More Banks Move toward Outsourcing

Article excerpt

When branch employees at New York Community Bank field a request for mortgage services, they put the customer on the phone with one of the bank's specialists - at Cendant Mortgage.

From then on, Cendant staffers - who represent themselves as working for the Westbury bank - help pick the appropriate mortgage, take application information, process, underwrite, and ultimately close the loan.

Joseph R. Ficalora, the president and chief executive officer of $10 billion-asset New York Community Bancorp Inc., said it could not handle such loans as efficiently as the Mount Laurel, N.J., outsourcer does. Outsourcing vastly reduces costs and provides better access to the secondary market without customers' ever knowing the difference, he said.

And though industry insiders and analysts are unsure how many banks are outsourcing their mortgage business, the trend appears to be growing faster than the overall industry. For example, between 1998 and 2001, while total originations grew an average of 14% a year, originations by Cendant - the nation's largest outsourcer - grew an average of 20% a year.

And many more banks are expected to jump on the outsourcing bandwagon, driven in part by the same factors underlying consolidation of the mortgage industry.

"It's a very difficult business, with very thin margins," said Donald Henig, an executive vice president at American Home Mortgage Holdings Inc., which in addition to providing mortgage outsourcing owns the online lender "You need scale in order to make a dollar."

Industry executives and observers say scale is critical to minimizing the cost of processing and underwriting as well as getting the best terms from Fannie Mae and Freddie Mac, the government-sponsored enterprises that are the largest buyers of residential mortgages.

"What we're providing to our partners, effectively free of charge, is all the technology that we've built and the relationships we have with Fannie Mae and Freddie Mac," said Robert Andwood, a senior vice president at Cendant Mortgage.

Mr. Andwood and others say outsourcing is likely to take hold in the mortgages business as it has in credit cards, where big banking companies such as Wachovia Corp., KeyCorp, and SunTrust Banks Inc. let others do almost everything but hand out account applications in the branches. Most of the banks using mortgage outsourcers are small, but several large and prominent financial services companies, including Merrill Lynch & Co., Bank One Corp., and Mellon Financial Corp., also do it.

"It makes sense for many players to continue to provide the product to their customers," said Monish Kumar, a manager in the New York office of Boston Consulting Group. "It does not make sense for them all to run the factory that makes the product."

Though some lenders outsource more of the business and some less, their arrangements almost always include processing, underwriting, and closing.

Some lenders are more active than others in the first step of the process - originating loans. Among them is $1 billion-asset Patriot Bank Corp. in Pottstown, Pa., which retained its staff of loan originators after contracting with American Home Mortgage in late 2000.

"You really want your loan officer to be employed by the bank," said Kevin R. Pyle, Patriot's senior lending officer and an executive vice president. Mr. Pyle said he expected members of his staff to work the referral network of builders and real estate brokers, which is generally regarded as key to the purchase mortgage business. The bank's loan officers take completed applications from prospective borrowers and turn them over to American Home Mortgage's processors.

Merrill Lynch Credit Corp., a Jacksonville, Fla., arm of the giant brokerage firm, steers a middle course in its outsourcing agreement with Cendant.

"What we are good at is distribution," said Kevin O'Hanlon, the chairman and chief executive officer of Merrill Lynch Credit. …