How We All Win As Servicing & Originations Converge

Did servicing just save the originations business in this cycle? Or is a continuous servicing-to-originations loop the key to lender profitability and customer success in every cycle? This panel of lender/servicer pros will give you the answers, and share what tech and teams you need to: increase retention; prep for the next homeowner hardship cycle; identify at-risk borrowers and offer new opportunities to performing borrowers; and adapt in real-time to new regs (like making key pandemic relief policies permanent). Come learn how lenders and consumers all win as servicing and originations continue to converge.


Transcription:

Heidi Patalano (00:09):

In the session, welcome to the session, which is How We All Win As Servicing And Originations Converge. And I'd like to welcome our speakers today. Starting opposite me, we have Sanjay Agnihotri, President and CEO of Opus Capital Markets Consultants. We have Larry Goldstone, President of Capital Markets and Lending at BSI Financial, and we have Chris King, the Senior Vice President of Business Development at Mr. Cooper. So thank you all for joining me here today. Really glad to have you. So I wanted to start off actually with a question that maybe Chris, you could take us off with start off answering. We know, and we've heard this discussed earlier today, that servicing is a natural hedge when there are low originations in a high rate environment. But we also know that IMBs of a smaller size may struggle to keep loans on the books. So I wondered what you're seeing among them today in terms of managing that balance and how do you think the amount of loans and servicing they might retain might change over the next year as rates are expected to trend slightly downward?

Chris King (01:30):

Awesome. But more importantly, congratulations. What a great conference you guys are throwing. So Heidi and everybody,

Heidi Patalano (01:35):

Thank you Chris, thank you.

Chris King (01:37):

So it's always a pleasure to be with you and Julian and everybody on the team. So congratulations for doing a great job. I mean, when I think about the market, I think about the COVID period, which was certainly the most robust maybe two years in our lifetime of history. You think about people made the record or lifetime earnings and then sadly had to give a piece of that back as you think about the period post COVID, right? And that was hard, right? Because we've talked about one of the most important assets, which is your people. There's been a lot of losses taken and also you think about it, a lot of wealth lost. So to that end, let's fast forward to where we are today. If you think about the NBA or partners, we look at data for like 75% of IMBs made money in Q2.

(02:21):

And for like us, we've got about 900 what we call a correspondent or COIs issue clients. That's a tremendous positive, right? Because you look back a year ago it was the inverse, probably 75 to 80% of IMBS were losing money. So now going back to Heidi's question, should IMBs be retaining more loans or retaining more? I would say how I think about it, and Larry and the team will do a good job complimenting, is when you hold MSR, you also have to have the cash flows in order to hold the MSR. So you got to think about the cash and the capital component of it. Obviously when margins are a little bit richer in originations, it helps offset that cash that's required. So my intuition is most small to medium sized IMBs may be challenged to hold MSR, but that's also not the worst thing in the world.

(03:09):

I mean, I think if you look at the competitive landscape, there's a lot of appetite for MSR. And if you think about it, whether it's companies like Mr. Cooper, Penny Mac, other large investors, there's tremendous values being put out for these MSRs. And then you think about the retention of that customer in a downward rate environment. Ultimately as rates go down, if I think about Heidi, right? If she did a loan with a B, C mortgage and sold a loan, did Larry, obviously Larry would like to keep the next loan, but Heidi's going to remember A, B, C mortgage, right? She's going to remember how well they did and that's okay, right? So the service is going to do a good job trying to retain the customer, but Heidi's going to remember the IB she worked with as well. And then I think for the small to medium, small to medium to larger I bs who maybe have more capital capability to own MSR one, make sure you're doing it for the right reasons, right?

