Should you outsource? Factors mortgage lenders ought to consider

December 29, 2023 4:00 AM

Delegating concept. Wooden figures and arrows.

As lenders ponder whether they should engage in a new paradigm around how they operate going into the new year, shaving costs is still a priority.

Outsourcing might be key in achieving such a goal, some industry stakeholders argue. By some accounts, close to 90% of players in the mortgage space offload some sort of non-core work to an outsourcing partner.

"There are things they're outsourcing that they don't really consider outsourcing, but are in fact outsourcing," said Nathan Lee, partner in charge at Richey May, a financial services consulting firm.

Some functions being outsourced by mortgage lenders include loan processing, customer support and technology.

Lenders can "leverage the expertise and resources of specialized external providers" which can improve "operational efficiency, reduce costs, and enhance customer service," Nexval Soumen Sarkar, Chief Operating Officer said.

"By outsourcing certain tasks, lenders can reduce the burden on their internal resources associated with hiring and maintaining an in-house team to perform these tasks," he added. "This brings down costs related to salaries, benefits, training, and infrastructure."

Outsourcing, in combination with other cost-reducing measures such as headcount management, cutting leases and scrutinizing some third-party relationships, could set mortgage shops up for a lean operating budget.

Outsourcing by offshoring

Outsourcing costly or time consuming tasks to third party partners can help a mortgage lender cut their internal spending. It allows a company to save on office space, equipment and technology costs, Sarkar said.

But outsourcing doesn't always mean utilizing mortgage labor inside the U.S., experts explained. Working with offshore talent is a significant undertaking for a workforce, said Keith Canter, CEO of Tennessee-based First Community Mortgage. The lender is using artificial intelligence and other automation, rather than offshoring, to augment its operations.

"Ultimately, if you could have both, you're probably in the best position," said Canter.

Companies can build their own offshore subsidiary, known as a captive, said Paul Campbell, executive vice president of lending at Kwik Mortgage Corp. and founder of outsourcing company Equilibrium Mortgage Solutions. Some publicly-traded mortgage firms with offshore employees include technology provider Blend Labs, megaservicer Mr. Cooper and digital lender Better Home & Mortgage which have employees in locations like the United Kingdom and India.

Captives give firms confidence that employees are operating with the same systems, support, security and licensing as the rest of the company, the outsourcing veteran suggested. Such subsidiaries are often located in countries where younger generations often speak English such as India, the Philippines, Malaysia, Mexico, Vietnam and even stateside in Puerto Rico.

While non-U.S. labor is typically cheaper, mortgage companies can't skimp when it comes to paying on time and being attentive to employee needs, Campbell emphasized.

"My employees have condos, my employees in India have cars," he said. "They have everything. They want to take vacation."

Some see offshoring as one of the "biggest threats to salaried mortgage employees."

"There are solid alternatives overseas at a fraction of the price, and they add efficiency at the same time, working while we're sleeping," Greg Sher, managing director at NFM Lending, wrote in a LinkedIn post. "It has become more and more expensive to run a profitable IMB, pushing many in the space to look for alternatives. Fact is, offshoring is a viable answer to rising costs.That's the threat people should be talking about, not AI."

What functions can be outsourced?

Most functions in the originations space can be outsourced to some degree, proponents of subcontracting say.

Examples of tasks that often get bounced to third parties include loan processing work, customer support, document preparation, appraisal and title services, pre-closing and post-closing quality control.

"When you're talking pre-closing QC, post-closing QC, those are big-time items that ensure that leakage with regards to defects can be minimized," said Campbell. "And you know that's an outsource function."

IT-related work, accounting, legal and human resources are costly and also often outsourced.

Moreover, a talent shortage is driving up the costs of these professionals "so companies have been faced with having to go and make offers at really high compensation levels to get people into the company in roles that aren't core to the business," said Lee.

What are lenders outsourcing most?

Technology and underwriting work seem to reign supreme as the tasks contractors most often perform.

"Areas where they're outsourcing a lot are cybersecurity functions, IT functions, including software development and customization rates, support of core systems like the loan origination system, accounting system, and the CRM," Lee said.

A lot of outsourcing is also happening in the accounting area right now, too, he added, because "accounting professionals are in short supply and it's driven the cost of accounting talent up significantly."

But there are exceptions to outsourcing, including core functions such as "sales and sales management of the loan officers and the branches that are out generating the loan volume," Lee said.

"Funding shouldn't be an outsourced function," added Campbell. "There's too many ways to have an error there."

When considering outsourcing, Dave Stevens, former Federal Housing Administration commissioner, tells companies he consults with "to not cut into the bone of an organization because if you go too far, you'll destroy the competence and commitment of the team that you need to be there when we come out of this."

"You have to be really careful when you're making these decisions, not to lose the faith and commitment of your organization as you move forward," Stevens said in a recent interview.

How much money can outsourcing save companies?

Businesses hiring talent outside their own walls can save 50% or more on operation expenses, Campbell suggested. With a lower cost of living in other countries, the industry veteran suggested the cost of a loan per full-time employee overseas is probably a third of what it would cost stateside.

The expenses are competitive with technology investments, which lenders, servicers and vendors continue to pursue. Over half of mortgage businesses plan to up their tech spend in 2024, while just under half say they'll increase their headcount, according to Arizent research's upcoming industry forecast.

A specific amount of dollar savings from outsourcing is difficult to quantify, said Pamela Hamrick, president of Incenter Diligence Solutions. Hamrick, who has over 35 years of industry experience, heads an Incenter division that handles third-party due diligence, data management and mortgage servicing rights reviews, among other tasks.

A significant benefit of outsourcing is that it helps balance headcounts whether a firm feels it's understaffed and missing business or simply is overcapacity, Hamrick and others said.

"That responsibility for maintaining the right level of staffing is no longer the responsibility of the lender," she said. "It becomes the responsibility of the third-party outsourcing providers."

How safe is outsourcing?

Sellers are fully responsible to Fannie Mae for oversight of their third-party relationships, according to its Selling Guide. The government-sponsored enterprise said in reviews it often finds sellers and servicers don't have comprehensive, written procedures for third party management, nor processes to confirm whether business partners are on the Federal Housing Finance Agency's suspended counterparty list.

Third party vendors don't necessarily have to be approved by the GSEs nor Ginnie Mae to perform tasks like QC, Hamrick said.

"However, there are elements of Fannie Mae's current requirements for QC that you would not necessarily be able to fulfill unless you are an approved vendor with Fannie Mae."

In an era of prevalent cybersecurity risk, firms are often wary of data security and compliance with their third party partners, experts said. A "zero day" attack on a vendor's file transfer software hit hundreds of firms this year, among them mortgage players. Firms need to heed their cybersecurity strategies when personally identifiable information gets involved, Hamrick said.

"It's really important that lenders, vendors, outsource partners, all across the board have significant policies and procedures for not only implementing those protections as it relates to PII, but also testing those protocols and being able to report out what those protocols are that they have implemented," she said.