Although it’s not happening with much fanfare or hyperbole, a once-in-a-generation change is sweeping the mortgage industry. After years of strategic focus on sales, revenue, product and growth, lenders and service providers alike are beginning to shift their focus.
Compelled by both a volatile market and compliance-driven changes, processes and operations (as they relate to quality, compliance and costs) are, in many cases, taking an equal footing to the revenue-driven models of the past. As a result, we’re seeing the rise of more comprehensive, embedded technology; a greater use of qualified third-party outsourcing; and even a philosophy that focuses on continuous business process improvement.
While the most obvious manifestation of this change is being called everything from “The Digital Transformation” to “eMortgage,” the evolution is much deeper than loan application and origination technology. While talk of Quicken Loans’ Rocket Mortgage innovation or numerous “end-to-end” digital solutions coming to fruition is all the rage, this trend runs much deeper.
At the core of the quiet revolution sweeping our industry is the change we are looking at. Arguably, it’s least understood and is the most process-oriented segment. While it takes only real estate professionals and loan officers to facilitate the origination segment of a home-buying experience, the phase that takes place between the approval from underwriting and/or the finalization of the sales agreement and the closing is usually more complicated. That’s in large part because, for decades, this settlement services phase has involved multiple touch points, numerous service providers, disparate systems or even manual processes, and above all, a patchwork mosaic of state laws and federal regulations, making a closing in one state very different from a closing in another.
And yet, this, too, is changing – perhaps a move for the better with regard to both the service providers themselves and the consumer. While this article will focus on the stealthy but massive changes overtaking the settlement services phase of the mortgage (title insurance, appraisal, inspection and closing), it also serves as an example for the many elements of the mortgage transaction undergoing similar changes.
Setting the stage for change
For decades, the traditional title agency followed a business model akin to the closely held private law firm. The reasons for this are simple: In many states, title agents must actually be licensed attorneys. Accordingly, the typical title agency kept operational functions (title search and abstract, escrow, closing, etc.) either in-house or on a short leash – even though this model resulted in higher operating costs. Why?
Most agents would tell you that quality was the driving factor in keeping much of their production internal. In the past, outsourcing or offshoring (especially for online title searches) was fairly equivalent to cutting corners. Many of these outsourcing providers lacked expertise, experience and an understanding of the many quirks common to local county clerks or records. Thus, outsourcing functions such as simple title searches amounted to accepting a higher error rate for the sake of cost – not a good formula for client retention.
Ironically, some service providers kept most production functions in-house for just that reason – to save costs. The thinking was that using internal resources to search for tax liens, execute title curative or undertake local searches would actually save the provider money.
However, in many cases, the opposite was true. The model discounted the very real cost (time and expense) of using internal resources for such functions. More importantly, that model opened the door to the need for additional staff (more expensive than contracted or outsourced work), to say nothing of higher error rates and redundant functions (e.g., the rekeying of data).
Finally, and perhaps at the root of the old model for operational functions, many service providers preferred the control of keeping those functions in-house. Even before the Consumer Financial Protection Bureau declared that lenders would be held accountable for the actions of service providers, a good number of title service providers simply preferred to have their proverbial hands on as many elements of the transaction as possible. The stated reasons for this were numerous: oversight, accountability and proximity. Over time, however, it became apparent to many that such a model also led to increased costs – sunk costs, even, when the client pulled a title order before it reached closing.
Drivers too powerful to ignore
Even though many service providers accepted production costs as a necessary evil until recently, those costs have begun to climb exponentially faster. A lethal combination of compliance requirements, client and investor demands, and growing scarcity of available resources (e.g., a noticeable decline in the number of available abstractors) has forced title agents to invest in expensive technology, bump staffing in functions traditionally understaffed, and undertake other costly measures to simply stay in the game.
As costs have increased, we’ve also experienced a quiet technology revolution impacting service providers directly. While the best production systems once required costly and customized integrations to connect with lender and/or vendor technology, cloud-based platforms and new developments have made one-off or bolt-on integrations a thing of the past. Less expensive options (again, many cloud-based) are beginning to proliferate in the market. Simultaneously, outsourcing is no longer synonymous with “throwing it over the fence.” Today’s outsource firms have upped their games with better technology, a better understanding that the human element of production requires experience and expertise, and an overall improvement in production deliverables, making them very valid options for title firms seeking to cut costs without sacrificing quality or accuracy.
And, of course, with the rise of these new drivers, a very consistent driver has remained – one that has only accelerated through the years: an ever-increasing client demand for better, faster, cheaper. In combination with the aforementioned factors, the bottom line for the typical title agent is no longer simply revenue-dependent. Most have come to realize that cost is a crucial element of profit.
The quiet revolution among us
For some reason, some of the top stories of today in the mortgage industry are topics that wouldn’t have drawn much attention five years ago. From service provider to Wall Street investor, what used to be back-office concepts are now front-of-mind – digital mortgage, business process excellence and fintech. The government-sponsored enterprises are building momentum on these topics, as well – topics that are only the tip of the iceberg for a much larger story.
Because of the rise of costs and market pressures discussed previously, a wide number of service providers have come to accept that maintaining their own production functions is not always the best option for a successful business. Instead, we’re beginning to see some title agents transform their businesses into something more akin to a sales operation (much like a P&C insurance agent), taking advantage of the improved quality and availability of technology and outsource providers to scale production costs.
At the same time, these agents are transforming their operations to make them more capable in today’s market. That includes using outsourcing and technology to become more flexible. This has had not only a cost impact, but also a sales impact: The service provider most capable of quickly adapting to new regulatory demands and shifting markets and investor requirements saves its client time and money.
The service provider of today is coming to understand that production is no longer simply a cost of doing business. Such a statement assumes that the only way to manage production is to bear its costs and requirements in-house. That assumption has harmed a good number of businesses already. Instead, in the world of the new normal, the savvy title agent is recognizing that production and operations are intertwined with sales and product development. The common denominator? Cost, and its impact upon profit.
Melanie Cornelius is vice president of national business development of mortgage, appraisal-business process outsourcing, title, and tax services for SLK, a provider of business process management services and solutions to the mortgage industry.