Outsourcing: solving the origination technology cost conundrum.

Author:Focardi, Craig

TECHNOLOGY IS OFTEN PROMOTED AS the panacea for the inefficiencies in mortgage origination processes. Software vendors, each providing only a piece of the mortgage origination technology pie, trumpet hundreds of dollars in cost savings from their solutions. If a lender bought all these technology components to build a complete loan origination system and added up each component's cost savings, it would pay absolutely nothing to originate a loan! Except, of course, for the software licensing and maintenance costs, which can add up.

Mortgage origination technology has been effective in reducing processing costs, but it can be expensive to build or license a complete system for a complex business like mortgage lending. Different lenders solve the origination technology cost conundrum by taking the following steps:

* Building a homegrown solution. This approach has the highest upfront, fixed costs.

* Licensing, installing and customizing a commercial solution.

* Licensing an application service provider (ASP) solution, which may have fewer upfront costs, but possibly higher -- but variable -- transaction costs.

* Outsourcing the entire business process and the technology.

The ASP mode helps reduce upfront fixed development costs that only the larger lenders can afford, but still requires system customization for each lender. Business process outsourcing (BPO) holds great promise in filling the technology gap between large and small lender caused by lack of capital for technology investment.

TowerGroup defines this BPO as third-party contracting of the processing of all or a portion of a service. Outsourcing occurs in horizontal or vertical business processes. Horizontal outsourcing includes core technology and support processes for business lines, while vertical outsourcing refers to specific customer and supplier business processes (such as loan origination and loan servicing).

Smaller lenders and financial institutions new to mortgage lending are increasingly outsourcing the entire loan origination process to third parties that include Cendant, Equixx, MortgageSelect.com and Nexstar. Private-label loan origination is analogous to subservicing, where the lender owns the servicing asset but has a subservicer service the loan and customer in the lender's name. Here, outsourcing firms may process, underwrite, hedge and/or close the loan in the lender's name.

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