is similarly vital. This will help manage expectations while ensuring the rationale behind the decision to outsource is understood. In many instances, the customer will see their lender and the MPO provider as one and the same. But it is paramount that this does work in any way to cloud or diminish the customer’s ongoing relationship with the introducing broker.
There are a number of key messages to understand when considering MPO as an option:
- Outsourcing does not mean an abdication of responsibility.
- Both parties to the arrangement must strive for continual process improvements.
- Their commitment to customer service, compliance and regulation must be unequivocal.
- They should look to provide increased benefit by sharing economies of scale.
- A credible audit review programme and the exchange of management information are key.
- Regularly review outsourcing options and alternatives to ensure the business – and its employees and customers – are being best served.
- Communicate with stakeholders both inside and outside the business.
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