Opportunity Hiding in Plain Sight

This piece originally appeared in the April 2023 edition of MortgagePoint magazine, online now.

During slow market cycles or periods of uncertainty, most mortgage lenders turn their attention to finding replacement revenue, be it through new markets, additional products, or increased promotion. Yet periods of volume decline also offer an opportunity for lenders to shore up their operations for the inevitable upswing ahead. While many have turned their focus to automation and improved technology, there is also an incredible opportunity afforded through partnering with optimal third-party service providers, such as title and settlement services firms. For lenders, now is a good time to review and reconsider their own unique needs, and whether or not they’ve partnered with providers that deliver the most bang for the buck.

As we saw so frequently during the recent refinance surge, operational shortcomings tend to stand out during times of high volume. For lenders who did experience challenges in their production pipelines, “automating anything automatable” has since become a high priority. But when one considers just how much the typical mortgage lender relies upon third parties to bring a mortgage to closing, it’s surprising to learn that more than a few perform minimal evaluations before selecting new vendors—especially when entering new markets. Whether it’s the appraisal management firm, the title agency, or closing provider, a lender is forced to rely heavily on the capabilities and expertise of quite a few third parties. Nonetheless, it’s not unheard of for some decision makers on the origination side, in a pinch, to fall back to outdated methods to locate a new vendor to fit a pressing need. Too many times, the primary criterion for finding the right vendor starts and ends with geographic location or overall bandwidth. But a small, boutique agency may not have the production capability some lenders need—even if they are serving the market on which that lender is focused. Other lenders opting for big providers with wide name recognition may also find that the largest providers have little flexibility in their processes, leading to gaps and bottlenecks in the workflow.

Know Thyself
Automation remains a hot topic for lenders in this down market. But other areas can be scrutinized for increased efficiency. As is the case when selecting a technology partner, lenders should start the vendor selection and vetting process with an objective look in the proverbial mirror. If it can’t be done objectively through the eyes of the in-house decision-makers, then a knowledgeable consultant should be brought in. What are the company’s strengths and weaknesses? What kind of markets do they serve? What is the product mix and will that be changing in the near future?

Without this information, a lender will find itself bending its workflow to fit the processes of the largest vendors, which can be disastrous from a CX, compliance, or production performance viewpoint. If a mortgage lender has a major presence in a state like North Carolina or Georgia, where state law and regulation are very particular about having an attorney active in the closing, or if it wishes to grow its presence in such states, then using a title agency or closing firm that merely partners with an attorney there may come with disadvantages impacting compliance or turn-time.

Technology, especially now as the transaction becomes increasingly digital, is a key consideration when it comes to selecting the optimal third-party service provider. If a title agency’s production system doesn’t synch well with a lender’s systems, the relationship is doomed from the start. Name brand isn’t enough. Many settlement services firms may use commonly known production technology like Qualia, ResWare, or SoftPro, but they may also have custom integrations or build-outs that make the fit between their systems and the lender’s technology more tenuous.

Now more than ever, it’s also imperative that a potential third-party service provider is “future proof,” or at least possesses the ability to adapt and grow as a lender makes its process more and more digital. If a vendor is unable or unwilling to upgrade or invest to keep up with a growing mortgage lender, then the lender probably needs to rethink their arrangement.

From a technology perspective, it’s still not uncommon to come across settlement businesses that still have an inordinate amount of manual or hybrid processes. And while the owners of these businesses might swear that this amounts to a “higher touch” or closer customer service, there are many new, specialized technologies that can be used to maintain elite customer service without as much hand-keying or manual data entry. Today, the most successful mortgage lenders are likely to opt for service providers who are as automated as they are—or, at least, seek to be.

How Much Value Does the Provider Add?
During market cycles like these, it’s very important for lenders that the sum of their provider network exceeds that of its parts. What else do their partners bring to the transaction? Some lenders may be focused on very specific geographic markets where a local, “mom and pop” title agency with extensive experience and expertise might be the perfect fit. The regulatory landscape in those markets might make the agent’s experience every bit as important as accuracy and time-to-close averages. Similarly, another lender seeking to grow its presence nationally, for example, might place a premium on throughput, efficiency, and turnaround time.

Today, accuracy and time-to-close are merely the cost of entry for good third-party providers. Lenders, especially while running lean and relying on variable costs, are now seeking additional resources beyond the license to operate and the ability to provide key services in target markets. Lenders are also seeking other qualifiers like a deep understanding of the market; data and cybersecurity assurances; or other capabilities like the ability to deliver Remote Online Notary (RON) or digital closing services. To that end, the lenders who get the most out of their provider network tend to look for these characteristics. Does the potential partner rely heavily on partnerships (fourth-party providers) for many of its key functions? If so, does it have robust monitoring processes in place such as scorecard, vetting, compliance, and security requirements of those partners? Does the potential partner serve most or all the lender’s core products? Some title businesses excel at servicing refinance loans but struggle in purchase markets, for example.

How does a potential title partner manage closings in the so-called “attorney states?” Does that partner have regular access to updated expertise in those markets? Or does it rely on a single attorney or firm that primarily signs off on closings performed, by and large, by non-attorney staff? The compliance and cost risks in such cases should be carefully considered.

As cybercrime and wire fraud increasingly find their way into, and increasingly target, the real estate industry, it’s important to recognize that the title agent or settlement services partner, with its access to closing funds and coveted Non-Public Information (NPI) is now a prime target of criminals and fraudsters. A third-party service provider that has anything less than a documented cybersecurity plan, access to cyber-defense expertise, and a multi-layered approach to protecting a lender’s data (and funds) is too much of a liability for lenders seeking to remain successful.

Most mortgage lending firms and banks don’t spend a lot of time thinking about their vendor networks. They often settle for the biggest name brand or a patchwork of providers cobbled together by personal relationships and/or the simple fact that they serve a geographical market none of the lender’s other partners can. But, in so doing, those lenders are often leaving money on the table and ignoring potential improvements that could help them in their battle against margin compression.

The home purchase transaction still owns an average days-to-close that stubbornly hovers around 50 days (and up), and yet we point to compliance requirements as the explanation. The fact is that not all mortgage lenders are created the same, and they don’t all have identical needs, plans, or requirements. The same is true for third-party service providers. Where lenders take the time to plot a well-thought-out strategy for selecting, utilizing, and managing that network, they tend to find increased efficiencies and improved performance across the board. In market cycles such as this, that can make all the difference.