A home-grown revolution.

Author:McCartin, Joseph T.
Position:Banc One Mortgage's management style
 
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Banc One Mortgage transformed its origination operation with a new model built on team processing, workflow management and a new origination software system. The result is a bumper crop of improvements.

Loan production operations, that unglamorous back-office function, is rapidly becoming the focal point of lenders interested in succeeding in the next decade. To a higher degree than any other mortgage banking function, operations and service excellence can offer sustainable competitive advantage by providing compelling reasons for customers to do business with you. In fact, as the industry shifts toward more consumer-direct distribution channels, the critical factor for attracting new business may very well be in the hands of your operations director.

At Banc One Mortgage, Indianapolis, we have spent the last year reengineering our processes and implementing a new system to support our vision for operations excellence. We've seen some impressive results from our pilot teams, including a 57 percent decrease in the time from loan application to loan shipping and a customer satisfaction rating exceeding 94 percent. In our opinion, the opportunity for making operations excellence the next competitive weapon in mortgage banking is both real and ready to be exploited.

The promise of operations

The mortgage industry as a whole is starting to rethink the profitability dynamics of loan production. This renaissance is partially due to the industry's recognition of servicing revenue volatility, and it's partially because of the rising rate of technological innovation coupled with new distribution channels.

Regardless of the motivation, firms are beginning to realize that they need to restore reliable profitability to their loan origination business. For many companies, this realization has resulted in increased efforts to develop or expand lower-cost distribution channels like telemortgaging and the Internet.

Although a worthwhile endeavor, firms that focus strictly on the distribution side of the equation will not create a sustainable advantage because consumer-direct distribution channels increase the need for higher levels of customer service. The real key to long-term profitability in the mortgage origination business is to develop a truly cost-efficient manufacturing capability to support any distribution channel at a lower-than-average cost while providing higher-than-average customer service and value.

Operations and customer value

Mortgage companies willing to invest in a manufacturing capability can achieve real cost efficiencies while creating customer value. Operational excellence is the key to providing customers quick approval and closing times, product choice and attentive service. Beyond the obvious impact on customer satisfaction, these same attributes can increase application volume and reduce fallout risk. Specifically, operations units that can handle a wide range of loan products will help reduce the customer's desire to shop. Additionally, quicker approval times and faster closings shorten the pipeline cycle time, resulting in both lower fallout risk and higher capacity utilization.

By developing an operations capability focused on customer value, mortgage companies can begin to sell their operations excellence and create a competitive weapon. Marketing campaigns focused on guaranteed closing times, instant approvals and guaranteed satisfaction are all examples of using operations excellence to gain market share.

Operations and profitability

Operations excellence has impact beyond creating customer value. On average, operations costs contribute roughly one-third of the cost to produce a retail mortgage. Although seemingly not a large factor compared with sales and commission expense, operations costs are essentially fixed - you pay for the capacity whether you use it or not. Reducing the fixed-cost component of loan production is a key factor in restoring reliable profitability.

Beyond reducing direct costs, investments to increase the quality of loans have a direct impact on loan securitization and whole loan sales. Operations excellence can eliminate the potential for repurchases or unsalable loans. Furthermore, quicker processing can help reduce hedging costs, while consistently faster loan delivery will provide an opportunity for better forward pricing from investors.

Investment in operations to date

So given the dramatic impact that operations can have on both customer satisfaction and the bottom line, where is the industry as a whole? The MORTECH 94 survey, published by SSP/RES Research, a joint venture...

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