If a lender wants to offer reverse mortgages -- but has no idea how to process them -- Mortgage Cadence is poised to offer business process outsourcing to handle all the complexities involved. Meanwhile, Guardian Mortgage Services continues to get high marks for the integration and ease of use of its proprietary TMS system for vendor management and fulfillment. Though many lenders still want to create and control their own systems, outsourcing some -- or all -- back-office processes has become a compelling option for others.

Paper-thin margins are an industrywide challenge. After lenders bloodied themselves seeking better margins via subprime loans and high-risk products, getting a handle on costs looks like a more durable strategy. And particularly at times when we read about massive layoffs at one company after another, hiring and firing seems a flawed way to deal with expansions and contractions in the mortgage market. A variable-cost structure may be today's Holy Grail for mortgage lending. Outsourcing is one obvious path to look for it.

Predictions abound that business process outsourcing will expand in and out of the mortgage industry. Gartner and others say this is a mega-trend, not some passing technology fad. We strongly believe business process outsourcing and offshoring represent the next fundamental stage in business automation, further streamlining business processes and systems using external vendors, says an E-Business Strategies Inc. white paper. Given the breadth and reach of the BPO buildout to come, we are confident that BPO will be much larger than any previous business automation cycle and could easily be ten to 20 times the size of the $20 billion combined ERP and CRM markets.

The EBS white paper defines fundamental BPO architecture as Web Services software integrated across partners and coordinated through well-defined interfaces, which should be music to the ears of veteran mortgage industry tech vendors like MortgageHub and Lydian and to newer players like Tavant that take a green-field approach to crafting mortgage tech systems. A host of others are stepping up to the BPO bar as well.

BPO for mortgage dovetails with other industry trends. Though lenders are more expert at increasing production than they are at reducing costs, taking paper out of the mortgage-creation process is broadly popular today. And with imaging being implemented at an accelerating pace, increased automation makes development of the e-mortgage seem more real to more lenders.

Says Scott Gregory of IBM's global service unit: We've seen substantially more interest in the e-mortgage over the past twelve months than we had in the prior two or three years. The lending institutions have recognized that they have to be doing something to deal with their costs.

Acquiring FileNet, Palisades Technology Partners, and other entities, IBM has set itself the goal of offering the mortgage industry a 60-second mortgage in which straight-through lights out automated processing will be a given.

While IBM assembles its BPO weapons to serve the larger players, Mountlake Terrace, Wash.-based MILA Inc. (Mortgage Investment Lending Associates; www.mila.com) is already set to offer its back-office processes to midtier and up-and-coming lenders via Next Online Technologies, its processing arm. The efficiency of MILA's systems is such that MILA says over 35% of its business goes to docs on the same day loans are first submitted. MILA believes it has a sufficient lead in back-office efficiency over most other players that there will be plenty of lenders ready to use Next Online as their BPO provider.

Meanwhile, Mount Laurel, N.J.-based PHH Mortgage Solutions has already established itself as the industry's leading provider of private-label mortgage services to financial institutions, real estate brokers, affinity groups, credit unions, corporations, and government agencies. It is safe to assume that GE Capital Solutions is agreeing to pay $1.8 billion for the company partly because it sees a growing role for end-to-end outsourcing services in the mortgage industry.

But do these vendors really expect lenders to outsource their back-end processes to outside parties? The industry is feeling the pinch, observed Tavant vice president of business development Christof Knoess. There are signs that the time has come for a trusted unified mortgage processing backbone. He said such a backbone should have reliability and robustness comparable to today's credit card processing networks. A loan would speed from lead to security, quickly and efficiently, and without redundant processing, underwriting and due diligence.

With U.S. offices in Santa Clara, Calif., Tavant sees itself as well positioned to come to the aid of an ailing industry. Using a team of a couple of hundred developers in India working with 30 to 80 U.S. contractors, Tavant built a $24 million service-oriented architecture for subprime lender Ameriquest in the wake of that company's $325 million predatory-lending settlement. Already deploying a transaction-based accounting system and now developing the loan processing piece, Tavant claims a place in the vanguard among other potential players in the BPO space.