(03:59):

If you're modeling, I'm going to retain 30, 40, 50% of the loans, make sure if you're applying that much economic value that you actually do execute to that percentage of retention. Also, again, if the values are strong in the market, it's okay. Take the cash today, right? Don't forget about the short-term memory of these last couple of years in COVID. And then if you haven't historically held MSR and you want to do it in this period of time, just make sure you're prepared, right? I mean, we're going into an election cycle. Larry runs capital markets for a great company, volatility is not your best friend, right? So make sure if you own MSR, you understand the ups and downs of hedging market to markets. Make sure you understand if you have to do advances on a scheduled schedule, make sure you understand how to manage delinquencies. So in summary, just to have a well sought out strategy, cash is king, make money and then do right by the customer. And I think a lot of things will happen for your company.

Heidi Patalano (04:52):

Yeah. Larry, what would you add to that?

Larry Goldstone (04:56):

Well, I think that, first of all, I agree with Chris. I think that the last couple of years have been a very different experience depending upon the size of the mortgage banking organization. The larger IMBs have had a lot more flexibility around retaining servicing or acquiring servicing. I think the smaller guys have really struggled. It is a bit of a perverse business given that half of the gain on sale revenue or gain on sale that's reported as profitability is non-cash or can be non-cash. And the sale of servicing is kind of an unfortunate outcome for IMBs because you've worked so much to identify that customer. The prior panel was talking a lot about lead generation and retention of those leads, and yet you turn around and you have to sell that lead away after a 45 to 60 day experience with that borrower. So I think that's why combining servicing with lending makes a lot more sense. Hopefully it gives you a lot more opportunity to retain clients, retain those relationships, build relationships over the time, and certainly focusing on the borrower experience on a day-to-day, week to week, month to month business is something that a servicing operation and a servicing platform can do. I think the second part of your question, Heidi, related to what do we see going forward?

(06:22):

And I think that the story there is going to be a lot more optimistic than what the story has been over the last couple of years when profitability has been strained by low volumes and very competitive and compressed margins. I think we're going to start seeing that unwinding, we're beginning to see volumes increase. Application activity is increasing with that. I think the industry is going to experience some gain on sale margin expansion as a result of capacity constraints. Hard to believe this industry is going to be capacity constrained right now given the low level of volume. But there's been so much downsizing, so much acquisition, so much consolidation that I think that it's a whole new starting point, a whole new jumping off point for the next form of this cycle. So I think the outlook is pretty good for retention. I think that there's going to be a lot more flexibility around retaining servicing and selling, servicing more when you want to as opposed to when you have to.

Heidi Patalano (07:24):

Yeah. Well I wanted to talk about how the tech fits into this and I think it'll be really interesting to go through the differences between what BSI and Mr. Cooper do because I know that you have kind of different strategies in terms of a bolt-on approach at BSI and Cooper, you do a lot of custom, but I wanted to actually start this question passing it over to Sanjay. What are you seeing from where you sit in the market in terms of the best practices, in terms of the platforms you're looking at across both originations and servicing?

Sanjay Agnihotri (07:58):

Thank you. They have this question, and you saw this in the morning also, whether you build or buy

Heidi Patalano (08:07):

Yeah

Sanjay Agnihotri (08:07):

You hear this question, if you're a 1700 people strong tech company you can build.

(08:12):

There are a lot of opportunities for you to build if you are controlling the whole farm to shelf. And there are some pros of building it because you control the whole value chain. You control borrow interaction, you control the legality and compliance. But there is another set of folks who like to buy. And what I'm seeing, and there are some benefits of buying because then you can be very nimble around your cost of acquisition is going to be not so high. You're not going to make a big hole that it takes you like three years to get through the LTV. So the lifetime value of that product. So there's a benefit of doing both. But what I'm seeing or what we are seeing in the secondary market is the people who are really successful in managing that balance are the folks who have a fundamental structure that they have on basic tech and then they're building on it based on what is new and emerging. And that's one trend that's come out very, very compelling. And if you look at this more closely and say, okay, between origination and servicing, origination has a very defined start and stop time. Everything that you're doing on the origination side is racing towards one goal, which is closing that loan. So everything is about how do you get speed, how do you get higher engagement, and how do you get zero day engagement with the borrower?

