Walk Before You Run

A slower approach to outsourced lending pays dividends for First Magnus.

As margin pressures increase and technology becomes ever-more critical to lending operations, more and more lenders are outsourcing back-office processes to cut costs and concentrate on customer-facing needs, according to Craig Focardi, research director for consumer lending and banking with TowerGroup (Needham, Mass.). First Magnus Financial, a top-20 wholesale and retail mortgage lender based in Tucson, Ariz., that services $25 billion in loans, stepped gingerly into the outsourcing arena for its back-office technology and support needs in February 2004.

First Magnus partnered with Tucson-based Trinity Partners, a business process outsourcing (BPO) provider. Since both companies are based in the same city, the partnership was a natural, relates Karl Young, COO at First Magnus, who adds, "Trinity has the most experience in the mortgage vertical." Consequently, First Magnus declined to enter into discussion with other outsourcing providers.

Trinity Partners hosts all hardware and software and hires employees at facilities located in India, which enables a lower total cost for lenders than doing the work in-house, the vendor asserts. Though lower costs were primary considerations for First Magnus, according to COO Young, secondary drivers included centralization and standardization of processes, increased service levels and faster deployment of technology -- which, hopefully, would result in increased revenue, he notes.

Snapshot Institution: First Magnus Financial (Tucson, Ariz.). Assets: $25 billion in loans. Business Challenge: Improve lending operations by outsourcing back-office processes. Solution: Trinity Partners' (Tucson, Ariz.) outsourcing services.

First Magnus originally concentrated its outsourcing efforts on low-risk, non-core processes, explains Young. "We started with functions that were less knowledge-intensive so that [the outsourced support staff] could perform them without a lot of specific knowledge about the mortgage industry," he says. These included loan document indexing; investor loan delivery; quotes, locks and extension pricing; purchase advice pricing; loan data verification; risk management; and quality control processes. Each of the functions took about three months to outsource once the process began, and, says Young, "We've saved more than 50 percent [in costs] on each of the processes that we've outsourced."

As each project succeeded, First Magnus and Trinity worked on outsourcing the next one based on a schedule developed when the two firms began their working relationship. Although First Magnus was pleased with the initial success, the lender contacted NeoIT, a San Ramon, Calif.-based offshoring advisory firm, to make sure the bank was receiving the expected benefits. "NeoIT told us that we were doing the right things," Young relates.

The Customer Comes First
The development of a strategic outsourcing model has enabled First Magnus to focus on growing its customer base by expanding product offerings to benefit the changing mortgage environment rather than on back-office processing, Young contends. With the exception of some short-term customer help desk support, which was one of the most recent functions outsourced (October 2005), customer-facing functions have largely been retained in-house because First Magnus did not want its customers to feel as if they were working with an offshore, third-party company, Young says. "A big part of our business is customer service," he adds.

And offshoring actually has helped First Magnus improve customer service, Young continues. The lender has been able to reduce turnaround time for loan processing, loan sales (on the secondary market) and post-closing document retrieval, he describes.

Young credits the relationship with Trinity with enabling First Magnus to increase business from $16.5 billion to $25 billion in the past year. In the past five years, he notes, the mortgage lender has opened more than 200 offices in 31 states. After reaping such benefits from outsourcing, First Magnus is reviewing the possibility of outsourcing additional functions in the future, Young adds.