TheMReport — News and strategies for the evolving mortgage marketplace.
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Feature I t may be 2013, but in many ways, the mortgage industry still operates as it did decades ago. Lenders rely heavily on manual processes, ad hoc and non-standardized work routines, subjective decision-making, and other outdated operating methods. Clearly, in today's environment—marked by cost pressures, heightened customer expectations, and intense regulatory scrutiny—the industry can ill afford to follow yesterday's playbook. What's needed is a model that applies modern manufacturing principles—quality control, industrial engineering, and systems design—initially pioneered by Japanese manufacturers following World War II. Indeed, Japanese manufacturers' ability to produce high-quality, low-cost electronics, cars, and durable goods in the post-war years was defined by a commitment to the principles of continuous quality improvement, as represented by Lean Six Sigma, Kaizen, and other managerial philosophies. Mortgages and Manufacturing M ortgage processing and traditional manufacturing have more in common than one might initially think. The fulfillment process—from completion of a loan application through processing, underwriting, closing, and investor delivery—is often referred to as a "factory model." The term "loan factory" is tied to the concept of industrializing the fulfillment process by introducing Lean Six Sigma methodology. That includes implementing advanced technologies and analytics to drive business intelligence, boosting efficiency through relentlessly consistent processes, and creating a more accountable environment. Today's increasingly complex operating environment is creating a huge challenge for lenders' "loan factories": how to lower costs while increasing productivity through more efficient, repeatable processes. Driving out variation and creating standardization methods are critical to delivering that efficiency, as it is in manufacturing cars or other consumer goods. Incorporating Manufacturing Discipline H ere's how the re-engineering of a mortgage process can incorporate the five principles of lean manufacturing: Value. The loan fulfillment process must only contain activities that result in the aiding or creation of value for the customer. Thus, each activity can only exist if it creates quality (accuracy and compliance), cost, service (customer experience), or delivery (cycle time and data accuracy) advantages. Any effort that does not contribute directly to these objectives is waste. 01 Mapping Value Stream. The order and flow of activities have to be designed to enable efficient execution. The steps in a given process build and contribute value to each subsequent step. Re-work and redundant activities destroy value, waste time and money, and create frustration for customers as well as employees engaged in inefficient and poorly designed activities. 02 03 Flow. Work should proceed at a consistent and unwavering pace from start to finish with predictable and constant progress. Barriers such as hold times, work queues, and re-work loops increase complexity, interrupt flow, and impede the ability to consistently commit to delivery cycle times, all of which results in higher costs. Pull Theory. Large pipelines requiring constant manual auditing to sift and find the next "activity to complete" create obstacles that quickly become unmanageable and unpredictable. With lean manufacturing principles, however, work is pulled through the system only when the process or the people have capacity to adopt and execute that work. To maintain cycle times and predictable closing rates, mortgage activities should move through the process at scheduled and predictable times, ready to be addressed on arrival at each step in the process. 04 Perfection (Continuous Improvement). Collecting performance data and applying analytics allows statistics to describe a "voice of the process" that constantly identifies inefficiencies and patterns of inconsistency, enabling real-time re-prioritization and corrections. 05 Designing the Mortgage Factory P rocess mapping and failure detection techniques—borrowed from Lean Six Sigma methodology—isolate frequently recurring defects and process constraints that hamper the mortgage loan fulfillment process. Breaking out the traditional workflow into its value-added sub-components, and asking the following questions, is the launch point for designing a modern factory approach: •• Why is this step relevant? •• What outcome will this step achieve? •• How do we know when a task is thoroughly executed? •• How should we measure the success of this task? •• When should this activity occur in the value stream to create logical, efficient flow? •• Can this task be outsourced to a specialty service provider who can perform it with greater efficiency and quality at lower cost? •• Can this task be eliminated or automated? Next, work activities must be arranged in a lean fashion, with the following principles as guidelines: •• Prioritize the customer experi- ence and service outcomes when designing any activity. Incorporate customer-facing portal technology that enables customers to monitor loan status in real-time and upload documents, without having to engage bank personnel. •• Eliminate activities that don't add value. •• Reorganize work into parallel or staggered activities that can be completed concurrently, so the output of one activity becomes the logical input for a subsequent activity. •• Balance staffing models based on normative cycle times and time-study measurements, and design the capacity of any single activity in the value chain so it harmonizes with downstream and upstream feeder work stations. This enables work to flow from one active station to another without resting in a "holding bin" until the next process can catch up. Files keep moving with minimal wait time. •• Install in-line meters that monitor cycle time compliance and quality compliance to ensure that a loan file is accurate and complete before it proceeds to the next station. The goal is to process the loan file so that it can close without any re-working or re-routing. •• Collect data and monitor trends that identify activities that do not yield intended outcomes so that corrections can be made. The M Report | 25