(09:38):

So what it does is basically it allows, allows the folks who are building their technology around those needs, they can easily go and use APIs and learn. For example, today's forum that I sat through early in the day, there were so many good technologies that are coming out there that can directly answer the missing link in some of these lenders because they have a very good fundamental technology, but they have some missing links and there are some very emerging technology they can use at APIs and plugins. And the second problem that I heard in the morning, both from Sridhar and Jason was you cannot just biotech and solve your problem. You need to have a good understanding of what your company can cannot do based on how your processes are laid down.

(10:30):

And there's no template. They say, okay, there's this tech you can buy and become better. Usually the better way of going about this is look at your organization's readiness and how much resilience you have to adopt something which is new and trendy. So we see that in the and on servicing side, even though there's a start and stop time, but it is not as defined as origination where the loan is not closing. They're like between a payoff to a loan administration. There are like six different panel lines running. And we think the firms who are able to converge the technology make it far easier for the borrowers to have less rework for their own agents, like between different services, their different specializations, the more they're able to make the technology bridge that fungibility gap between talent, we see there'll be a huge winners because then they'll be able to compress their cost lines.

(11:31):

They'll be able to reduce the time it takes for a borrower through this lifecycle of that loan.

Heidi Patalano (11:36):

Right and certainly, Chris, you can speak to that at Mr. Cooper, what would you say about developing your own systems?

Chris King (11:41):

I mean, whether you develop it on your own or you integrate, I mean there's really not a wrong answer. I mean, ultimately what you're trying to create is a seamless personalized customer experience. And I think if you think about the theme of the question is we will progress through the panel. It's like within Mr. Cooper, we don't ever go to bed saying we have 6 million customers. We say we have Heidi's loan. How can we make Heidi's experience today be great from an overall servicing customer experience? And whether that's a bolt-on tool or whether the team integrated, I mean that's really where the world's going, right? I mean we're going to talk about it a little bit more in the panel, whether there's propensity data and propensity data doesn't always mean retention. It also just means how can I help Heidi and her family's life be better every day, but the personalization of where the world's going we are, we're not even in spring training yet of where we're going to go, right?

(12:31):

And all the data and we will see what gets defined as far as good data and what can be leveraged. But you got to know Heidi at a personal level and help her family and there might be the 22-year-old Heidi and there might be the baby boomer Heidi, and you have to be able to adapt to that kind of personalization. That's going to be the table stakes as we transform this industry. And I think it's exciting. I know like Mr. Cooper, as a servicer, I want to see Larry and BSI do as great as we do every day. The servicing industry improves. That's a homeowner who's going to find a home who kiss their loved ones goodnight. I mean, that's our job. A bit dramatic, but I mean that's the bar of what you set in this industry.

Larry Goldstone (13:14):

It is all about the customer. There is no doubt about that. It is about the borrower. I think the way we think about things at BSI is, it is not so much about tech, it's about data. To me that's a little bit more interesting. I think that becomes a little bit more insightful and I think we try to use data and analytics to gain insight into what, to Chris's point, what do people need? What do borrowers asking for? What are they looking for? What can help them gain insight? So we don't invest, I mean we buy a lot of technology off the shelf because that's a lot about process. What we really want to focus our attention on is data and analytics so we can understand, gain insights into what is meaningful to our borrowers, and we do it through watching their payment behaviors. We do it watching their delinquency behaviors. We do it by observing how they interact with the company from a phone perspective, a statement perspective, how they interact with us on using our online technology and portals and trying to pull all of that information together and make informed and hopefully intelligent evaluations about what matters to people.

