Survival Integration Report Summary by RGA Public Relations

Price: $895.00 USD

Mastering “Survival Integration” for the Mortgage Industry

Covering over 200 processes within eight functional classifications, this detailed sector report provides the framework for sustainable operational improvements that must be made by organizations seeking answers, while incorporating downstream financial implications.

February 2008 Release 1.08

Achieving Success Beyond Traditional Operating Models using Business and Knowledge Sourcing Augmented by Significant Process Transformations The U.S. mortgage lending industry is ripe for takeovers and bankruptcies. Fueled by historical risks, recessionary markets, and vanishing customers, the operating climate for 2008 and beyond, points to permanent financial and process modifications. Organizations are ill‐prepared for the consequences of the new markets including foreign investments, illiquid assets, and demand for rapid transformations. With banking loan losses the highest in over 20 years, survival integrations or M&A’s will accelerate forcing established players into difficult terms and conditions, while allowing nimble well capitalized organizations with experienced management teams to alter the competitive landscape. Additionally, with funding sources severely reduced, the ability to singularly finance organizational profitability cannot be achieved using the operating models of the past. Arcane processes and fixed cost over‐capacity will accelerate the drain on resources hastening operational losses and forcing integration / M&A events which can only be addressed with process transformations and collaborative global sourcing.

“I closed the gulf of anarchy and brought order out of chaos. I rewarded merit regardless of birth or wealth, wherever I found it. I abolished feudalism and restored equality to all regardless of religion and before the law. I fought the decrepit monarchies of the Old Regime because the alternative was the destruction of all this.” ‐‐ Napoleon Disclaimer: The intent and purpose of this report is purely for informational dissemination purposes only. Dangelo & Associates, Inc. and its market brand Innovative Relevance® (together with its shareholders, directors, officers and employees) and Rick Grant & Associates (together with its shareholders, directors, officers and employees) have made no attempt to verify the reliability of sourced information and cannot be held responsible for any areas of concern with the information’s usage. This report should not be construed or taken as professional advice or statements of direction. Any result taken by the reader, its organization, or related parties either directly or indirectly are at the sole discretion and responsibility of the user / reader. The information contained in this document is not a substitute for proper analysis, research, legal advice, accounting, tax or professional services and use of the data, its conclusions, and projections are at your own risk. The authors and their organizations cannot be held liable for negligence, errors, omissions, improper conclusions, regulation violation, assessments, projected directions and / or any recommendations within or beyond their control or knowledge without limitation. Without limitation, the report authors and their corresponding organizations will not be liable for any direct, indirect, consequential, punitive or other damages. This includes but is not limited to real or perceived obligation or breach of services surrounding intent, action, regulation, statute, or tort. The content of this report should be taken “as‐is” and no expressed or implied representation or warranty will apply. Use of this document is at the readers,’ and if applicable, their organizations’ own risk.

Table of Contents Preface .......................................................................................................................................................... 1 Introduction .................................................................................................................................................. 2 Section 1: Market Realities ‐‐ Why U.S. Institutions Are on Sale .................................................................. 4 The Capitalization Realities ....................................................................................................................... 4 SWF Influences and Dynamics .................................................................................................................. 6 A Dangerous New Environment ................................................................................................................ 7 Section 2: Market Dynamics, Impacts, and Diluted Ownership ................................................................... 9 Framing the Enterprise Mortgage Process Dependency ........................................................................ 10 Enter the Sovereign Wealth Funds ......................................................................................................... 11 Industry Consolidation is the Unpreventable Result .............................................................................. 13 The Carnage of Risks and Dogma ............................................................................................................ 15 The “Fire Hydrant of Pain” ...................................................................................................................... 17 A Matter of Survival ................................................................................................................................ 18 Section 3: Surviving the On‐going Industry Consolidation ......................................................................... 20 Understanding the Political, Regulatory and Economic Dynamics ......................................................... 21 Understanding the Importance of Successful Global Sourcing............................................................... 23 Understanding the Racial Challenges of Globalization ........................................................................... 24 Understanding Innovation – A Forgotten Subtlety ................................................................................. 25 Understanding the Need for Significant International Experience ......................................................... 26 Understanding the Need for Immediate Action ..................................................................................... 27 Section 4: Mastering Process and Sourcing Alignment .............................................................................. 29 A New Look Into the Mortgage Lending Enterprise ............................................................................... 30 Defining and Analyzing Enterprise Lending Processes ............................................................................ 31 Putting the Global Sourcing Processes into Perspective ........................................................................ 32 Section 5: Framing Global Process Sourcing for Success and Adoption ..................................................... 35 The Multi‐Faceted and Iterative Framework .......................................................................................... 35 Framing Organizational Discussions – Avoiding Singularity .................................................................... 37 Offshore, Onshore, or Near Shore? ........................................................................................................ 39 Setting and Achieving Integration Targets .............................................................................................. 40 Section 6: Overcoming Challenges, Markets, and Behaviors ..................................................................... 43 Dealing with Customers Effectively ........................................................................................................ 43 Understanding and Applying Force‐Field Dynamics ............................................................................... 43 Enter the Auditors ................................................................................................................................... 45 Mitigating Investor Insurgency ............................................................................................................... 46 Regulatory Oversight .............................................................................................................................. 48 Dealing with the “Walking Wounded” .................................................................................................... 49 Section 7: Summary and Conclusions ......................................................................................................... 52 Appendix 1: Enterprise Mortgage Processes Defined ................................................................................ 54 Appendix 2: Sourcing Processes Ranked by Characteristic ......................................................................... 58

