[David] I think the trigger leads Alice was a significant, again, MBA talked about it the last two months, which means there not a lot of talked about it twice two times in a row, which means probably not a whole lot of things happening. Anything else on your radar, Alice?
[Alice] For the legislative update.
[David] Yep.
[Alice] Yeah, so the thing that’s on my radar today was there was a recent FHA credit watch termination, actually direct endorsement authority termination. I don’t like to name lenders names because that’s not the important part for our show. I’m not trying to call anybody out. But since that came up I went back and took a look at the FHA compare ratio numbers. Now those of you have had to deal with these for years, know that there’s a lot of flaws in this number, but nonetheless, it still is the number that FHA will primarily use to be able to identify whether or not they’re going to come into a lender and really start, conducting a physical and really having concerns about your FHA loan quality. So one of the things I want our listeners to be, aware of is take a look at when you sort the FHA neighborhood watch list by who has the highest compare ratios and this lender of course who had their DE authority pulled in a couple of branches, couple of regions who’s on that list is, is up in the top five of that list and when you sort it by high compare ratios and you look at the top 50 names, register those names, then you go back and you sort it by volume. Who are the lenders who do the most volume and what are the names in that top 50? And only one lender appears in the top 50 of bad compare ratios. So very often it’s the smaller entities, it’s not the giant folks because they have that denominator to work with. They’ve got lots of volume that helps keep their numbers down even though their unit count can be really high. So it’s just was a good time to put neighborhood watch. And FHA quality on the table. As lenders are always looking for volume, one of the things that they start doing is looking at where am I in relationship to my peers and should I be pushing my FHA credit quality a little bit, push the boundary, get the envelope a little bit closer to the table to get more originations in the door. And can I be comfortable with managing that level of delinquency, pushing into that 150% range? But out of the top 50 lenders in origination volume only one was on the top 50 of high compare ratios and I did the top, that would be over 164%. So it was interesting.
[David] Yeah. It is interesting and Kittle and I were talking this morning. We were having coffee before breakfast and about that one particular lender and it’s really interesting and we’re gonna leave them mundane because certainly don’t want to generate undue tension. It’s, but it’s really a good point to Alice. We gotta be focusing in on it. You’ve gotta be looking at compare ratio as we start dealing with this. It is volume does flow to mean rising tide floats boats, and that’s so nice when you have the extra volume. If you’re gonna get into this, you better start out a little bit more on the conservative side. And he said that’s not fair because I see what some of the bigger lenders are able to get away with because their denominator, they’re dealing with so many more loans. They’re able to get away with things. Yes, they are. Get over it. Manage your number because it will bite you. There’s gonna be some limiters getting. Their papers. We were sitting with Brian Montgomery last night. He used to be at FHFA there so much, F-H-F-A HUD and both at Ginnie Mae and at HUD. It’s really fun to get some of his take on what’s going on in the market. And we’ll leave that commentary for another day because I’m trying to get, we wanna get him back on the podcast. Great perspective on what Brian is seeing from his place in DC. A lot going on in the marketplace. But Alice, I had a question for you. When you look, and it’s related to rates, but it’s also related to operations. You did a lot of work. You and I have worked together on some clients. Radius Financial is one of them. That’s we got other people interested, really focusing on processes. I would ask our listeners, how are you preparing for a loan volume increase without a fixed cost?
Alice, I’d love to get your comments. Is this the solution more? operational efficiency is something you and I have always talked about for years and years and over our friendship but then there’s also, do you go into a fixed cost structure hiring a people. That’s what I hate about our industry. We hire higher, then it gets to Thanksgiving right into, we go into the holidays, we lay everyone off and the humbug of the holidays is our industry. So why would you say Alice, to those that are contemplating how to prepare, as you look at this discussion on the interest rates after all the years of consulting you have done.
[Alice] I think one of the ways it’s easy to pivot or if you try and say, how can I be more nimble, is to make sure and there’s many, but, the first one that comes to mind is making sure that you have positions that are entry level and technology. So it’s a combination of people and technology that does all those small tasks to get a loan onboarded. Literally onboarding, or when I say onboarding, getting those initial disclosures out, everything in that initial stage of the loan to get everything set up and everything ordered. Can you get that to where a human doesn’t have to touch the file, but if a human does have to touch the file. Can it be entry level? and so trying to keep your experts up at a different level. You can call it a split bifurcated loan process. You can talk about setting up pods. There are multiple ways to achieve this and I know those of you with smaller staff, you’re cringing right now. But that is the really, so that you have a way to build people. And you’re not trying to hire experts. You’re hiring people across the middle spectrum. And your more specialized folks can, your underwriters and so forth, and are saddled with as much work. They’re just checking the rough stuff. And as much as possible can go through the system without a human touching it. So you need Allen.