Heidi Patalano (14:34):

Well actually, Chris, you mentioned propensity models, and I did want to expand on this with both of you actually. I was wondering if you could talk about your process of developing your propensity models and if you could talk about how often you are tweaking these formulas and reassessing them. So Chris, maybe you

Chris King (14:57):

Can, I do want to iterate. Propensity tends to be correlated with just retention purposes only. We look at propensity meaning what is the next activity for a customer? And so to answer Heidi's question, we are updating it real time every day. I mean, that's just the reality of data and information. So if you think about it, we've got about 65 to 70% of our customers who come into our digital website over a given month. So think about if you have 6 million service customers, you have three and a half, 4 million customers. We want to understand, and Laurie alluded to this, what are they doing inside the site? What do they have a propensity to do? So you can imagine a world one day where a customer may Google what is escrow, and if you're their servicer, you could probably answer if you can't do that in today's world. But pretty soon you'll be able to send 'em a SMS text and answer their question the next day.

(15:54):

We know when her insurance is coming up, we can get ahead and say she lives in maybe a part of the country that has challenges on getting renewals of insurance so we can help her in that part of her life. So there's really no boundaries, but we're going to follow really the servicing experience to try to help her home experience along the way. You're trying to gain customer satisfaction and then ultimately we may do ultimately, well the retention, but it's really an offset of just trying to provide a strong customer experience. That's really just the end goal that happens by helping the customer through their journey and servicing.

Heidi Patalano (16:30):

Yeah, yeah. And Larry, what would you say about developing a propensity model at BSI?

Larry Goldstone (16:35):

Yeah, I think we take a much narrower view there. When we talk about propensity models, we're talking about trying to understand consumer behavior. It makes no logical sense or intuitive sense that borrowers that have 3% note rate mortgages are paying their mortgages off and yet you know what they're paying off every month. And trying to understand what motivates that behavior, what drives that behavior is information that is outside of what you would find in a borrower's loan level data file.

(17:12):

Can't discern anything about that behavior from looking at loan to value ratios necessarily. Certainly the loan to value ratio at origination FIO scores or how FIO scores are changing note rates and whether they are in the money or out of the money, there are some very confounding and interesting and nuanced explanations for what it is that motivates borrowers to do the things that they do. And so we've spent a considerable amount of time and effort over the last year trying to build a propensity model that seeks to explain those behaviors. And we've looked outside of the mortgage data space. We look at demographics, we look at neighborhoods, we look at zip codes, we look at home price appreciation in zip codes, we look at demographics. There are communities that are highly mobile in this country, and there are communities that are highly stable and there's data out there that you can glean and discern and acquire that will help you explain some of these behaviors.

(18:13):

So we try to, I mean, the world has definitely changed. We use a learning model and we have spent a lot of time building our learning capabilities in a very different environment, interest rate environment than what we just apparently turned into in the last six weeks. Things have pretty dramatically changed. They were pretty static for a long, long time showing signs of maybe rates falling, but then backing up again. I think the game has changed on in a permanent way, and I think we're in for a very different environment going forward. And so learning and teaching and training our software to identify borrowers who want to pay off and we want to get in front of them quickly before they even know they want to pay off is kind of what we're seeking to achieve.

Heidi Patalano (19:00):

Yeah, yeah. It's fascinating to see the different kinds of data that can tell you something that's completely unrelated to your financial, you buy this certain kind of yogurt. I've heard of examples like that. Are you a Netflix subscriber and things like this. It's amazing.

Larry Goldstone (19:20):

Our data geeks, I laughed at them. I have an econometrics degree, and so I've done a lot of predictive modeling in my day, but nothing like what's going on today, data and technology and AI and learning models. It's pretty fascinating.

Heidi Patalano (19:37):

Yeah. Well, I have another question for the group, and maybe Sanjay, you could take this one to start us with this. What kinds of tech do you think would be most impactful in terms of reducing the cost per loan, really in what have you seen from where you sit in the market?

Sanjay Agnihotri (19:55):

Yeah, so it's a powerful question and we can take the rest of the hour, but I think there's drinks after this, right?

Heidi Patalano (20:03):

Yeah.

