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Editor's note: This print feature originally appeared in the October 2015 issue of DS News magazine.
With foreclosure and REO inventory shrinking, firms must seek new ways to eliminate costs.
By Shannon Cobb
The rebound of the mortgage and housing market is good news for all except those who work in the counter-cyclical segments, such as foreclosure and REO services. What was a boom period in the late 2000s has now dwindled along with the national foreclosure industry. Adding to the anxiety of most businesses is an increased regulatory scrutiny being placed on many in the industry, especially servicers.
As REO-related firms look ahead to the near future, they realize that order volume will be dramatically reduced. They will be battling for market share. They will also need to find new ways to contain costs, which are only rising as regulatory-driven requirements multiply. Some actions will be obvious to any business owner, but difficult to execute. Others might not be so readily apparent. Either way, it is never a bad idea to review expenditures and the systems, policies and procedures which spawn them, asking “where is my operation inefficient?”
New Technology?
About the last thing most business owners wish to do when markets recede is invest money into infrastructure—especially technology. It seems counter-intuitive to spend money when there’s less to spend. However, the long term perspective must win out in these cases. If the technology in question is outdated, the replacement cost savings in the not-too-distant future will easily outpace the near term expenses. New compliance requirements will likely mandate the implementation of new technology solutions to some degree (e.g. TRID’s impact on loan origination systems, vendor management systems and title production technology). Technology, used correctly, is an excellent way to leverage the resources in place more efficiently. It can eliminate redundancies and tasks previously done by personnel manually and increase available space in the facility. Used properly, it can save time and increase productivity. Unless your firm is facing extremely bad circumstances, consider this as the time to shore up your systems before the next market upswing arrives.
Make Better use of Human Resources
It is an unfortunately reality in our world that the most expensive asset a company can have is its personnel. Although it’s never easy, downsizing staff is generally one of the first orders of business as markets shrink. However, now is also a good time to add an element of versatility to your team. It is a good time to train specialists in multiple tasks and introduce them to other elements of the business. Although it is an investment in the short term, it can lead to increases in productivity as well as sowing the seeds for future managers (who generally are more effective when they have a broader understanding of the operation). It will also save on training expenses and time should there be a need to further trim staff in the future.
Ours is an industry that, for decades, has been willing to outsource some services, but not others. A firm that outsources its tax, accounting and IT functions, for example, might balk at using title search products or vendor management providers. However, it’s highly likely that some of the firm’s highest expenditures (whether as a function of time or cost) can be outsourced with no loss of quality. Although many outsourcing providers, at one time, tended to cut quality for the sake of speed and cost, that is no longer the case. Any business process outsourcing firm or outsourced product producer won’t be in business long if the services or products rendered fail to meet higher standards.
An inaccurate or poorly composed element of the larger real estate transaction can have surprisingly major repercussions, and may be an indicator that the firm providing the product or service has produced subpar results on a larger, systemic level. The secondary market, government enforcement agencies, and clients won’t tolerate the risk associated with poor products or services. Thus, the outsourcing industry is involved. As is the case with using any vendor, of course, decision makers should be sure to kick the tires on any potential partners, including but not limited to sending them sample orders and visiting their facilities if at all possible. Due diligence should also be performed by collecting formal references from the potential vendor and informally soliciting the opinion of all network connections about their experiences with the vendor. Engaging the right vendor after a sufficient vetting process could be the difference between profit and loss in a down market.
Cut Operational Costs
A slowing market also signals that it may be time to examine the entire operation, top to bottom, for needless or redundant costs. One major expense to any firm is the brick-and-mortar operation and its related expenses. Unless your function absolutely depends on having a physical presence, how many offices are needed need to manage the existing clientele and, perhaps, add some scalability through centralization of tasks? Centralizing standardized tasks is a way to reduce cost because it eliminates redundant staff and tasks within the organization and gives flexible capacity abilities when the need to reduce or add scale comes into play. Closing an office need not be the only recourse. Can you reduce the amount of space you are leasing in a particular building? Is the commercial market such that there is some leverage to renegotiate? Many firms open new branches when order counts rise. However, it’s much more difficult to shutter those same sites when the market dips. Nonetheless, it may have to happen.
Location isn’t just important for those seeking to buy or sell a home. The location of the office can have an impact on costs. It may be time to trade an office in a trendy urban location for a suburban home if the difference in taxes, utilities and space is significant. It’s easy to be sentimental when it comes to a business that has been in a certain office for a long time. But that sentimentality may be harming the actual business in the form of unwarranted costs.
Even the layout of an office or offices can have an impact on costs. Is the workspace laid out efficiently to allow staff to capitalize on all of the resources available to them? For example, if the firm still utilizes copiers and scanners, are the personnel who use them located nearby? Are the resources the team needs to complete its tasks readily available to them? Is the office setting relatively pleasant environment? Lean staffs tend to have lower morale, leading to lower productivity. Responsible executives must do everything possible to ensure that the workplace is a setting conducive to a positive outlook from employees. The operation ultimately depends on the performance of the team.
Manage Risk
The threat of being audited and/or fined or losing a client because of a failure to comply with regulatory and client requirements is today higher than ever before. More lenders are doing more onsite audits to ensure NPI (Non-Public Information) is thoroughly protected. More state regulators are paying greater attention to our industry. If compliance and security is not a priority for the organization, now is the time. Business will be more difficult to gain in a down market. The success of the organization should not be impeded because of an in ability or unwillingness to acclimate itself to the new reality. Client and consumer communication regarding, encryption, the storage of sensitive data (limited server access ), and even which desks are near first floor windows (clean desk policy) are potential points of risk to the business if a cohesive strategy has not been implemented.
Risk doesn’t rest upon internal operations alone. Partners and vendors should be audited regularly with several contingencies considered. Are they protecting client NPI? How do they monitor the quality of their products or services? How does their compliance policy work? In a day and age where a mortgage lender is liable for the actions of its service providers, that lender will want to know how closely vendors down the line are being monitored. Now is the time to implement a successful vendor audit program. The potential financial consequences will seem doubly harsh in a down market.
Trimming outlays in a down market is certainly no revolutionary concept. But it is something few enjoy doing. It’s always more enjoyable to simply increase sales efforts in thriving markets to cover one’s expenses. However, with foreclosed and REO inventory sinking quickly, it will be the businesses willing to answer the hard questions and make the difficult moves which maintain acceptable profit levels.
Shannon Cobb is an EVP with American Tax and Property Reporting. He is responsible for the sales and operations of title search product SmartProp and other planned products in the mortgage lender and real estate information segments. Shannon has over 20 years of experience in the title and settlement services industry.