Appendix 3: Composite Rankings for Enterprise Processes ........................................................................ 69 Appendix 4: A Discussion of Successful Survival Integration ...................................................................... 79 Appendix 5: Understanding Global Population and Political Realities ....................................................... 81 Appendix 6: Onshore, Offshore, or Near Shore .......................................................................................... 84 Appendix 7 – Supporting Discussions for Overcoming Survival Adversity ................................................. 91 Underestimating Digital Complexities .................................................................................................... 91 Organizational Misdirection .................................................................................................................... 93 Informational Voids ................................................................................................................................ 94 Mitigating Excessive Vendor Influence During Survival Activities .......................................................... 95 Corporate and Customer Privacy ............................................................................................................ 98 Virtual Data Collection and Storage ...................................................................................................... 100 Author Bios ............................................................................................................................................... 102 Report Sources and Reference Materials (needs updated) ...................................................................... 103 Endnotes ................................................................................................................................................... 107

Table of Figures Figure 1 ‐‐ Housing Foreclosures and Loan Volumes ................................................................................................................................................. 3 Figure 2 ‐‐ Three Year Stock Averages for Selected FSI / Mortgage Firms ................................................................................................................. 4 Figure 3 ‐‐ Housing Markets and Indices Continue to Deteriorate ............................................................................................................................ 5 Figure 4 ‐‐ SWF's and their Growing Influence .......................................................................................................................................................... 6 Figure 5 ‐‐ Investment Allocation and Availability Favor Asia and the Middle East ................................................................................................... 7 Figure 6 ‐‐ Mortgage Process Integration (MPI) "Wheel" .......................................................................................................................................... 9 Figure 7 ‐‐ Investment and Market Dynamics Will Influence Processes .................................................................................................................. 10 Figure 8 ‐‐ MBS and CMBS Issuance ........................................................................................................................................................................ 11 Figure 9 – New Financial Capitalization has the Potential to Change the Operating Models .................................................................................. 12 Figure 10 ‐‐ Integration Survival Challenges ............................................................................................................................................................ 13 Figure 11 ‐‐ Private Equity (PE) Volumes and Number of Deals ............................................................................................................................... 15 Figure 12 ‐‐ Sample Set Market Valuation Changes and Challenges ........................................................................................................................ 16 Figure 13 ‐‐ The Rise and Dependence of Equity Raised by Banks ........................................................................................................................... 17 Figure 14 ‐‐ M&A Volumes and Number of Deals .................................................................................................................................................... 20 Figure 15 ‐‐ Economic and Regulatory Dynamics..................................................................................................................................................... 21 Figure 16 – Select M&A Buy‐Out Activity by Region, Implications and Their Impediments .................................................................................... 22 Figure 17 ‐‐ Aging Domestic and Global Population Base ........................................................................................................................................ 23 Figure 18 – Process Integration "Wheel" Implications and Rationale ..................................................................................................................... 29 Figure 19 ‐‐ Integration Models Must be Multi‐Faceted and Iterative .................................................................................................................... 36 Figure 20 ‐‐ Process Integration and Alignment with the Global Sourcing Life‐Cycle .............................................................................................. 37 Figure 21 ‐‐ Integration Model Opportunities and Challenges ................................................................................................................................ 38 Figure 22 ‐‐ Global Sourcing Approaches, Rationale and Strategies ........................................................................................................................ 40 Figure 23 ‐‐ Survival Integration Target Approach ................................................................................................................................................... 41 Figure 24 ‐‐ Overcoming Resistance and Challenges Resides with the Benefits ...................................................................................................... 44 Figure 25 ‐‐ Human Resources Personnel Fulfillment .............................................................................................................................................. 59 Figure 26 ‐‐ Human Resources Administration and Oversight ................................................................................................................................. 