Outsourcing services for commercial real estate servicers

May 22nd, 2008 admin Posted in Uncategorized | No Comments »

SOURCE: MBAA.org ( Probably – someone just emailed this to me!)
DATE: May 21st, 2008

Primary servicers now weigh factors other than cost benefits to determine inherent profitability in outsourcing services—onshore or offshore—to commercial real estate vendors, said industry experts here at the Mortgage Bankers Association’s Commercial Multifamily Servicing and Technology Conference. Mark Goldberg, director at Standard & Poor’s, New York, said that while lock boxes, Uniform Commercial Codes, tax service, inspections and insurance remain traditional outsourcing services for primary commercial real estate servicers, financial statements and new loan setup are becoming new functions to outsource.“Cost and expertise were traditional reasons for outsourcing, but business process outsourcing and time-sensitive issues are new reasons to outsource,” Goldberg said. “Outsourcing is in the eye of the beholder.”In an S&P survey of primary servicers—42 percent from mortgage finance, 35 percent from banks and 23 percent from life companies—nearly all primary servicers outsourced lockbox service and 77 percent outsourced a tax service. Nearly 70 percent of primary servicers outsourced property inspections, 65 percent used a UCC service, 35 percent outsourced financial statements and 15 percent outsourced loan boarding.Of the 77 percent of primary servicers who used a tax service in the S&P survey, 70 percent paid tax penalties compared to 17 percent of the 23 percent not using a tax service. Three-quarters of the 15 percent who outsourced loan boarding paid tax penalties while 55 percent of the 85 percent not outsourcing loan boarding paid tax penalties.“It really stems from the setup operation on the front end for loan boarding,” Goldberg said. “Whether it’s a lock box or tax service, inspections were not getting done.”Sean Reilly, managing director of real estate structured finance at Bank of America, Charlotte, N.C., said company size, product, time sensitivity and risk level all factor into the question of outsourcing—onshore or offshore.“While billing processes could go offshore, high-risk, time sensitive and decision-making items would likely not be outsourced, Reilly said. “We typically look at processes that are matrix driven. We may decide to offshore something that is time sensitive, but the level of risk is definitely going to play into it.”Part of the advantage to offshoring is the time difference for Bank of America. “With overtime, some of the economics go away,” Reilly said. “The 24-hour shop helps quite a bit. It does give a little more flexibility.”Marilyn Addison, director of compliance and third party oversight at Wachovia Securities, Charlotte, N.C., said Wachovia assesses processes before outsourcing and performs a technological feasibility analysis, making sure it understands all decision-making procedures before outsourcing. “We do an assessment for each of the processes we wanted to outsource,” she said.Sherri Oddo, senior vice president of servicing and closing at Q10 Essex Financial Group, Greenwood Village, Colo., said compliance issues—such as Reg AB, Gramm-Leach- Bliley Act and FAS 140 accounting rules—and technology make outsourcing likely to continue.Q10 Essex Financial Group provides subservicing for five different customers. “Corporate culture, including perspectives on customer service, all factor into outsourcing portfolios,” Oddo said. “As a subservicer, Q10 contracts on a percentage basis from the servicing fee. As loans mature, servicing fees shrink and costs adjust. It’s on a percentage of the servicing fee they are receiving for that portfolio.”
 
Q10 Essex Financial is also a non-private label environment that meets with clients in routine weekly meetings early in the portfolio to confront potential issues up front. “We’re very open and upfront with our clients that we are working with them in partnership,” Oddo said. “We do provide them with measures of how we are doing. We supply them with monthly reports.”Addison said communication with a partner for a good product is extremely important, but Wachovia continues to keep decision-making and borrower contact in house.“We make the decisions,” Addison said. “We keep the decision process in-house and make sure we retain our relationship with our borrower. There should be no impact on the borrower.”Oddo said smaller companies should also look at how outsourcing impacts their relationship with borrowers and customers. Reilly agreed, noting that firewall issues and interfaces should be discussed as part of the set-up.
 
“It’s really a business partnership,” Reilly said. “Data protection is going to be important.”Q10 Essex Finance places loan information on a web site so that borrowers, investors and the primary servicers could view information online. “They have that daily touch with their portfolio and they see what we are doing,” Oddo said.
 
Bank of America and Wachovia both outsource offshore in India—Bank of America with a subsidiary and Wachovia with a vendor. Bank of America bases it outsourcing on process control, quality control and cost containment, Reilly said, adding that vendor processes need to make sense to the Bank of America servicers.Oddo said Wachovia maintains oversight, making sure technology and security are functional overseas. Its outsourcing includes inspections, taxes, insurance and leasing. “It’s really dependent on the quality control on [the servicer’s] part or the vendor [the servicers] are using,” she said.
 
Based on the S&P December survey, outsourcing does create greater efficiencies. Outsourced loan boarding rated at 451 loans per full-time employee (FTE) compared to 60 loans boarded per FTE without outsourcing. Insurance consultants allow for processing nearly 1,299 loans per FTE versus 600 per FTE for in-house insurance reviews.The survey also found that financial analysis outsourcing achieved more than 800 loans per FTE versus 500 without outsourcing. Companies using tax service report tax payments averaged 1,800 loans per FTE versus 365 per FTE where no tax service was outsourced. Costs for outsourcing could be the same or lower, but outsourcing or offshoring can also develop talent and provide opportunities to allocate personnel and decrease per unit costs and overhead costs with in-house expertise to review a vendor.“I think there should be a short fuse in identifying issues or errors,” Reilly said. “A company outsourcing should expect high quality if in production. If the partnership is not working well, the primary servicer or lender needs to step back and the servicer needs to still take responsibility. You have to definitely stay involved.”
 
Wachovia’s product managers have day to day contact with vendors and create a scorecard on them, Addison said, and Goldberg noted some amount of overhead for monitoring the vendor. He added, however, that a vendor would not likely fix an in-house problem that the primary servicer has also been unable to repair.
 
“Generally, you’re just sending out your own mistakes to someone else,” Goldberg said. “As you can see, there are cost benefits to outsourcing, but if the process is broken, there are not going to be any cost benefits.”

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