Sanjay Agnihotri (20:05):

But I think if you decompose cost into that $11,852, and I think the other panel I was talking about, how much of that is coming from tech and tech hasn't been able to reduce the cost per transaction. In fact, it's increased. I have a very different view on that. But just to answer your question specifically, very German to what you're asking. I think anything in that can reduce the effort in the process that tech should be prioritized. And the second will be whatever allows you to hyper personalize your borrow experience that has to be prioritized.

(20:49):

And the hyper-personalization will happen in the front end, which is identifying your borrowers demographic, cryptography, understanding what they like, what they don't like, how do you make that bond on day zero of prospecting and then ensure that because you are touching that borrower less time, you're able to reduce your cost through the process. And on the backend, which is if there's one use case that absolutely makes sense for AI, is the whole document extraction, indexing, bookmarking thing. It works. And we are highly documented industry, especially in my world. We look at the loan when the loan is closed and funded. We are looking at average of three and a half thousand pages in our loan, and we have run our beta version, we run UAT testing and we are using an AI sort of AI because we had to kind of build a corpus and run some models on that.

(21:52):

But that technology itself will have a huge impact in terms of how your cost per loans going to come down because the time you'll spend, it'll indirectly reduce the effort it takes. And there's some very good partners that I see here around in the conference who can really help us get there. And I don't think we have to build that. We can easily buy that there's enough use case that tells me that you don't have to kind of invest in running your own and creating your own corpus. You can easily obtain it from the market.

Heidi Patalano (22:26):

Larry, what would you say to this?

Larry Goldstone (22:29):

I think there's some interesting new ideas out there today, but I'm still not completely sold on the tech forward solution to lending. To me, it's still a judgment around character of borrower and documentation around that. And Fannie, Freddie and Ginny May or FHA VA control that process. And so I think that to Sanjay's point, and it's befuddling one to me, that despite all of the technology and all of the innovation and all of the talk around all of the great things that are happening, the cost of originating alone just keeps going higher.

Heidi Patalano (23:24):

It was funny that Jay actually said that in the last panel. He said, why did it go up so much because of all of this technology? Which I was kind of surprised to hear that. That's

Larry Goldstone (23:32):

Right. I think there's some really simple things that we have found that potentially are interesting. I don't know if they're really going to work in the big scale of things, but touching touch points, how infrequently or how can you limit the number of touches that your origination team needs to spend with a loan we work on, and we have some technology that limits the number of touches that our underwriters have to make each time they do. A loan could very well be in the old days, an underwriter would have to go back and forth five or six or seven or eight or 10 times looking at the same loan over and over again, verifying calculations, verifying data, verifying information, making sure that they've got everything right. There are some solutions out there that can limit touches now to one or two times maybe three times. To me, that's a real big efficiency driver.

(24:32):

Same with processors. How many times do you have to reach out to borrowers? Can you implement solutions that can help borrowers gather their documentation and provide it to you or develop technology that can enable you to help the borrower get the information you need quickly, easily, efficiently? Those are generally point of sale systems. So to me, those are the interesting things. But at the end, and actually the signing and closing has gotten to be pretty slick as well. Electronic notaries and DocuSign type tools, e-signatures, very fascinating. But somewhere in the middle of all that things do just bog down as an industry, not necessarily for us, but definitely true as an industry.

Heidi Patalano (25:18):

And Chris, what would you add to that?

Chris King (25:20):

Yeah, I mean, I think we're at an interesting paradigm. I think where the world's had a couple of challenging years, and this is more just a market paradigm not representing the company I work for, but I mean, servicing is starting to get aggregated to a very small number of non-bank servicers. And if you think about it, these five or six non-bank servicers, if you fast forward three to five years, could own 50 to 65% of all mortgages in this country. That's not. And as part of that, they have become really focused on the tech side. So I mean some of the NBA numbers that come out when you see these, as Sanjay mentioned, 11,000 plus cost originate, my intuition is table stakes is going to be like 75 to $8,500 a loan. And I think you have to look at it, your model and think about it, and then competitively look at the horizon and figure out how much can you automate as far as data automation, call it LO.