59 Figure 27 ‐‐ Compliance and Risk Management ...................................................................................................................................................... 60 Figure 28 ‐‐ Compliance and Customer Fulfillment ................................................................................................................................................. 60 Figure 29 ‐‐ Information Technology Application and Network .............................................................................................................................. 61 Figure 30 ‐‐ Information Technology Data Oversight and Management ................................................................................................................. 61 Figure 31 ‐‐ Information Technology Operations and Planning ............................................................................................................................... 62 Figure 32 ‐‐ Information Technology Administration and Oversight ....................................................................................................................... 62 Figure 33 ‐‐ Research and Analytics ......................................................................................................................................................................... 63 Figure 34 ‐‐ F&A Fundamentals ............................................................................................................................................................................... 63 Figure 35 ‐‐ F&A Administration and Oversight ....................................................................................................................................................... 64 Figure 36 ‐‐ Legal Foundational Services ................................................................................................................................................................. 64 Figure 37 ‐‐ Legal Extraordinary and Exception Services ......................................................................................................................................... 65 Figure 38 ‐‐ Marketing and Public Relations ............................................................................................................................................................ 65 Figure 39 ‐‐ Production and Product Sourcing ......................................................................................................................................................... 66 Figure 40 ‐‐ Loan Management and Processing ....................................................................................................................................................... 66 Figure 41 ‐‐ Underwriting, Settlement and Release ................................................................................................................................................ 67 Figure 42 ‐‐ Secondary and Investor Processing ...................................................................................................................................................... 67 Figure 43 ‐‐ System, Governance and Processing .................................................................................................................................................... 68 Figure 44 ‐‐ Expert / Non‐Conforming Processing and Oversight ............................................................................................................................ 68 Figure 45 ‐‐ Human Resources Composite Rankings ............................................................................................................................................... 70 Figure 46 ‐‐ Compliance and Risk Composite Rankings ........................................................................................................................................... 71 Figure 47 ‐‐ Information Technology Composite Rankings ...................................................................................................................................... 72 Figure 48 ‐‐ Research and Analytics Composite Rankings ........................................................................................................................................ 73 Figure 49 ‐‐ Finance and Administration (F&A) Composite Rankings ...................................................................................................................... 74 Figure 50 ‐‐ Legal Services Composite Rankings ...................................................................................................................................................... 75 Figure 51 ‐‐ Marketing and Public Relations Composite Rankings ........................................................................................................................... 76 Figure 52 ‐‐ Mortgage Transaction Composite Rankings ......................................................................................................................................... 77 Figure 53 ‐‐ Comprehensive Composite Process Rankings ...................................................................................................................................... 78 Figure 54 ‐‐ Market Situations are Swiftly Shifting ‐‐ with Some Limitations ........................................................................................................... 82

Release 1.08, February 2008

Mastering “Survival Integration” for the Mortgage Industry

Preface Many times, sector reports are written using a purely historical context to project into the future potential linear conclusions or volume of activity. This report represents a departure from that traditional method of creating mortgage and FSI industry reports. Our industry is experiencing extraordinary and permanent structural changes that cannot be extrapolated with certainty. The history of the current Financial Services Industry (FSI) Rebalancing is being rewritten daily. The media headlines and nightly news reports are evidence of a sector in turmoil, or as we put it in this report, “it is a chapter yet to be written.” To make this report useful, we have treated history as a dynamic element. In order to take into account current events and their impact on both the future and way the past is interpreted, this publication includes a version and revision number. Periodically, registered report purchasers will receive selective updates to this material. Report owners should register for these updates at the following location: www.Innovative‐Relevance.com\SurvivalIntegration.html This content update approach was selected to cover new market actions, potential gaps, or general events that are openly shaping the framework and discussions of “Mastering ‘Survival Integration’ for the Mortgage Industry.” Please note that changes, updates, and their availability are at the sole discretion of the authors and their representative organizations. No implied warranty or contractual obligation is set forth.

