It is hard to exaggerate the dramatic turn of events in mortgage lending. An industry recently swamped with more new loans than it could manage is now swamped with more bad loans than it can manage. Servicing departments that once got by with 20 or so people can barely make a dent in their workload with hundreds or thousands of new employees. In addition, regulatory and legislative demands have servicing departments hiring, training, and automating for one directive, then shifting to another conflicting directive, all the while in dread of making mistakes and incurring harsh headlines and heavy penalties.
For decades, handling defaults was managed as a simple exceptions process. A small number of borrowers would default, some to work out payment plans and the rest to proceed more or less smoothly to foreclosure. As with most exceptions processes and small groups, efficiency was a lesser concern, and compliance was simpler then.
Fast forward to today: Bolted on to this small, orderly exceptions group are thousands of new workers following rules that didn’t exist before, working for managers in the same predicament under the hot, bright light of scrutiny by regulators, press and advocacy groups.
It is a novel situation and it calls for a novel approach. Rather than “throwing bodies” at the problem, some servicers are stepping back and asking, “In this vast, new, and volatile servicing environment, how do we reengineer a business that will be the new normal for the next few years?” We have some suggestions:
View mortgage exceptions as a business, not “operations.” As you build your organization to handle problem loans, it makes sense to step back and view it as a new business, because it is new in scale, regulations, and customer impact. Ask what an entrepreneur would ask about each specific decision in the business-building process:
- What organization structure will cope with these vast volumes?
- What business processes will best move these troubled loans efficiently toward resolution?
- What skills do those customers and processes call for?
- Where will we find talented, experienced people with those skills?
- How do other industries with complex, information-intensive, customer-facing processes staff their businesses?
- How will we incent them to perform at the highest levels of customer satisfaction, compliance, loan resolution, and efficiency?
- What should be the ultimate standard for resolving a troubled loan?
- Even if three to six months is the industry average, is that tolerable or necessary?
You will quickly find, as most entrepreneurs do, that there is not one single right set of answers. The data and circumstances of your own organization will lead to the right answers.
Organize for business outcomes. Ten to 20 years ago, the mortgage business experienced a similar growth explosion, but in originations. A single group of 2,000 to 3,000 employees might originate, process, underwrite, close, and ship $4 billion to $5 billion of new loans per month – and these were fully documented, government and conforming loans. That came to about 40,000 to 50,000 loans a month for a single origination group, with loans completed in three to six weeks.
As large as today’s volumes seem to overwhelmed servicers, they are still much smaller than in decades past. In July 2011, the total number of completed loan modifications for all mortgage servicers was only 56,000, according to the homeowner advocacy group Hope Now. Yet servicers today have tens of thousands of loss-mitigation employees, probably more than 100,000 people combined, struggling to resolve loans in three to six months or even a year or more.
A key to success in earlier times was a small team approach with all functions represented on each team – sales, processing, underwriting, closing, shipping, and so on. The sales guy, for example, knew “his” underwriters personally, how they worked, what they needed, and vice versa. The team reported to accessible managers who could quickly solve issues when they arose, rather than to a functional manager who only knew processing, or underwriting, or one part of the business. All members of the team were focused on the same business outcome: finalizing loans.
If a mortgage servicer were starting a loan resolution operation from scratch today, many would choose the team approach. But they already have entrenched resolution operations and most are organized as functional silos rather than business teams. One siloed group sets up the default file, another talks to the customer, another collects the documents, another reviews them, another underwrites, another sends files out for signatures and so on. The groups are managed by managers who know that function.
When resolution volumes were small, that approach served. Now, as problem loans skyrocket, some servicers are still taking these narrow job descriptions and quickly hiring as many people as they can. Each group is compensated for its ability to push a file through that group’s steps, not for the business outcome, which is resolving loans.
As their numbers grow, each group rarely knows, let alone interacts, with people who perform other parts of the process. Most will have no idea if their work satisfies the customer. The person appointed as a customer’s single point of contact has only a blinkered view of the whole process the customer is coping with. Not until the functional silos roll up high in the organization does any one person have responsibility for the entire process and that person is so senior as to almost never have contact with the thousands of new workers. Delays and errors are the result.
While the sheer pace of growth and change may make it infeasible to make a wholesale shift from a functional to a team approach, many significant improvements can be made with that ultimate goal in mind.
Lead with pilots. Consider carving out a team and piloting the team approach. Let the pilot help you understand what level of empowerment the managers need, what volumes the team should be able to handle, what size team is ideal, what skills the managers need to have, what incentives will spur superior performance for each team member, how quickly they should be able to resolve loans and what metrics to apply to other members of the team. A successful pilot often proliferates smoothly when non-participants hear about it and learn that there is a way they can improve their performance.
Improve the silo linkages. Many delays and errors can be avoided when people in separate silos better understand how their work affects another functional group. Use incentives to improve the linkages between the silos. Ask each siloed group: To increase your productivity by 30%, how could other groups change what they send to you or how they interact with you? Or: If we were solving issues as they arise, rather than leaving them to linger for months, how many more loans per employee could you handle in your area? Improving the communication and learning among the groups will yield rapid results. It may even yield information that points to clear opportunities to consolidate some processes and cross-train employees on others.
Check the tech. It is not unusual to find that the functional groups are not taking full advantage of the technology available to them, especially workflow and reporting features. Again, that’s not a huge cost in a low-volume environment but it can create havoc in a busy one. A review of each group’s efficiency should include how well they use the technology, how well the technology serves them and the management information it can optimally provide.
Value skills and experience. It might make economic sense in a short-term, low-risk operation to skimp on experience and skill. But if this is a four-year challenge with high reputation risk, it may be wiser to hire from the ranks of the skilled and experienced, especially now in an employer’s market.
Handling distressed, confused or even combative customers requires skills not necessarily needed in the past. The risk of misunderstanding a new rule or making a compliance error puts a premium on employees who can handle complicated rules. Delving into old files to handle loan modifications and foreclosures likewise puts a premium on people with experience in the origination process.
Every problem loan is different. Every customer has a different set of issues. Issues will arise that have not been provided for in the most prescriptive of processes – issues that require knowledgeable people with good judgment. Before you recruit, make sure you know which would be better for your company: hiring 100 people for $20,000 a year or 50 experienced people at $40,000, with incentives for performance in place?
The wrong structure and approach can make loan resolution harder and create the horror stories found in the newspaper every day. Those fiascoes expose servicers to recriminations from customers, and more regulatory scrutiny and restrictions.
If problem loans were a short-term challenge, expediency might suffice. But loan resolution will be a key core competency for years to come, with significant customer, financial and reputational impact for any lender. Designing for excellence today is a sound investment for the future.
Mr. Evetts is a managing partner of Dallas-based ABeam Consulting USA and can be reached at email@example.com. Mr. O’Bryan is a managing principal and can be reached at firstname.lastname@example.org.
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