Regina Braga of Res/Title: Margin Compression Doesn’t Have to Be Inevitable in a Competitive Market

Regina Braga serves as Chief Operating Officer of Res/Title where she oversees and manages day-to-day operations. She focuses on compliance, security, SOC Audits, licensing, state specific guidelines as well as the company’s overall growth. Regina began working at Res/Title in 2004 and has held every position in the Admin Department prior to her COO role.

Although some lenders are still seeing strong refinance volume in various markets, the refinance boom will likely be ending in the coming months. MBA recently announced it expects refinance originations to decline in 2022 by as much as 62%, to $860 billion (from $2.26 trillion in 2021). That decline, however, could be significantly offset by an expected rise in purchase originations to a new record of $1.73 trillion. In fact, MBA is forecasting a second year of record purchase volume in 2023. So although few, if any, will welcome the end of the refinance market, the good news is that there will be ample opportunity for strong purchase volume for the foreseeable future.

Right now, conditions are beginning to intersect that will likely create two new realities. One, an expanded production capacity built to capture the record numbers of 2021 will probably mean increased competition for market share with the decline in origination volume.

Second, the purchase transaction is an innately more complex transaction to streamline on the production side. Client service expectations and communications demands increase significantly when other entities such as real estate agents and sellers become involved. These conditions usually lead to increased transactional and service touchpoints and potential cost or delays. As a result, it’s quite likely that lenders who are configured to process refinance transactions in high volume could see the signs of margin compression sooner than later.

Although the mortgage industry hasn’t seen a true or robust purchase market in quite some time, lenders tend to have several traditional strategic approaches to the potential for shrinking margins. With almost any change of market conditions or cycles, the initial instinct is to pare back expenses, especially in non-revenue generating or support services such as HR, accounting/finance, frontline or customer service and even, to some degree, marketing. However, with the reduction in expense inevitably comes a reduction in capability and/or quality.

While the productivity in profit centers may temporarily rise, the opportunity for mistakes, errors and delays in the production process rises while ancillary service levels decline as well. More often than not, this approach becomes a hunker down and wait-it-out reality. While those lenders who do turn to third-party outsourcing to manage those functions, the quality of the service provider and the lender’s ability to integrate with its services and systems plays a massive role in the overall success of that tactic.

Another traditional approach taken by lenders facing market transition, especially lenders serving a multi-regional or national footprint, is vendor consolidation. The equation is fairly simple: fewer vendors handling more volume means fewer touchpoints, fewer system integrations to manage, fewer contracts, fewer service providers to manage and oversee (with all of the time and expense that comes with it), and even fewer fourth party subcontractors.

All of this can lead to significant cost savings. However, this approach too, can lead to counter-productive results as well. Many times, the service providers left standing after a consolidation process are the largest, enterprise level firms. The throughput, bandwidth and geographic coverage become the primary criteria for selection. However, other elements of the business can suffer when this happens. Many of these service providers are able to achieve their efficiencies and scale through the use of centralized process and centralized resources. That, however, can actually harm a lender seeking to grow in a purchase market, where a presence in local geographic markets is critical.

Instead, lenders should consider examining existing or new service providers for critical services (title, appraisal or other elements of the mortgage process that would be difficult to produce in-house, but without which, a purchase mortgage transaction simply cannot take place) much as they would their own, internal cost centers. Is the provider delivering ample value? Can that provider ramp up the services it delivers without loss of quality?

In evaluating a critical service provider in transitory markets, lenders do, indeed, need to ask if a vendor can manage additional order volume on a multi-regional or national scale. Without this requirement, the scale sought by consolidation in the first place is lost. However, lenders also need to evaluate whether or not the potential provider can handle the increased volume (while they will likely be managing less refinance volume, the assumption is that the provider will be absorbing more purchase volume from a wider geographic range of markets) without a deterioration of quality? Is the turn-time average or better than market average? Is the error rate acceptable? Do the vendor’s systems align seamlessly with the lender’s systems and workflow? Does the provider make itself as easy to manage and oversee as possible, including and especially on the compliance side? And does the provider deliver when it comes to client and partner communications and service—long a perceived thorn in the side of the title industry especially?

A lender seeking to consolidate its service network without a loss of service and quality should also demand even more. Even with the approach, odds are that most lenders will be functioning in the new purchase market with a “lean” approach internally. There is no reason a lender shouldn’t expect its service partners to help pick up the slack there where possible.

In a purchase market, a loss of marketing or sales capability is far from ideal when it comes to competing for share. Good, multi-regional service providers, regardless of where their processes reside, have a “boots on the ground” presence in most or all of the geographic regions they serve. It’s one thing to originate a refinance transaction for a Palm Beach homeowner through a loan officer in Orlando and a back office in Dallas. It’s quite another thing when a Palm Beach realtor with a question about the effect south Florida closing customs will have on the closing of her homebuyer is routed to an assistant located in Omaha with little to no local familiarity or expertise. A lender seeking to make inroads in a more competitive market may be able to help itself with a strong national marketing campaign, but the odds are that without a strong, ground-level presence in the markets where they wish to win share, those lenders will struggle in those markets.

A strong, national service provider can absolutely boost a lender’s standing in the local markets it serves at a local level, assisting (in compliant fashion) with networking, leads and localized understanding and knowledge to assist in the sales and marketing process. Many strong national service providers are also able to assist a lender when it comes to compliance in multiple regions, serving as a lookout and watchdog on the ever-changing regulatory environment impacting lenders at a state, county and even municipal level. More than a few service providers are happy to provide training, monitoring and updates to their clients on state and local matters—which can prove useful when a lender is otherwise running lean.

Finally, although it may not be an absolute necessity, a lender seeking to fully leverage its service network at minimum expense should consider service providers that offer multiple services. It’s one thing to partner with a top-flight, enterprise level service provider the strength of which is to process refinance transactions. That’s far less useful—or profitable—when the same provider turns out to have severe deficiencies in its purchase process, or doesn’t even manage purchase transactions. Almost every service provider claims to be “full service.” But not all of them offer consistent service from specialty to specialty. If your provider can offer niche services as well, so much the better. Commercial transactions, home equity products and even, in some cases, a capability to manage REO transactions can only add more value at a time a lender needs all the value it can get from its service network.

The coming purchase market should not equate to a downturn for prepared mortgage lenders. Instead, it should be seen as an opportunity to differentiate from the field, maintain success in the short run and position that lender for even greater share when the market turns again. However, just as the leading originators accepted and embraced the need to increase digital and automated capabilities the last time the industry anticipated a purchase market, perhaps this cycle will see a new and more customized approach to selecting and maintaining critical service provider networks—one that sees those partnerships as a chance to reduce internal expenses and leverage additional value from the right vendors.

(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.)