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Introduction The conditions in the U.S. financial and mortgage markets are deplorable. The subprime lending crisis has led to a widespread liquidity crisis that has all but eliminated subprime lending in the U.S. and forced hundreds of mortgage originators out of business. The securitized assets created by the mortgage industry and sold into the secondary market have lost billions of dollars worth of value, sending Wall Street firms, institutional investors and the stock market spinning out of control. In our industry, the crisis has impacted institutions at every level, from the mortgage broker all the way up to the secondary market investor. As investors pull out of the market, national wholesale lenders are shutting down operations, leaving third‐party originators without a product to sell. At the same time, borrowers who refinanced during the historically low rates of the last few years have abandoned the refinance business in the wake of rising interest rates. Those borrowers that most need to refinance—homeowners who bought into low teaser rates on adjustable rate mortgages that will soon tick up significantly—find themselves with few options for refinance. Defaults and foreclosures are now at historically high levels. Of the announced $100+ billion in downgrades and write‐offs currently attributable to complex market instruments, this number may represent just 25% of the total market exposure that may reside inside corporate financial statements. Not just with commercial banks, but insurance companies, pension funds, hedge funds, and commercial institutions. Worldwide projected subprime exposures currently exceed $400 billion, while the “contagion” affect is still being determined. While working on this report, the headlines nearly every day talked about billions of dollars in write downs, corporate losses, and employee separations all wrapped in the national specter and localized geographic reality of a U.S. recession. Those executives who have worked in this industry for more than 10 years know that the industry has experienced downturns in the past, some of them quite serious. We contend that this on‐going crisis is fundamentally different for a number of reasons. Perhaps chief among them is the fact that our financial institutions now exist and compete in a truly global marketplace. This has the effect of spreading our pain across the globe, but it also opens up our crisis as an opportunity for foreign buyers, which will result in a significantly different landscape when the dust finally settles. Exploring the causes of the current crisis or joining the game of assigning blame is beyond the scope of this work. Suffice it to say that there is no apparent easy fix and no financial wizard that can wave a wand and rescue the market from the inevitable unwindings that are a sure result of inadequate risk management (see Figure 1). We do not predict ultimate doom as the U.S. housing industry is far too important to our national economy for any stakeholder to allow total collapse. However, the solutions employed and the recovery process itself will take time. As the industry struggles to recover from this crisis over the next 12 to 18 months, well funded entities from around the globe will swoop in and purchase stakes in the institutions that survive. This has Not for Reproduction, Reuse, Copying or Transmittal Without Prior Written Approval Governed by International Copyright Laws and Protections, ©2007 ‐ 2008, All Rights Reserved

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already begun and will present a host of challenges for these firms, many of which we will explore in this sector report. Those that seek to avoid the challenge of foreign acquisition will be forced to radically reinvent their institutions. Many will pare down their operations to more manageable units. The majority of these will fail as they find themselves ill‐equipped to compete with the diversified financial institution consumers have come to expect. Others will seek to choose their own partners or acquirers in the hope of finding a better fit or a more controllable parent. Almost all will embrace global process sourcing in order to streamline their operations, cut costs and improve organizational efficiency. % of Total Foreclosures Started Prime ARM

Prime Fixed 17.6%

18.7%

14.5% Sub Prime Fixed

6.3% 63.1%

8.7%

Sub Prime ARM

Prime ARM

Prime Fixed

12.0% FHA & VA

% of Outstanding Loans

43.0%

The total percentage of loans in f oreclosure processes nationally stand at 1.69%

Survival integration has just begun – the result will be a radical and permanent break with traditional approaches and operating constraints in an effort of remain viable with a changing consumer base and regulations

6.8%

Sub Prime Fixed Sub Prime ARM

9.3% FHA & VA

The national delinquency rate (not including those in f oreclosure) was 5.59%

• Lenders and institutions which concentrated on the fastest growing market segments are suffering significant adjustments and loan‐ loss reserves. • The market valuations for several lending niche providers as well as national, diversified brands have been in excess of 50% and in a few cases over 80%. • With declining loan volumes, lending and servicing organizations are saddled with extensive back‐office operations.

C hart Data Source: Mortgage Bankers Association, 2007 Q3 data

• Innovation has suffered dramatically in the last 12 months due to a lack of capital, focus, and profits – something must change.