(26:16):

You want the LO involved in the process, but how do you keep 'em only focused on the most pertinent task? You got to just try to automate everything possible to keep them efficient so they're focused on the next loan, not working on a mundane task. I know philosophically, processors have had a tremendous role in this industry for a long time. I think the world's going to be a lot different. I mean, Larry alluded to it. We call it microprocesses, right? So how do you break down every part of the process? As Sanjay alluded, what data can do X parts of the process? And we don't really call it a processor. It's a task specialist working on the task that a human needs to do. But I think just not be long window with some other topics to get to. I would really be looking at a three to five year business plan trying to get in the 75, 80 $500 cost per loan range. I do believe that'll be table stakes for competing in this industry when young people like Larry and I have passed a baton to the next generation. I think that's table stakes.

Heidi Patalano (27:14):

Well, we did talk earlier about things looking a little more positive in recent weeks, but then there was another great point made in the first session this morning by Jeremy Collett from Ray talking about the US Labor Department saying that there were actually 818,000 fewer jobs added than they initially thought from earlier this year. So there is some cooling in the job market. That's part of what's going on right now. And I wanted to discuss what you're doing to prep for the next homeowner hardship cycle, identifying at risk borrowers and such. So Larry, maybe you could start us off with that one.

Larry Goldstone (27:56):

Sure. Well, we certainly learned a lot of lessons in the COVID pandemic period about borrowers. We use the word propensity to continue to pay their mortgage. We've got a lot. I mean, so the bad news I guess is if you get out of the habit of paying your mortgage on a monthly basis, it's very difficult to get back in the habit of making your mortgage payment on a monthly basis. And we have definitely observed that I think as a servicing organization, and this really does speak more to the servicing side of the house than it does the origination side of the house.

(28:37):

We have developed a lot of data and analytics to try to understand payment patterns of borrowers to try to understand and ferre it out who is actually having problems and who's just a slow payer to try to focus our collection activities on borrowers whose behaviors deviate from historical trends as opposed to people who just consistently are late payers. I don't know why people pay their mortgage on the 25th of every month and incur a late fee, but you know what? We got plenty of them out there that do that. And so why chase them around until they don't do that or pursue that behavior? Again, I think the other side of the coin here is as a result of the great financial crisis, and then certainly COVID, the government vis-a-vis Fannie and Freddie as quasi government agencies I guess, and F-H-A-V-A and HUD have developed some really creative programs around loss mitigation.

(29:39):

It's almost impossible to foreclose on a borrower these days. They have made it extremely difficult to foreclose. You have to almost want to be foreclosed on to be foreclosed on because they have developed all these programs that are just crazy giveaways, free money for homeowners. So I think that the next cycle is going to be an interesting one. I dunno how severe it would be. I don't even know if it's coming. Maybe we'll avoid it, but we're definitely prepared for it and we've got more tools and more training and we hope that we are prepared for it.

Chris King (30:18):

I think Larry hit it. The only thing I would add is what's been great is you should have really the same framework for a customer who has, let's just say a loss mitigation need as you do a customer who's current, right? I'm sure BSI is the same way a customer can come and Mr. Cooper who needs a mod and do everything digitally. So this is a digital conference, so let's think about that part of it. So I mean, if you think about it is just really incredible to think about 2008 when people didn't even have a loss mitigation screens to now you can do a mod without ever talking to Julian, who's your Spock single point of contact. So it's just between, as Larry said, I think we actually do study our foreclosures to figure out how they got that far in the process. And that's good. I mean, listen, Fannie, Freddie, the government and parties, it's fantastic what they're doing to try to keep people in homes as a servicer. We have the same spirit. It certainly gets expensive at times. So hopefully there's a balance found over time. But ultimately what's good is the framework around the investment that the services has made into the default customers is encouraging. I think even if we have a little bit more of a challenging landing versus a soft landing, I think we're prepared as a service industry to do a good job.

