The credit crisis of 2007-2008 has loosened traditional corporate thinking among mortgage bankers. Information technology (IT) and operational decisions that have been on hold are now up for reconsideration.
Constraining market conditions
The changes that will influence capital allocation decisions are now present, and they are profound.
"I believe that we are seeing across the U.S. housing market--from borrowers, lenders and everyone with a stake in the future--what I would call a 'new realism.' Step by step, we are putting in place a new foundation for our industry. It's a foundation based on the right lending standards and on a broad re-examination of what constitutes sensible risk," said Mike Williams, president and chief executive officer of Fannie Mae, in a speech made at the Women in Housing and Finance Inc.'s July 2010 Public Policy Luncheon in Washington, D.C.
Williams sees the changes in terms of how federalization of the mortgage markets will demand improved data quality, enhanced risk management and the imposition of process rules to comply with tightened oversight. Should there continue to be standardization of product and processes, lenders will be left with little on which to compete for declining mortgage volumes.
Forecasts for mortgage volume call for a continued decline. The industry has been in a seven-year recession. Should the forecast materialize, lenders will be competing in what will seem to be an ever-shrinking market.
Lenders will have to find ways to differentiate, reduce process turn times and tightly manage costs in order to survive. In the meantime, the industry and its value chain will find a new shape not now apparent.
The changes in the mortgage industry generally favor increased outsourcing. Factors that influence the evolution of an industry's value chain indicate a trend toward outsourcing.
Increasing compliance costs are putting pressure on lender workflow architectures. In many cases, lenders are opting to invest in updating their technology infrastructure. MORTECH LLC is forecasting as much as a 15 percent increase in technology spending in 2011. According to MORTECH 2010, others are choosing to arbitrage skill and labor cost differences through outsourcing.
In another guise, outsourcing is a form of vertical "dis-integration." The mortgage industry has undergone a series of fundamental restructurings of the mortgage value chain.
Mortgage operations were largely integrated prior to 1970. Commercial banks and savings-and-loans (S&Ls) ran all operations under one roof.
With the spinoff of Fannie Mae from the Department of Housing and Urban Development (HUD) in 1968, risk management increasingly was carved out from production and servicing. …