Home Lenders Face a Smaller, Purchase-Driven Market

Mortgage servicing flaws and banks' efforts to correct them garnered much attention last year. Less obvious has been the need for process improvements on the origination side of the business.

In 2011, lenders must retool their loan-production engines and strive for greater efficiencies, observers say, in an environment of less volume, more regulation, fewer loan products and tougher competition.

The market's changing dynamics will require a more nimble operation, one that is differentiated by customer service and speed.

"People are realizing there is money to be made in originations, and I think the play is going to be who can do it the cheapest and with the best service," said Joseph Pepe, the chief administrative officer at RoundPoint Financial Group, a loan originator and servicer in Charlotte, N.C.

The latest forecast by the Mortgage Bankers Association is for total one- to four-family residential mortgage origination volume to drop 36% this year, to about $967 billion, from $1.51 trillion in 2010. These numbers would compare with roughly $2 trillion of mortgage loan volume in 2009. Looking out to 2012, the MBA expects volume to pick up slightly, to $981 billion.

What is more, refinancings, which are less expensive to originate than purchase loans, are expected to fall to 36% of all originations, from 69% in 2010. In 2012, refinancings are expected to make up less than one-quarter of all originations.

Not only is volume down from the housing market's peak but also the types of loans lenders are willing to make are fewer.

Products like hybrid adjustable-rate mortgages and stated-income and alternative-A loans are not as easy to come by as they once were. Regulations enforcing the Dodd-Frank Act are expected to restrict many lenders to plain-vanilla, conventional mortgages. This would mean lenders would have to work harder to differentiate themselves.

"One of the ways lenders in the 'old world' would compete for business [wa]s to offer different products," said Michael Fratantoni, the MBA's vice president of research and economics. "I think everybody is going to be offering the same set of products."

Terry Moore, managing director of North American banking practice at the Accenture consulting firm, said mortgages have become commoditized as never before.

"It's going to get a lot closer to an analogy of the manufacturing of a product," he said. "Competition is going to be fierce, and that goes back to: Whoever can run one of the most efficient loan origination processing factories is … going to be delivering more return on investment and more profitable revenue than others."

Some larger lenders have been considering technology upgradings or outsourcing more processes.

"If you back up [to] a number of years ago, people were making money, and there wasn't as much focus on the operating model, the process, the volume fluctuations," Moore said. "Lenders have now realized that they've got ailing, high-cost infrastructures, so they're out there changing technology. There is an awful lot of interest in changing systems. … The most efficient factory is the winner."

Lester Dominick, the president and chief executive of MortgageFlex Systems Inc., a technology vendor in Jacksonville, Fla., said his company has the largest pipeline of orders he has seen in several years.

"What we have found is, the last four to five years have had so much uncertainty in the marketplace [that] companies weren't upgrading their technology. They were sitting with what they had," he said. "There's been a pent-up demand of companies wanting to be more efficient, but they held off."

Large lenders are also relying more on outsourcing either parts of, or the entire, loan origination process for certain loan types. They are "doing it for variable capacity," Moore said. "Lenders are finding they are getting very high quality with the model, and equal or less cost per loan, and getting faster cycle time, so they're seeing the speed element of it being an advantage."

Some lenders are determining what amount of origination volume they are equipped to handle, and outsourcing anything beyond that, said Chetan Patel, an executive vice president at ISGN, a mortgage technology company.

"That is going to be the biggest thing for them," he said: "to have a core team and have the rest managed by someone else."

David Green, the president of StoneHill Group, an Atlanta company that sells outsourcing services to mortgage lenders, has contracted to handle the underwriting on about 1,000 loan files a month, in aggregate, for several lenders. He said he expects that number to triple in the next 90 days. Lenders, he said, are doing more outsourcing to "manage the peaks and valleys so you don't have to hire new employees."

Smaller lenders, meanwhile, say they are focused on expanding relationships with real estate agents and mortgage brokers to increase their reach. RoundPoint's Pepe said his shop is too small to consider outsourcing. It has 22 loan officers licensed to do business in 47 states. On average last year, the company made $40 million to $50 million of loans a month. Pepe said his company expects to double its volume in 2011.

The key is "relationship building," he said. "The only way you can really build that relationship is delivering on time lines and giving … real customer service."

Kate McCue, a vice president at McCue Mortgage Co. in New Britain, Conn., does not have a plan to outsource any processes but, instead, will hire more staff. Specifically, McCue wants to recruit young, inexperienced workers who can be trained.

"Our average loan originator age is over 50," she said, "so what we're looking to do is bring the next generation of originators to the market."