A brand new model.

Author:Thinakal, Sadu
Position:Mortgage banks - Cover Report: Servicing

Old ways and tired concepts need to be tossed out if servicers are to make breakthroughs in productivity and customer service. Outdated models of how the business is done must be traded in for new ones that open up new opportunities.

The mortgage industry is in the midst of considerable change. Consolidations, strategic alliances, technology, heightened customer expectations and awareness, alternative business sources and new ownership structure are driving the new industry dynamics.

Beyond that, rising interest rates and a resulting production slowdown are accelerating the change.

To survive in this environment and find sustained profitability requires finding new and different approaches to doing business. And these innovative approaches will have to be deployed simultaneously through all aspects of the mortgage business.

This article explores strategies for enhanced profit and success in the business of mortgage servicing.

There are three distinct facets of mortgage servicing:

* Servicing management - the transactional, operational and task-management aspects of servicing;

* Asset management - both servicing assets (for mortgage bankers) and portfolio assets (for portfolio lenders); and

* Revenue enhancement and management.

To increase profitability and future viability, mortgage servicers must employ strategic thinking and tactical execution in all three of these areas.

Servicing management

Mortgage servicing is characterized by a variety of attributes including its service-intensity, volume processing (with the resulting economies of scale), external deadlines, predictable - but uneven - work spurts, and a spectrum of customers ranging from borrowers to investors, with several others in between.

The revenue from the servicing side of the business - whether servicing fees for mortgage bankers or interest spread income for portfolio lenders - is a given. Margins are thin in servicing because of the commodity-like nature of the business, the universality of securitization, and other investor, accounting and regulatory requirements. Thus, increased profitability from servicing can be achieved only through operational excellence and taking advantage of all available opportunities.

While servicing managers generally cannot control or influence the loan product offerings or pricing, servicing unit cost reduction and enhanced service delivery are well within their control. A continuous and intense focus on cost reduction is imperative in today's business environment. This is the case today, in order to simply stay in business or get a good price in the event of being acquired.

Achieving a structural improvement in costs, while at the same time improving service, can only be done as a result of core-process redesign; leveraging technology; and making a commitment to service excellence. While servicing includes several discrete, and not necessarily related, activities - unlike production - process redesign philosophies are still quite applicable.

The following tips will help servicers analyze and synthesize the data needed for an organizational and core process re-design, as well as establish meaningful tools for ongoing measurement of results.

Approach the analysis with a "macro" perspective - see the whole and the connectedness within your business operation.

A systemic view of the business, within the context of the economy, the industry and your own company, will provide an effective framework for planning. This will allow you to quickly spot areas of vulnerability, areas of opportunity and ideas for cost prevention.

In the context of servicing, for example, the systemic view enables you to pinpoint the possibilities of exceptions early on. From a systemic vantage point, a servicer can devise strategies to accommodate exceptions before they occur. Exceptions are what kill servicing operations, placing a barrier between productivity and the achievement of desired levels of service.

Exceptions can arise because of certain economic developments. Significant rate movement in either direction will create additional and sometimes different servicing activities. An example of this was the recent payoff/refinance activities and the current new adjustable-rate mortgage (ARM) product and assumptions activity. Many organizations may not have the information systems and workflow/workload process management facilities to accommodate sudden peaks in servicing activity. But this merely underscores the need for servicing managers to be in tune with economic trends, both national and regional. Knowledge of regional economic trends is important because a booming regional economy may cause a localized refinancing wave due to property appreciation. Similarly, a faltering economy can cause an increase in delinquency management activities.

Exceptions also can be created by certain developments within the industry. For example, Wall Street and the agencies might introduce new investment products to satisfy investor needs. If underlying systems cannot easily configure the remittance and reporting needs, an exception situation is created. For those who take an industrywide perspective when faced with such developments, opportunities can open up for partnerships.

Because several other parties, such as insurance carriers and tax-service companies, possess segments of servicing information and maintain certain servicing-related data, opportunities may exist for cost reduction and quality improvement through data base sharing.

Taking an industrywide perspective and seeking industrywide cooperation at times may help alleviate regulatory burdens. For example, the new HUD RESPA rule on escrow analysis practices might have been avoided had the various parties to servicing transfers followed the same escrow accounting conventions. This could have been the case had the industry as a whole adopted customer-oriented yet business-friendly escrow reserve policies.

Exceptions also arise from developments that occur within the context of an individual company. Taking the broadest possible view when it comes to the servicing operation - with a "cause and effect" perspective instead of a micro/compartmentalized functional view - will help determine optimal structure and processes to follow in the servicing department. Servicing operations are rife with chain reactions - payment processing issues causing delinquency notices, delinquency notices causing customer calls, these customer calls causing outgoing letters back to customers and so on. A lot of this doesn't have to happen if someone were to think through the consequences of the initial action that triggers such a chain of events.

Be aware of and understand key details - see the forest and the trees.

The old management adage that "senior managers need to see only the forest and not the trees" is not applicable to mortgage servicing today (for that matter, to any business). The servicing manager should have a strategic perspective of the business. That means having your finger on the...

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