[David] Yeah. I mean it, it is really showing up to be the case. The company, Radius Financial, we worked with Al to gather they started putting in bots. When we, how many? That’s over 10. 12 years, 30 years ago that we did that project with them and they immediately start putting in bots and bots. Now we have AI agents and so many new tools that are out there. Before we get into the technology component, are you seeing any trends when you’re talking to the people you know, Alice, that are leaning more towards the higher cost of outsourcing rather than hiring a permanent hires are more affordable, but it’s a fixed cost, whereas you go to a variable cost leaning on some companies out there, evolve is one of them that’s doing contract underwriting for lenders. It’s more expensive, but it is a solution and we create some variableness to the overall cost. Any recommendations you have or any thoughts you have on that?
[Alice] I do from working at Indiecomm for many years, and they were a great provider of outsourcing services for absolutely anything, right? They could contract out for a small little piece of the process or for a big piece, and especially underwriting. And what I learned from that experience is if you wanna get into outsourcing and having it as a solution, you need to always have outsourcing. So it’s not something that you just pick up in one day. Hey, this is great. I’m keeping my two day turnaround, and I’ve turned on outsourcing. You need to have your systems change when you’re working with an outsource provider. So to have that wheel constantly moving all the time within your operation, or if you say, I need this because I like this, like you said, Dave, it gives me a variable cost model that I can, I’m more comfortable with. So that would be my recommendation. If you think you can, if you’re okay with that, you can find a good vendor to work with who gives you the same customer service that you want. Then when you establish it, commit to establishing it, you can ebb and flow that piece then that’s the piece that’s going up down opposed permanent step. But don’t think of it as I turn it on and turn it off. Turn it on and keep it running. I the like your merchant Marines, right? They keep shipping running for us all the time.
[David] That’s a great way to put it.
[Alice] So anyway, I’m wondering Dave, if you had something, David Kittle, you went Oh, Kittle, a long time ago when we were talking about compare ratios. I wondered if you had something there.
[Kittle] No, not really. My highest if we’re talking about the FHFA compare ratios, is that what you’re talking about? Yeah. In the first company I had on that 12 and a half year run or whatever it is. Let me see if I can remember something real quick. I indemnified one loan, went through one HUD audit where they came in they were gonna nail me and hit me with a penalty because I had a title company, which was totally arrestable compliant. I had to hire, they hit me with, $20,000 worth of penalties. Think about this. And I hired I can’t remember the respa attorney in DC. We went before the mortgagee review board and it all got thrown out. So it cost me $27,000 in attorney’s fees to get rid of a $20,000 penalty.
[Bill] Yeah. So Alice’s point, right? You to be successful, you need to outsource when you wanna, not when you have to, right? If you try and create it when you’re behind the curve, it’s gonna, yep. And the other thing and especially for the smaller lenders, the number one, to me, the number one driver of efficiency is starts okay, with a pen and a piece of paper. You’ve gotta have detailed procedures on which you do, because I totally agree with Alice, if you’ve got something in a bigger shop that is automated, yeah, it’s gonna be frustrating. If we had that automated you don’t today. So the next best option is the lowest cost of labor possible. And that is directly related to how detailed you are in what the steps are, number one. Number two, if you start down the automation path with bots or anything like that, to automate it, you have to know what the steps are, if you try and wing it, then the low cost labor model will blow up in your face. But if you take the time, and that’s what you should have done, when business is slower to make sure you’ve got detailed step by step, then you can hand that to somebody and you’re not looking for a mortgage skillset. You’re looking for above average intelligence that can follow directions. It’s not a complicated formula. That’s why.
[David] And yeah. And that’s why you, the folks in India, which whether it be Indiecomm all the others that are out there, FlatWorld, that have a huge contingent, a thousand, thousand people in the India, they are that, but they require, they’re very bright, but they are very much a tell me what you want to do exactly the way you don’t wanna do it. And we’ll absolutely commit and execute, which is to Alice’s point, if you’re gonna go on a variable cost. Outsourcing is a great way to do it, but you gotta be committed to it and you can scale that up and down. You raised a really good point, Alice.