Heidi Patalano (31:33):

Well. You know to your point about Fannie and Freddie now and Jenny, the loss mitigation is so different now than it was a couple years ago. We also see these major shifts. We can see shifts after each election cycle. So of course we're kind of going through this cycle every four years, and I wondered we could have a raft of changes to regulations after this election. And I wondered, Sanjay, especially since your company specializes in compliance, you could lead us in discussing how implementing those changes are handled. And then maybe Larry and Chris, you could walk us through how your shops go about integrating the changes.

Sanjay Agnihotri (32:21):

Yeah, it's a tough one, but Larry's the economist, so he should have a better opinion on what is going to happen to the market. But I think it'll be just based on whoever comes into White House, the government usually makes policy changes based on where the economy is. I think it'll be an expansionary economic policy. There'll be more push to create aggregate demand, increased government spending. And every time this happens, we see a cycle on credit becoming easy and it allows more borrowers to apply for more loans, and it creates a big amount of influx in the market space. I think if I divide your question to two parts, there's a regulation side of this that'll come with the new government, which we know we have plenty of regulation. It's just a matter of complying to those regulations that we need to worry about. I don't think we have less of rules, it's just how well are we hearing those rules and how well and how are we putting a framework to ensure that the ecosystem is effective enough to hold people accountable to those regulations.

(33:40):

But from a compliance standpoint, I think it'll be more around information security and you'll see large emerging trend towards data protection, information security, and around ensuring that there's some kind of guard around protection of consumer information, less of mortgage compliance specifically. I think there's some work to be done there, but I think that's what we are hearing and seeing more and more in most of the conversation that we are having in the capital market space. And I think regardless of who comes into par, I think companies should reserve some money aside to be ready to adopt to any technology investment they'll have to make as a result of the changes that may come to us. So those are two, three forces that I see from my vantage. But I'll turn this to you sir.

Larry Goldstone (34:44):

Yeah, no, that's fine. I think I'll take a different approach. I'll try to stay out of the politics a little bit I can certainly get on my soapbox over here, but that's probably not a great idea. What I will say is, having been around this industry for more years than I care to admit, the amount of focus on what we call change management is extraordinary

(35:16):

And is evolving as we sit here today, at least it is. At BSI, we spend an incredible amount of time and energy monitoring regulatory changes and changes in laws. We have to pay attention to cities, counties, states, and the federal government. That's a heck of a waterfront to try to cover. And we have a lot of systems, capabilities and monitors in the marketplace to make sure that we are aware of every nuance change that comes along. We have to evaluate all of those changes and determine how it affects us. And then we have to document the fact that we are aware of the change, that we know that there is a change forthcoming. We need to know, we have to document when it was in place, when we have to comply, and we have to make sure that we comply when we're supposed to be.

(36:13):

And in order to do that, we have three lines of defense. We have what we call QA testing, which is real time active testing at the point of implementation of new processes or procedures or following new rules. We have QC testing, which is more like a quarterly statistical random sampling or statistical sampling to make sure that we're continuing to do things appropriately. And then we have an internal audit team that we pay to go back around twice a year, once a year and make sure that we're doing it again correctly. And all of that has to be documented and documented in a way that can be presented to regulators, auditors. It is a remarkably complex process. You would think it'd be pretty easy, but it's pretty crazy.

Chris King (37:03):

Everything that Larry just references, 100% true. But that's certainly the table stakes to industry. And at the end of the day, we're going to get further. I mean, regardless of the election cycle, how Mr. Cooper thinks about it, we're really agnostic to ultimately the election. We have to be prepared for all cycles. If you think about if the Democrats are reelected, I think we know a lot of the existing policies. And if you kind of follow tradition, let's just say the Republicans may get nominated, you may see less regulation a little bit, but at the end of the day, four years comes around pretty quick. It can change. So we're not going to make a material change based upon how the election works, as Larry referenced. If you think about Mr. Cooper, for example, within our risk of compliance department, we have north of 350 people alone just in full-time employees.