Source: Innovative Relevance

Figure 1 ‐‐ Housing Foreclosures and Loan Volumes

But, in the end, merger or acquisition will become a significant survival strategy used by the majority of the organizations caught within this mortgage market downturn. How U.S. financial services firms can best manage those strategies are the subjects contained in the following sections and diagrams. Mark P. Dangelo Rick Grant

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Section 1: Market Realities Why U.S. Institutions Are on Sale In the U.S. mortgage market, liquidity is a magnet for metaphors. It is the blood that pumps through the market systems, the fuel that keeps the financial engines running, and the water of life to the companies that compete here. In today’s globally interconnected markets it is also continually elusive. In the wake of the subprime lending crisis, global investors have fled the secondary mortgage market, taking with them the capital that in 2006 fueled a business that originated more than $2.7 trillion in mortgages, but only projected to be $1.9 trillion in 2008 driven by refinancing2. As a result, hundreds of companies have failed and tens of thousands of professionals have permanently lost their jobs. Financial services firms have written down the value of tens of billions of dollars worth of mortgage‐related assets, creating historic losses in the process. Stock prices for U.S. FSI firms have fallen to historic lows and are now ripe for takeover. At the same time, new investors are entering the game which has an almost unlimited supply of cash. The stage is set for a change in the world’s economic balance and global wealth is being redistributed.

The Capitalization Realities When it became clear in 2007 that the high returns promised to investors in subprime mortgage‐backed securities would not materialize, the value of these assets fell. A number of institutions took pains to control information relating to their actual exposure to subprime assets, but it was in vain. $250.00 WFC BAC WM

$200.00

JPM NCC STI $150.00

IMB LEH CFC GS

$100.00

C MS FRE $50.00

FNM BSC MER

$0.00

2005

2006

2007 Data Source: BigCharts.com

Figure 2 ‐‐ Three Year Stock Averages for Selected FSI / Mortgage Firms3 Not for Reproduction, Reuse, Copying or Transmittal Without Prior Written Approval Governed by International Copyright Laws and Protections, ©2007 ‐ 2008, All Rights Reserved

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Since August, the subprime lending crisis has cost financial institutions worldwide $94 billion, according to Friedman, Billings, Ramsey & Co. In addition, banks and lenders have taken $14.7 billion in what FBR calls "elevated loss provisions." Before it’s over, FBR estimates that banks could lose between $59 billion and $148 billion on their portfolios.4 However, as we prepared this report release, even those numbers were proven incorrect5. The resulting impacts on the market capitalization and stock price of the nation’s publicly traded mortgage lenders have been severe (see Figure 2).

Adjustments could reach 20% to 25% negative – Goldman Sachs states in 01/2008

20%

10%

(10)% An “up turn” may not be reached until late 2009 or early 2010 (20)% 2000

01’

02’

03’

04’

05’

06’

07’

US Subprime Mortgage ABX Index BBB Ratings (5% of total market)

Case‐Shiller US Home Price Index

As news of actual losses emerged, many of the nation’s top financial institutions lost some of their most experienced executives. With the housing market in steady decline and housing recessions already being experienced in states that once led the boom6, the portfolioed assets continue to drain the liquidity life out of financial enterprises (see Figure 3). Additionally, the U.S. lenders alone, according to one study, have fired or otherwise released over 86,000 mortgage professionals in 20077. Worldwide in 2007, nearly 200,000 financial jobs were lost8. Moreover during the first two weeks of 2008, well over 10,000 employees and their livelihoods were quickly added to this growing causality statistic. 100 Total subprime losses are estimated between $210 to $400 billion USD 75

2007

Data Sources: The Wall Street Journal, Standard & Poor’s

• Market implications point to another 12 to 24 months of volume difficulties and market unwindings. • Consumer spending will be reserved and potentially materially constrained. • Recessionary worries will restrict pipeline growth and increase margin pressures. • New delivery models will be demanded and authorized.

Nov Jan Mar May July Sept Dec Feb Apr June Aug Oct Data Sources: Financial Times, Markit, Goldman Sachs

• Credit difficulties are not over and their aftermarket implications are still unknown. • After the sale of assets and capital injections, focus will be on efficiency and cost structures. • Growth will be important for survival mandating non‐critical functions to be outsourced or eliminated. 9

Figure 3 ‐‐ Housing Markets and Indices Continue to Deteriorate

One company that did not reduce its mortgage workforce was JP Morgan Chase & Co., the nation’s third‐largest bank10. That company added nearly 4,500 new jobs to its mortgage operation in 2007, the same year it sold a $5 billion stake in its operation to China Investment Corp. But Chase wasn’t the only Not for Reproduction, Reuse, Copying or Transmittal Without Prior Written Approval Governed by International Copyright Laws and Protections, ©2007 ‐ 2008, All Rights Reserved

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Section 2: Market Dynamics, Impacts, and Diluted Ownership While there are doubtlessly many political, cultural and macro‐economic impacts of a world in which the major U.S. financial services firms are owned in whole or part by foreigners, these global discussions exceed the intent of this work. Within our industry and markets, we are concerned with the impact on day‐to‐day mortgage processes, while properly framing changes and improvements to ensure adoption, sustainability, innovation, and adaptability.

