Since the middle of last year, mortgage lenders have seen margins come under severe pressure. Relatively low demand compared with volumes experienced in 1999 and increasing price pressure borne out of massive oversupply means few lenders can originate anywhere near as much business as they would like.
At the extreme end of the spectrum, many small lenders are struggling to match new lending with redemptions and the prospects of regaining market share of new origination look bleak.
In short, lenders face the dilemma of choosing either profitability or growth, with a combination of the two seeming to be an unrealistic goal.
These competitive pressures force lenders to look to cut overheads in order to preserve profitability by, for example, converting fixed costs into variable ones, which fluctuate according to the volumes of business written. In the circumstances, and with the millennium IT issue safely negotiated, outsourcing has come back on everyone's agenda.
Instead of each lender running an internal factory to process payments and administer customer loans, these functions are passed to an external specialist company which is equipped to look after the loan portfolios of many lenders, thereby achieving economies of scale.
Third-party admin is not limited to mortgage loans, it can equally be used to manage secured or unsecured personal loans, credit cards or any other kind of lending portfolio.
This means lenders can save time and money and concentrate on what they do best – developing and marketing products and providing customers the range of services and added-value solutions they expect.
Of course, it is in the best interests of IFAs that mortgage providers have high-quality, low-cost admin to offer efficient service at the lowest price.
What do lenders look for when choosing a servicer?
First and foremost, they need someone they can trust to look after their borrowers as well as they would do themselves.
This means finding someone who has a track record and can provide the references of having looked after portfolios of mortgage assets for a variety of lenders.
After all, would they really trust their administration to someone who had not done it before or whose primary focus was looking after the assets of its own parent company?
On top of this, lenders should look for added-value services above the standard package.
These include internet capability, ideally with online origination capability, and the ability to interface with in-house systems so lenders can continue to manage their key customer relationships – again very important for IFAs.
Among the players in mortgage outsourcing are Global Home Loans (a joint venture between the Woolwich and Countrywide Credit of the US) and Alltel Mortgage Solutions (a joint venture with Bradford & Bingley).
The market has also attracted the interest of other new entrants. In 2000, Marlborough Stirling and Egg announced their intention to enter the market through a joint venture to be known as MSMS.
Global Home Loans and Alltel are working hard to take on the assets of their owners, and are positioning themselves to handle third-party business.
However, such existing players need to continue to invest in technology and in people to compete. There are significant barriers to entry in this business.
As we have seen, client expectations are necessarily high and meeting them places heavy demands on existing players and new entrants alike.
We believe that, by 2005,up to 40 per cent of the UK's residential mortgages may be administered by specialist servicers set up for that very purpose.
This year, many lenders have been seriously looking at third-party mortgage admin as a potential solution to their problems and we anticipate the early announcement of at least one more major joint venture involving a top 10 lender and an IT provider getting together to offer third-party servicing.
As lenders review their options, we believe more and more will conclude that maintaining the infrastructure to administer their mortgage and other loan port- folios just does not make financial sense.
So the outsourcing market seems set to grow strongly. As this happens and we see more new entrants in the marketplace, the business will become increasingly competitive.
In this business, reputation and credibility are hard won and we see competition as being based on three key drivers – track record, technology and a total commitment to personal service.