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Simplification brings Mortgage Underwriting team closer to increase of approving

HAMP Loans| Case Study

Client

A privately held company working to

approve mortgage modification loans for

customers in the United States of

America.

Challenge

Cost per modification was $90/ loan as

against a target of $30/ loan.

Mortgage modification Approval rates

were as below

1. First pass approval – 20%

2. Second pass approval – 20%

3. Third pass approval – 30%

4. Fourth pass approval – 30%

Solution

The project team used traditional Lean

and Six Sigma practices with a focus on

reducing/ eliminating wasteful activities

in the process and implement plans for

continued training, measurement,

control and sustenance.

Results

The company managed to reduce cost

per loan modification from $90/ loan to

$35/ loan and also increased HAMP

approvals until 2nd pass from 40% to

75%.

The company got acquired in the 3rd

month of sustenance of the project.

Identifying and removing hard to see waste in a typical

service centre environment to increase opportunities for

cost reduction.

Identifying wastes in a process is possibly the first thing

anyone would do in order to improve their process. In a

classical service/ contact/ call centre industry, it is this first

step that proves to be a stumbling block for a lot of

individuals.

When the company’s underwriting unit having a workforce

of about 70 underwriters and 2 Quality control specialists

experienced high modification costs per loan, resulting in a

loss of approximately 30% of their revenues due to Cost of

Poor Quality, the consultant C. Vishwanathan, then working

as a Lean Six Sigma Black Belt with the company decided to

initiate a Lean project.

Since the client volume was growing month on month @

10%, this problem would have had to be fixed with

immediate effect to ensure the company was working on

optimal cost margins.

Step 1 – Formation of team and assigning roles and

responsibilities

A team was formed and the business case was discussed with

all team members. The team composed of 5 people – C.

Vishwanathan, the AVP of the business process, the

Manager, 2 team leaders and a senior underwriter. After all

the team members agreed to their roles, we moved to Step 2,

which was to collect data.

Step 2 – Data collection

Data was collected from available reports on:

a. Experience of associates

b. Class of loans by geography

c. Average cycle time per loan

d. Number of passes made by loans

A sample period of 6 months was decided as apt for data

collection.

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Step 3 – Current State Map

The current state map was created by the team,

which identified various points where the loans

were getting deviated from the future state

version.

This was attributed to the loan complexity and the

case of missing documents. It was found that

about 70% of loans that went through multiple

passes had missing documents.

Four issues were attributed to the high

modification cost and low rate of first and second

pass approvals:

1. High instances of missing documents

(70% of loans had missing documents)

2. Repeated loops into Quality Control

Department.

3. Income calculation from credit statements

proving tedious exercise for underwriters

(Approximately 80% of the cycle time

spent in IC)

4. Errors pointed by Quality Control not

rectified even in first and second pass.

Step 4 – Future State Map

Once the current state recommendations were

agreed upon, the team decided to prepare the

future state map, which would have little to no

wastes identified.

Training and educating the associates of the

process was important and it was taken care of, by

the training manager.

A team of 5 associates was formed from the floor,

who would review all the loans for documents.

They would hit on “All documents ok” on the

Loan console, which will lead to loan flowing into

the underwriter’s queue.

It would take approximately 2 minutes/ loan for

these associates to review a loan for documents.

On an average day where 500 loans are processed,

this totalled to 1,000 minutes of reviewing

documents work.

Contd..

Next, weekly calibration sessions begun to happen between

the Quality Control department and the Underwriting

department. Areas of opportunities in terms of knowledge

gaps were addressed during these sessions.

These calibration sessions also led to a gradual decline in the

number of errors being made by the underwriting

department.

Income calculations which was consuming about 50% of the

cycle time for every loan was finally to be considered for

improvement. The project team agreed that while fetching

entries from the credit report cannot be automated, the basic

calculations by the underwriter once the inputs were

provided could be automated. The project team formed the

logic for calculation and the IT Department was asked to

create a software which could be launched on the

underwriter’s consoles. The IT Department created the

application within a week’s time and it was tested for proof

of concept. Initial training was provided to a team of 5 senior

underwriters and their performance on the new software was

measured and checked.

Once the pilot was deemed successful, all the underwriters

were trained and got to use the software application within 1

week.

Here is a timeline for all waste elimination activities

1. Identification, training and process workflow

creation for doc review team – 1 week

2. First round of calibration sessions followed by gap

identification and fix – 2 weeks

3. Income calculation software – 2 weeks

All of these activities were conducted in parallel with the

Managers and the Team leaders working in close cohesion to

deliver results. The project leader took stock of all the results

and validated them with data.

Step 5 – Lean as a way of life

“It was extremely important that the pilot gains don’t subside after pilot

completion and all concerned stakeholders ensure they understand how to

sustain this project in the long term.” --- Vishwanathan

The new procedures were drafted into the Standard

Operating Procedures of the business unit. All trainers in the

process were introduced to the new way of working and

recognition platforms were decided upon for sustenance of

the project.

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Step 6 – Measurement of results

As the project pilot was completed after the sustenance activities were drafted, the project team decided to

measure on a sample of 15 days after completion of the pilot, the effectiveness of the project. The key

indicators that were measured are:

1. Time to complete income calculation

2. First pass rates

3. Second pass rates

4. Quality errors (DPU)

5. Knowledge gaps between QC and Underwriting

6. Cost per modification

Stage Pre-Lean 15 days after Lean

3 months after Lean

Time to complete income calculation 15-20 minutes 2-3 minutes 2-3 minutes

First pass rates 20% 32% 45%

Second pass rates 20% 35% 30%

Quality errors DPU 1.2 0.2 0.09

Knowledge gaps between QC and Underwriting

2 gaps per week

1 gap per week 0 gaps

Cost per Modification $90 $45 $35

Step 7 – Plan for future

According to the AVP of the business unit, “Underwriting is a technically sensitive subject and we weren’t sure if Lean

tools could help us in reducing wastes in our process. For sure, we have an experienced team that has been together for about 5

years, but we were absolutely clueless on what was resulting in such high costs. By doing such simple improvements to our process,

we have benefited our customers a lot. Now, we are in a position to take 20% more volume without even having to impact our

headcount.”

The business unit committed to sustain the results of the project in the long term.

3 months after the pilot project was done, the company was acquired by another company resulting in a

complete closure of all process improvement activities. Financial benefits was calculated for a total of 30,000

loans @ a cost savings from $90/ loan to $35/loan resulting in a total realized financial savings of

$1,500,000.

The estimated cost savings, if the project would have completed a year, would have been $6,000,000.

At an upfront cost of doing the project at $20,000 and recurring costs of $40,000, the project generated an

ROI of 25:1, and it would have generated an ROI of 100: 1 in the first year.