posted on Apr 12, 2017 by Andy Efstathiou
The mortgage and loan servicing industry is beginning a period of rapid change in the way business process services are delivered. Over the past few years, mortgage portfolios have not grown rapidly. For example, in the U.S., the largest residential mortgage market in the world, loans have grown only 7.3% from year-end 2012 to year-end 2016, a CAAGR of 1.8%. Some lines of loans have grown quickly, such as auto and education loans in the U.S. However, those loan pools are smaller than the mortgage pools and loan servicing requirements are less complex, both of which drive much lower revenues for processing services.
During the same time, regulations governing loan servicing have increased the cost of servicing by 14% CAAGR, according to the Mortgage Bankers Association. The increasing compliance costs of processing loans has led to banks and servicers exiting the business, notably CitiMortgage’s sale of 780k mortgages to New Residential Investment, due to close in Q2 2017. A separate contract with Cenlar to process the remaining Citibank mortgage portfolios will result in Citibank processing all its mortgages with third party vendors by 2018. In fact, according to the U.S. Government Accounting Office, from 2012 to 2015 non-bank mortgage servicers increased their market share from 6.8% to 24.2% of the market. The gains in market share by non-banks is attributed to the lower level of supervision of non-banks by regulators. Despite this, the economics of servicing are so bad that, in a review of the three largest non-bank mortgage servicers in the U.S., Moody’s found that only one of the three were profitable.
The bottom line is that the economics of this business are terrible, and eventually either lending will shrink or servicing operations must become much more efficient. We are seeing signs of vendors moving towards much more efficient methods of business process delivery for loans. These methods can deliver 40% cost reductions from the current standard of practice. The methods employed to deliver efficiency gains rely on the use of FinTech solutions, but include a broad range of techniques, including:
- Greater focus on employee training, which enables greater effectiveness in process execution, particularly when using digital tools to support external stakeholders (primarily customers, but including regulators, service providers, and management). Increased training increases the employment value of a worker and serves to enhance efforts in recruiting, retaining, and adapting the workforce over time
- Increased investment in proprietary IP, including templates, frameworks, APIs, and methodologies. These serve to facilitate process reengineering and change management when business conditions change and the lender changes its portfolio of offerings
- FinTech solutions which increase the level of automation and STP to reduce the overall cost of delivery. The key to modern digital solutions is the adaptability of solutions across environments. In the past, scripts were applicable to one task. Modern digital solutions can deliver automated execution across hardware, software, databases, and processes. Reuse of a single license across tasks reduces cost of ownership and increases flexibility of operations.
Banks have been focused on compliance challenges and sales efforts for the last five years. In the past year, banks have been turning to BPS vendors to deliver improved process efficiency for them. Delivering increased efficiency requires a deep dive into industry sub-processes, with an equivalent level of domain knowledge around technology, and yet finding individuals skilled in both areas is difficult. BPS vendors committed to process transformation as part of their services delivery are working to attract and develop those rare employees with dual skill sets. The result can be cost savings over 40%, versus traditional outsourcing cost savings of ~20%.
NelsonHall will publish a major market analysis report and NEAT vendor evaluation for next generation mortgage and loan BPS services in late Q2 2017 to address these issues in greater detail.