Tavant points to Advectis, Fidelity, First American, IBM, Lydian and MortgageHub as competitors already positioned or currently beefing up through acquisitions to position themselves to deploy such a backbone. Those who can leapfrog the rush to cheaper offshore processing labor and get to full automation first are the ones most likely to win. Tavant already offers a fully automated POS and LOS platform and is now adding the processing services, said Mr. Knoess. Over time, the labor arbitrage so rampant today will prove to be a stop-gap measure as BPO earns its spurs through automation, he predicted.

Efforts to create such a backbone are nothing new. On the failure side, witness Microsoft's ill-fated foray into the mortgage industry with HomeAdvisor Technologies. On the success side, in 2000 Minneapolis-based Dexma added processing services to its Transaction Director to form a CUSO (credit union service organization) with Boeing Federal Credit Union and Fannie Mae to deliver soup-to-nuts mortgage origination, processing, and investor delivery for credit unions. Now Dexma is expanding that effort to serve community banks. Prime Alliance Solutions Inc., Tukwila, Wash., now comprises over 75 credit unions and CUSO customers representing more than 40% of the credit union market. Combined, Prime Alliance's 2005 mortgage originations totaled approximately $25 billion.

Prime Alliance Services' Web-based and intelligent Loan Fulfillment Center automates loan workflow without human intervention. In addition, the company has formed alliances with third-party vendors to fulfill the loan by clearing AU conditions and ordering needed services, with a cost reduction of up to $800 per loan.

Palo Alto, Calif.-based Addison Avenue Federal Credit Union, which maintains branches in 10 states and Puerto Rico to serve over 120,000 members, was first drawn to Prime Alliance because of the relationship with Fannie Mae. They initially used Prime Alliance for automated underwriting and then adopted the full solution. We definitely did our homework first, recalled their real estate operations manager Sue Siudinsky. Our team first set up our criteria and then visited several credit unions using the system.

Ms. Siudinski oversaw the implementation of the LFC. Because the system operates with a single, common database, she said, it eliminates the need to transfer data and enables the development of a fully paperless process.

As part of the conversion, Addison switched to the Fannie Mae staffing model and thereby realized a number of efficiencies, Ms Siudzinski reported. Having one place for all the information with the electronic file cabinet was a critical reason for adoption. Some day we would like to go paperless, and an integrated system enables that, she stated.

Is there really some urgent need for smaller players to leapfrog into advanced automation? Perhaps so. One observer speculates that Countrywide was so eager to get the MISMO stamp of approval on e-signed PDF as a standard because it expects to deliver e-mortgages to the investor community more quickly than the rest of the mortgage industry and wants to protect its secret sauce by deflecting some of the investor due diligence to Adobe PDF. Seeing how far down the road Countrywide has gone in its quest to take the friction out of the relationship between Main Street and Wall Street, the race to provide business-process automation on an outsource basis is on, says Mortgage Hub CEO Bill Adamowski. If it isn't on, then I am wasting my time flying around the country talking to potential partners and acquirees, he told this reporter.

For an outsource specialist to offer cost reductions as a value proposition means it has to have a better handle on costs than do most lenders. Palm Beach, Fla.-based Lydian Technology Group, a company with deep roots in the mortgage industry as an integration specialist, steps out to name itself the lowest-cost producer. I think we can make that claim, said Lydian president Brian Fitzpatrick. Our cost to produce will rival any lender's in the industry. But you also have to make sure you know how to make money in the processing business. And you must have highly variable processing models.

A top-of-the-line BPO provider cannot be hampered by its infrastructure in any way, shape, or form, he stated. Companies with legacy systems can't compete. Maybe they can create a workable business process internally, but processing for multiple companies is another matter. Because Lydian's Mortgage Connectivity Hub is a service-oriented architecture, he said, the company can enable its users to deploy the business process they want to, as a piece or a whole.

That high degree of flexibility is what distinguishes a best-of-breed BPO provider, Mr. Fitzpatrick argued. A true BPO enables lenders to leverage their own investment in technology -- their own front end, their own back office, their own secondary market process. I still believe you have to give lenders a choice of how they do business with you, not lock them into your network.