Mortgages are just about the most complicated financial service, so it's not surprising that decisions regarding IT for real estate transactions have more moving parts than other business lines-with wildly swinging volume levels, rate changes and an uncertain regulatory environment all playing a role. Morgan Stanley Dean Witter Credit Corp. is among those choosing to outsource portions of the mortgage enterprise to deal with the special challenges.
The residential lending unit of one of the nation's largest retail brokerages has struck a deal with Nexstar Financial Corporation-a mortgage outsourcing specialist-under which Nexstar will provide private label mortgage processing services. The institution wouldn't say what led it to choose outsourcing, and wouldn't make an executive available for an interview, but it plans to turn over customer service functions to Nexstar, which has about 20 mortgage lending clients. "There's a skill set that's required to do mortgage origination that wouldn't be required for other products that are simpler to do," says Jerry Halbrook, COO of Nexstar. "Our philosophy is to use technology to eliminate mundane tasks."
Morgan Stanley's customer service officers will take client applications using a customized Web tool built by Nexstar, which supports the institution's pricing and credit policy. The application will flow to Nexstar, which will provide all borrower contact, processing and fulfillment services through loan closing on a private label basis.
The institution's move is part of a larger trend in financial services toward specialized outsourcing based on lines of business. Uneasy with exposure to a single outsourcer, financial institutions are looking to spread the work out over a number of specialized providers. It's a strategy that makes perfect sense for the mortgage lending unit, given the complexity of the service.
Mortgage consultant Richard Beidl says outsourcing mortgage lending technology can be a good move, even in an age when many financial institutions are moving toward centralized customer data management and customer service and away from individualized operations based on a particular product or service.
"Even in a bank that doesn't have its business units siloed you'll have mortgage lending outsourced separately," he says. Beidl adds that while Morgan Stanley has its hands in a number of financial services through its association with Discover, it's not an expert at processing. "It makes sense for them to outsource that."
Beidl says the processing requirements for business lines such as credit cards, auto loans and other personal loans fall into what's often called "five liners." "You get the first five lines of information on the application, then you get a credit report," he says. "On the mortgage side, you're a long way away from that."
Specialists in Mortgages
That creates an opportunity for technology companies that specialize in mortgage outsourcing such as Nexstar. The company's customizable Web tool is designed to be used by institutions that choose to have their own employees and loan officers take applications but want to integrate with Nexstar's processing and fulfillment services. The Web tool can be tailored to meet an institution's program, pricing, underwriting and credit parameters.
Halbrook says a key part of Nexstar's platform is its database application. "We have built a service that allows us to customize the entire origination proc-ess and brand it in the name of the client...from customer contact, vendor ordering...from start to finish it's in our partner's name," he says.
The are a number of other applications that are utilized by clients to allow them to move loans into the Nexstar processing system, including a call center that operates in a telephony environment and a full-service Web application. The Web option includes taking applications, approval, and decisioning. "We have built the Web application to look and feel like a [client's] home site, but we host the site," Halbrook says. "We close the loan in their name in a seamless way." Halbrook adds that the Web sites are integrated using the same database that's used in other channels, allowing for customer service integration between the Web site and call center.
An additional tool is a loan officer application that allows an institution's sales people to take customer applications. An option for institutions to host their own Web sites, which can access the tech company's origination services, will be rolled out in January. Halbrook says his firm's strategy isn't to eliminate means of interaction between consumers and institutions, but to facilitate communication in a number of channels. "That makes for better processing efficiency."
Devoid of Paper
To that end, Nexstar remains in the background from a branding perspective, in the name of continuity. "There's no need for the consumers themselves to deal with another party. They are dealing with who they started with through the entire process," he says, adding that the process is devoid of paper. "When a document comes in from a vendor or client, it all becomes electronic. It's attached to an electronic file that enables us to manage the workflow effectively in terms of the task that needs to be done and the speed at which work can be moved from one person to another."
The goal is to move beyond the traditional mortgage lending process in which paper only allows one task to take place at any one time. "An electronic file allows us to do multiple tasks on a borrower's file at the same time. So if a customer calls with a question, anyone in our call center can answer because they have complete access."
Beyond highlighting the complexity of the mortgage origination process to financial clients, mortgage outsourcers also hope to play on the volatility of the mortgage market and the impact that can have on the performance of technology buys and development made internally by institutions.
Halbrook says outsourcing offers an opportunity to change a lender's fixed cost for technology to a variable expense. "Rather than having a technology investment and people you have to manage that are a fixed cost, we allow firms to convert their model to a pay for transaction model," he says.
Beidl says additional complexities in mortgage lending also lend credence to the outsourcing argument. There are differing legal guidelines for real estate lending, with a whole body of laws surrounding mortgage lending that doesn't exist for credit cards and other modes of credit. And there's also the expense of mortgage processing. "Processing is expensive, and the technology is also costly," he says. "And from a standpoint where volume can fluctuate, it's not unusual to consider going to somebody who can level out cost over periods of time."
The complexities of mortgage processing aside, Beidl says business process outsourcing is relatively new to the mortgage business. "It's only something that's taken hold in the past few years," he says, adding that most large mortgage firms developed their own operations in-house. "Firms would always outsource bits and pieces, functions such as appraisals. But outsourcing the operation en masse is relatively new."
Stiff Competition
But as the appetite for jobbing out has increased, Nexstar is finding it's not alone in providing mortgage outsourcing-facing stiff competition from Countrywide, Wells Fargo and Bank of America. These institutions all offer some form of mortgage process outsourcing, in some cases in an effort to generate revenue off of their own excess capacity as large mortgage bankers.
By outsourcing, these large firms can gain revenue, and bring a certain amount of uniformity to mortgage banking. "Firms like Countrywide, Wells and BofA have unique processes. They have a certain way they want to do things, processes they will follow based on their abilities to sell to third parties such as Fannie Mae, Freddie Mac and Ginnie Mae," Beidl says.
Nexstar claims it separates itself from these institutions by playing the role of the outsider in a land of giants-giants who have a vested self-interest at odds with their institutional customers. "(These firms) have people who are competing with their outsourcing clients for mortgage lending business," Halbrook says. "All of our business is going toward helping clients. Outsourcing is our core business. It's what we live and breathe ever day."
Beidl says that while a firm like Nexstar can position itself as disinterested from gleaning origination business from its clients, the verdict as to whether that's enough of an advantage to win business away from big players is still out. "Yes, there's autonomy. They're not competitive and banks have a fear of sharing information with other banks," he says. But there's also a "Chinese wall" that separates the outsourcing function from the origination function at most large institutions, Beidl says. "Banks are very well scrutinized. They don't want to get into anything negative like that. A few thousand customers isn't worth the negative feedback they would get."