(37:49):

And so I think the future of this has to be, and I know that again I'm going to resonate back to a digital conference, is the regulators want to see various testing for a company like us. You have the OCC, the FDIC, the CFPB for any Freddie, F-H-A-B-A, HUD 50 states. So at any given day, you have three to five audits going inside of our company every day. So just if you can resonate there, and ultimately this testing is important. I mean what they want to know what's being done right by the customer. So our vision as an industry needs to be partner. And I'm not really, I'm not using the word lobbyist. I'm saying genuinely partner. And that's our position. And we have to figure out to automate a lot more of this testing and because the testing's important and it's not going to go away. But given this is a digital conference, I know that's where a lot of our time and investment is spent, whether we own MSR or whether we're also one of the largest sub-services in the country, we have a lot of responsibility to our partners. We have to automate all the testing for them.

(38:44):

I don't think regardless of the political party, we're going to have less burden on us overall obligation. Let's partner, let's figure out automated and get everyone comfortable so we can take some of the costs out because ultimately those costs are passed on to the consumer, right? There's no doubt about it.

Heidi Patalano (38:59):

Yeah, it's very interesting to hear you guys talk about the testing, the frequency, and it's a lot. There's a lot to it.

Larry Goldstone (39:08):

It's a lot. It's a lot.

(39:10):

It is

Heidi Patalano (39:10):

Lightly.

(39:11):

Well, we only have a minute left. I just wanted to give you each an opportunity to share anything you didn't get to discuss during the panel that I know we did talk previously and we had a lot of good conversation and I wanted to make sure that there was still time for you to impart some things that you wanted to mention before we break for the day. So maybe would anyone, I don't know, should I call on you? I dunno, I'm done. I'm good. Yeah,

Chris King (39:41):

No, I'm great. I mean, what an honor it is to embrace this next journey, right? I mean, let's not get so excited about the fed moves and the rates go down, build your company to be built for 2028, 2032, build for the future, inspire your people, build processes, get your costs down. We probably all got caught a little bit post COVID, right? But let's not watch the Fed every day and see if CN BBC has a great article about, is 10 year now at three six or three five? Five, right? Build your company around. Great people inspire people. I don't want to end negatively, but there's going to be a lot of competition in this next cycle. The prior panel talked about people are going to come out of the woodworks and could not agree more. It's going to be the most intense, probably stage even for us. We've been in it for a minute, but what you can manage, what you can control, and get your company set up to be great for the next three to five years. Enjoy this next three to six months. We've earned the right to be profitable, but really focus on making sure you're well positioned well down the road.

Larry Goldstone (40:46):

That's a really good way to end, Chris, I appreciate that because I think you're right. I think we got to remember what we're doing. We do have a purpose. I think the panel, the last panel emphasized, know your culture, invest in your people, appreciate what they do, build good organizations and do right by customers and borrowers. Home ownership is a privilege, there's no doubt about it. And we should be doing everything that we can to facilitate that. And I think there's a lot of cool technology that does help consumers better understand what that home ownership means, whether it's on the front end on the lending side, or whether it's as a servicer and you're trying to keep them informed about what's coming and what's happening in real time.

Heidi Patalano (41:35):

Right. And Sanjay.

Sanjay Agnihotri (41:37):

I'm not good with the emotion part, so I'll stick with what I had know best. I see this as cycles have a tendency of repeating and mortgages a cyclical business, but the changes that we are going through are only two types. They're linear and they're exponential. And we have to get on the right side of these changes because whatever changes we are going through on the tech side will change the dimension of this business. Totally. And I think firms who embrace that as part of all the things that Chris and Larry covered, doing the right thing, building the business, looking at the future and being optimistic about it, but embed that piece, that third dimension in your strategy, because whether we like it or not, that's going to be pretty much table stake in the future.

Heidi Patalano (42:31):

Yeah. Well, I thank you three for being a part of this. It was a pleasure to have you here. Thank you so much.