[Alice] Oh yeah. And I, you know me, written procedures, everything has to be written down every click. Don’t assume they know to, don’t assume someone can walk in the door. You can hand them this, these steps and follow it and it works. Yes, that’s been my life.
[Marc] Hey David, chime in here if I could for a minute. Yeah. I spent most of my career one, one factor or another managing outsource that work for me. And in consulting That’s right. You did outsource for other people. And the one thing I learned is that most of us in the industry make a mistake. We look at outsourcing as being an easy solution and it’s not. You gotta make sure that when the volume starts going up again, that the outsource you use is not a company got set up three months ago seeing this thing run. You gotta look at their track record, you gotta talk to the people they outsource for and see what kind of job they do and evaluate them on that. And you gotta make sure that, I agree with the comments were made earlier. If you’re gonna do outsourcing, it always should be a relationship for you so you can manage it and then you just ramp it up in times of volume and keep it out there as a solution for you so you can stay on top of what they’re doing, the technology they’re using and everything else. Too many of us in this world see outsourcing as as I looked at outsourcing and I’m deaf on outsourcing overseas by the way, because I managed that for Washington Mutual. But in outsourcing can screw you over in a New York minute if you don’t pay attention to it and monitor it. And I can’t say enough what, enforce enough what Alice said about having the right kind of procedures to put outsourcing in play. And just remember, just because we’re an outsourcer, they don’t mean they can do it any better than you do it. What you’re doing is using it to handle the volume for you. Sometimes it could be better, but most of the time they are hiring people off the street and training them, they don’t. The only good thing going on when they’re outsourcing right now, there is the surplus of underwriters out there that are working for outsourcers. So at least that’s one piece of it. It might work pretty well right now, but I just caution people going, outsourcing the right way and make sure you cross your T’s and dot your i’s. ’cause if not, you can really blow yourself up real quick.
[David] Yeah. Not everyone has the ability to travel. How many times did you go over to India, Marc while you were managing that? All of that at Washington Mutual.
[Marc] I went to India about four times. Philippines, twice Mexico, one time. Costa Rica, a couple times, Panama a couple times. Oh my gosh. And then we had a small amount of systems outsourcing we did in Ireland. I went there once. So it was a big deal.
[David]Yeah, tremendous amount of experience on it and very few people fly around and can afford a, companies can fly around. So , I mean I think this gets to a bigger discussion, guys that I wanted to go to is we’ve already talked about the scale, like whether it be a compare ratio. How do you compare ratio? Big companies have an advantage. You look at outsourcing. Big companies have an advantage. Big companies all have these advantages. Does that mean it’s lights out for the little guy? And I’ll argue, absolutely not. But you’re gonna have to be dang good at what you do as a smaller company out there. And you’re gonna have to be very nichey and very good. And that comes in the product. I’m working with a client right now that is doing brilliant job of marketing a particular product. He’s found this one product and is very perfect for this kind of economic environment. He is. And I’m not gonna tell what it is because this guy has, he is a client and he is knocking the cover off the ball because he found one product and he could sell it extremely well. There’s an example of a small company doing that extremely well. They manufacture, we make this one widget and we make them better, faster, cheaper than anybody else out there. And that’s, think it’s where consultants can come in and play a role. I consult, Alice is retired out of it, we wanna try, always try to drag her back in. Bill does a consulting on and kittle and I mean we all do it. Marc does. So I think it’s a really advantage when you’re considering some of these strategies. Listeners get somebody in there that, who’s been got the bend there, done that t-shirt like we all have here. And get some advice. It’s, most of us will talk to you for a little bit at no cost, give you some direction on it, but you should go deeper than that. We’ll leave it at that.
Alice Alvey, Master CMB
She handles development of their World Class Training program designed to support UHM partners and organizational effectiveness.
Prior to UHM, Alice served as Senior Vice President at Indecomm leading the Indecomm-Mortgage U division, Internal QA and Compliance and SaaS technologies. Indecomm acquired Mortgage U in 2013, where Alice was President/Co-founder, providing training and consulting since 1996. Prior to MU she served as SVP of Operations at a national bank overseeing operations for wholesale, retail and correspondent from underwriting through servicing, and compliance.
She has been in the trenches of mortgage lending operations from application through servicing for over 30 years. Her authoring work in training content, policies and procedures and the FHA/VA Practical guides illustrates her ability to bridge regulatory requirements with day-to-day operations.
Alice has been a weekly contributor to the Lykken on Lending show since its beginning in April 2009 and has made her weekly contributions to 450+ episodes!