Building a Best-Practice Organization: Lending Organizations Today Face Complex Challenges in Building Value for Consumers in a Commodity Business. Yet the Best Companies Are Tackling Organizational Change That Will Leave Them in the Best-of-Breed Class
Jones, James D., Mortgage Banking
THIS YEAR LENDERS ARE GRAPPLING WITH A YEAR-over-year forecasted decline in mortgage originations of roughly $260 billion, according to the Mortgage Bankers Association (MBA). As a result, they are rushing to identify ways to stabilize profits.
Refinance loans are estimated by MBA to total roughly $983 billion in 2005, $689 billion in 2006 and $559 billion in 2007. As such, they are in no way going to produce the volume lift the industry enjoyed during 2001-2003. To cope with this new environment, large lenders, including Washington Mutual Inc. (WaMu), Seattle, have embarked on plans to wring substantial costs out of the mortgage franchise while pursuing greater efficiency and productivity.
Tom Casey, WaMu's executive vice president and chief financial officer, announced during a fourth-quarter 2004 earnings conference call in January 2005 that WaMu had already reduced mortgage bank noninterest expenses by $469 million or 15 percent in 2004, as compared with 2003. Casey also indicated there exists substantial opportunity to continue to improve efficiencies in WaMu's mortgage bank. WaMu is certainly not alone in this respect, but it serves as a powerful example. Countless mortgage lenders are currently seeking ways to cut costs in light of the current production volume downturn.
Craig Chapman, then president of WaMu's commercial and mortgage banking units, presented the bank's mortgage strategies during WaMu's November 2004 Investor Day. Chapman's presentation included the awareness that the company was encountering changing market conditions, significant industry volume declines and shifts in product mix, including a higher demand for adjustable-rate mortgages (ARMs).
Chapman stated that WaMu's focus is on improving operational execution and building scaleable, repeatable processes in order to meet customer needs while simultaneously reducing costs. WaMu's customer research, as presented by Chapman, identified that primary mortgage customers' preferences include: (1) obtaining competitive rates and monthly payment amounts (i.e., fair deal); (2) an accurate closing process and ease of closing (i.e., execution); and (3) speed to resolve issues (i.e., service).
WaMu's announced focus for 2005 is to improve efficiency throughout its mortgage process. Many mortgage lenders have identified the same goal.
I believe that mortgage lenders are limited in their strategic alternatives to create and maintain a true competitive advantage. The mortgage industry is a mature industry and, as such, is characterized by several factors over which mortgage lenders have limited or no control: product pricing, product commoditization, the secondary market, regulation, retail and wholesale compensation structures, and customer preference.
Lenders understand that the market sets prices; individual lenders do not. Lenders that choose to compete for loans must price to the market. Consumers generally view the mortgage as a commodity and demonstrate low brand loyalty.
Given that there are factors over which lenders have little or no control, what strategies can companies pursue to generate long-term success?
An "economy of scale" strategy, fueled by multiple acquisitions; or a product, channel, geographical or customer "niche" strategy are two common strategies. I contend that all lenders, following scale or niche strategies, must also pursue a best-practice organization strategy, characterized by operational excellence and cost control, to achieve enduring success.
A best-practice organization is focused on elements that lenders can control and deliver--operational excellence, efficiency and cost management when originating, selling and servicing mortgages. A best-practice organization embraces a culture that continuously identifies, adopts, implements and improves best-practice business process execution for the major components of the mortgage banking value chain. …