2006 will go down in the mortgage industry as the year of the new entrant. Everyone’s trying to get a piece of the action. The Financial Services Authority (FSA) is reported to have received around 30 applications from new lenders entering the market this year alone. There has been a particular frenzy among investment banks, both from the United States and Europe, who wish to start or increase origination of mortgage assets which, in turn, they can securitise using their in-house expertise.
New entrants mean more competition, better products and finer pricing, which is good news for mortgage intermediaries and for their customers.
It also begs the question, how do all these start-ups make the necessary investment in systems and people, marketing and advertising, and stand a realistic chance of making money within an acceptable timeframe? The market is already hyper-competitive – while mortgage lending volumes continue to hit new records, a lot of the volume is remortgage activity which, almost by definition, is done at lower margins than the back-book it replaces.
Targeting niche sectors
These new entrants target specific niche sectors of the market with a business model based on lower-cost manufacturing of mortgages. They achieve a low cost base by being centralised and specialised, thereby avoiding the costs of maintaining an expensive branch network or of delivering a whole range of financial services and products.
In addition, they usually outsource the servicing of their mortgage business, entrusting this to specialised servicers under third party administration (TPA) contracts. This avoids having a fixed cost processing function at start-up when business volumes are inevitably uncertain and relatively small. They benefit from variable costs from the outset and can get to market much more quickly than they could on their own.
The servicer enables lenders to take cost out of their business models, and concentrate fully on the value-added functions of delivering new products, of winning and retaining customers, and indeed offering competitive pricing. The cost and hassle of building infrastructure – including a burgeoning IT spend – falls not to the lender but to the TPA servicer. The latter typically operates out of unified facilities located in low-cost locations.
Importantly, because the servicer handles the business of a large number of lenders with much larger asset value, it benefits from economies of scale that individual lenders could not achieve. In our case, the client base ranges from well established, top 10 lenders through to start-up operations.
TPA contracts are also eminently more scaleable than a lender’s in-house processing function. Most intermediaries will have come across examples of lenders offering particularly attractive products, but then falling down on the time they take to process the application and issue the offer letter. A TPA servicer has the resources and technology infrastructure to handle peak demand levels and makes sure there is no delay in handling applications.
Quality is key
It is not just about cost and speed. The TPA servicer is judged on the quality of what it delivers: in the current competitive environment, meeting customer expectations is a critical deliverable.
Typically the servicer works as an extension of the lender, with fully branded delivery. This extends to answering telephones and correspondence in the name of the lender, and issuing communications and other notices to intermediaries and customers using the lender’s stationery, allowing it to retain both independence and individuality.
Of course, there are as many different outsourcing agreements as there are relationships between lender and TPA servicer. It’s really not ‘one-size fits all’ – the beauty of it is that our industry has the willingness and skills to design a tailored solution to meet each individual lender’s requirements. We work with lenders entering the market, leaving the market, launching specialist or niche products, buying or selling assets, or simply looking to rationalise or re-organise their processes.
There are many options – for example, at one end of the spectrum, the full ‘cradle-to-grave’ service from initial enquiry through to shortfall debt recovery. Other lenders may prefer to retain greater involvement in client interface or just to cover peak requirements arising from seasonal fluctuations, new product launches or other temporary surges. In some cases lenders that otherwise have a full internal processing function entrust administration of certain portfolios to servicers because their systems do not have the functionality to handle a particular type of product.
Where a mortgage lender wishes to securitise its portfolios, the servicer plays a key role in satisfying the rating agencies and other regulatory requirements of the securitisation programme.
With a continually growing need for IT enhancement and an ever more complicated regulatory environment, our industry has excellent growth prospects. We assimilate a level of expertise and resources that few individual lenders can achieve on their own. We help established lenders as well as new entrants, and play a significant role in the efficient operation of the mortgage industry. That must be good for borrowers and intermediaries alike.
