Chetan Patel of Verity Global Solutions on Managing Costs in a Transitioning Market

Chetan Patel is COO of Verity Global Solutions, San Antonio, Texas, a provider of highly crafted services spanning the mortgage loan lifecycle. He has more than 25 years of leadership experience in the mortgage industry and has been recognized as an IT All-Star by Mortgage Banking magazine. In 1998, Chetan co-founded MortgageHub.com and rebranded the company to ISGN, one of the nation’s largest and most diverse providers of mortgage products and services. He can be reached at chetan.patel@verityglobalsolutions.com.   

MBA NEWSLINK: Why is it important to have a strategy for managing costs in a transitioning market?

CHETAN PATEL: Lenders typically staff up to handle large origination volumes, but that isn’t necessarily the most cost-efficient strategy, especially when the market shifts. Fortunately, new outsourcing strategies and technologies have made origination costs much more predictable and easier to manage. In fact, with the right resources, it is possible for lenders to increase capacity and lower costs. 

NEWSLINK: What are some new strategies in outsourcing that are really helping lenders through the current market?

PATEL: Lenders are dealing with excessive volume, which I expect will remain the case for the next 9 to 12 months. While that’s good news in many ways, lenders face reputational risk as well as financial risk by constantly hiring and letting people go whenever they need to scale staff up or down based on the current market. For that reason, we’re seeing lenders gravitate toward outsourcing strategies that help them mitigate losses while operating more efficiently.

One of the best outsourcing strategies is using offshore third-party vendors that provide underwriting support, specifically pre-underwriting services. These services have been shown to help underwriters increase their output to as many as six to seven loans per day. The benefit of using offshore support is that there is no long-term commitment. It’s simply demand-based overflow work. When volumes go down, the agreement can be canceled, so there’s no financial risk.  

Another strategy is using onshore, independent contract underwriters, who work with loan officers and loan processors to complete the entire loan file, including credit risk underwriting. Lenders can access these services on a pay-per-file basis with no long-term commitment. For example, Verity will process, underwrite, and clear conditions for closing, and our methodologies include a buyback guarantee, which reduces a lender’s financial risk. We also provide buy reps and warrants on loans we underwrite for up to $100,000 per loan, with a $1 million aggregate per client.

NEWSLINK: Underwriters are reportedly in short supply, which is slowing down loan production for many lenders. What are the advantages of outsourcing underwriting support from a third party? What are the risks, and how can you avoid them?

PATEL: Underwriters are in short supply everywhere, including for onshore and offshore outsourcers and contractors. The advantages of outsourcing underwriting support depend on whether you’re using offshore or onshore assistance. For example, a typical ramp-up time for offshore underwriting support is 45 to 60 days, while onshore support can take as little to 20 to 30 days. Onshore, your QC needs will be minimized to an extent, while offshore, you’re QC needs will increase. On the other hand, offshore support can be obtained at about 50 to 60 percent of in-house salary costs—plus you’re not paying benefits. Either way, your outsourcer’s employees will need to be trained on your processes and methodologies, so finding an outsourcer that rigorously trains its staff can help mitigate some of the risk.

NEWSLINK: Are there certain tasks or processes that lenders can outsource and lower costs that they may not be aware of?

PATEL: I don’t think many lenders realize that they can outsource practically any function or component of the mortgage process, from initial and closing disclosures to HMDA reporting, loan setup, pipeline management, shipping, title searches, Encompass administration and more. The typical loan has about 20 functions that can be easily outsourced. With the right vendor, each of these can be broken down into buckets to take a significant amount of the burden off a lender’s domestic underwriting staff. It’s a matter of finding the right balance between outsourcing and in-house staff. An experienced outsourcing provider can help determine the mix that works for each organization.

NEWSLINK: How has technology improved to better manage and even decrease origination costs?

PATEL: There are constantly new technologies coming out that are significantly reducing process times and helping lenders to lower costs.

For example, right now we’re beta testing our own automated appraisal review system that reduces the time it takes to review appraisals from two hours to half hour, while decreasing the cost of reviews by up to 80 percent. It’s an interactive collaboration tool that extracts all the data from an appraisal report and runs it through 2,500 business rules and USPAP guidelines before creating an exception report, all in just a few minutes. It also checks appraisal values against values from third-party data providers and compares similar properties to each other—even comparable properties located in HOAs. As the industry matures, we’ll see more automation, including AI and robotics, to handle repetitive tasks. Those forms of automation have been shown to save as much as 60 to 70 percent of the cost of managing human staffs.

NEWSLINK: Since many lenders continue to hire new staff to meet origination demands, what do you anticipate happening if rates increase in 2021?

PATEL: Rates will probably remain the same or might see a slight increase in 2021, but even if rates do not change, origination volumes will decrease. At some point, everyone who can refinance their mortgage will have already done so. Lenders will have to switch their focus to purchase volume, which is going to be 60 percent of today’s volume. For most lenders, the core teams they have in-house will be sufficient to manage those volumes.

I don’t think we’ll see much downsizing, but lenders will be looking to trim costs. Contract underwriters will probably be the first ones to go, because they typically act as an extension of the lender’s staff to handle overflow. At the same time, I anticipate an increase in outsourcing components of the underwriting process, because the cost of employing offshore staff is about 40 to 50 percent of what onshore employees cost.

All this being said, most lenders that utilize both onshore and offshore teams will probably reduce their dependence on each equally, to keep the same balance of workload the same. If you’re using offshore teams to handle bulk processes and onshore teams to handle exceptions and more challenging files, the value of having that mix will be the same no matter what happens to volumes.

NEWSLINK: What advice do you have for lenders who think increasing staff is the answer to handle increased origination volumes?  

PATEL: Increasing staff is typically the go-to option for most lenders that find themselves suddenly dealing with increased volumes. But it’s really a short-term fix, and an expensive one, too. The better option is to look at a long-term solution that will help them maximize productivity and minimize costs while also providing the ability to scale up or down swiftly with volume swings. In most cases, outsourcing work to a trusted third party is probably the best way to go.

NEWSLINK: What is your outlook on lenders and outsourcing for 2021? Will we see more or less outsourcing for originations and QC, and why? What processes or tasks do lenders need the most help with?

PATEL: I see less outsourcing for underwriting ahead, simply because the volumes won’t be there. A lender’s internal staff and offshore staff will be able to fulfil those requirements. But lenders will still be outsourcing functions like QC, post-closing QC, disclosures, and title and settlement services offshore, because it will be too costly for lenders to use their internal staff to perform these repetitive, checklist-driven tasks. That’s why I think you’ll see an increase in offshore task-oriented work, while lenders maintain high-level, critical thinking jobs in the U.S. But even for relatively simple, repetitive work, successful outsourcing depends on using a highly disciplined partner with proven expertise in the services you need. No matter what happens next year, that has always been the case, and always will be.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)