Human Resources

Marketing & PR

Compliance & Risks

FSI / Mortgage Banking

Legal

Finance & Admin.

Information Technology

Research & Analytics

Source: Innovative Relevance

Figure 6 ‐‐ Mortgage Process Integration (MPI) "Wheel"

Fundamentally, the sources of capital that a mortgage lender taps into will have a direct impact on the way it delivers its services and products to the markets. A critical question at this time is: How can we expect SWF’s and foreign investors to impact mortgage lending processes? First, it must be pointed out that SWF’s are not typical investment funds, at least not in the Western sense20. They are not generally as transparent as the private equity and hedge fund investors that we typically work with in the U.S. Many experts now predict that foreign ownership, particularly when those owners are SWF’s, will likely impose many changes on the operations of the firms they invest in. Even prior proponents of SWF investments have recently sounded a cautionary tone: “Because sovereign wealth funds, by definition, are potentially susceptible to non‐ economic interests, the closer they come to exercising control and influence, the greater concerns we have.” ‐‐ Chuck Schumer, New York Senator 21 Not for Reproduction, Reuse, Copying or Transmittal Without Prior Written Approval Governed by International Copyright Laws and Protections, ©2007 ‐ 2008, All Rights Reserved

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Section 3: Surviving the On‐going Industry Consolidation The mortgage and FSI consolidation efforts are just beginning. Nearly every institution currently operating in the U.S. mortgage lending industry will be affected by M&A / survival integration activities in the days, weeks, and months ahead. Worldwide M&A volumes continued to grow in 2007, and while global deals in 2008 are projected to decrease, the deals for U.S. firms involving European buyers is expected to continue its steady growth (see Figure 14).

Number of Deals

( in thousands)

( deals)

300

150

450

600

2008 (est.) 2007 2006 2005 2004 2003

6.0

4.5

1.5

3.0

M&A Volumes (global) ( in trillions, USD)

100

150

200

US Targeted M&A Deals Involving European Acquirers (global) ( in billions, USD)

Data Sources: Financial Times, Dealogic

Figure 14 ‐‐ M&A Volumes and Number of Deals

It is now critical to establish methods by which firms can successfully deal with the new challenges that are being created by this operating environment. A common fallacy is that all FSI and mortgage integration managers can follow a standard consultant or advisory provided series of processes or methodologies to ensure success49. This is not necessarily true when all parties are from the same industry and country. It certainly won’t be true when new owners are foreign corporations or SWF’s. One size won’t fit everyone’s needs. While a good framework is necessary, most prescriptive amalgamation approaches fail to realize the variability created by globalized workforces, regulatory and compliance requirements imposed by multiple countries, informational sourcing, and integration risks. Within integration, the decomposition and compartmentalization of required targets too often goes from deal to definitive action plans using simple, linear delivery approaches. This business and business environment will require more than that. The “writing down” of assets and goodwill, elimination of jobs, and the establishment of one‐time charges may be relatively straightforward, but the integration of operations, common customer Not for Reproduction, Reuse, Copying or Transmittal Without Prior Written Approval Governed by International Copyright Laws and Protections, ©2007 ‐ 2008, All Rights Reserved

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Appendix 2: Sourcing Processes Ranked by Characteristic This appendix is given over to a series of charts which together make up the core of this report. For the first time, to our knowledge, the entire mortgage lending enterprise has been broken into tangible, assignable processes, categorized and then ranked based on a number of discrete criteria. This was a painstaking process, but one we felt extremely important. So what is valuable within these charts? What do they tell you and the industry? First, since eight separate categories of sourcing processes were assembled, the 200 discrete entries represent the most comprehensive list of mortgage enterprise organizational processes accumulated (as presented and segmented in Appendix 1). The categories are best shown in the following diagram (a duplication of Figure 6). Human Resources Marketing & PR

Compliance & Risks

FSI / Mortgage Banking

Legal

Finance & Admin.

Information Technology

Research & Analytics

Source: Innovative Relevance

Once assembled each of over 200 processes were classified into additional sub‐categories and assessed across nine integration criteria using a format typically called “Harvey Ball” or “Moon” diagrams. Each criterion was ranked within one of five mutually exclusive potential ratings. What is contained in each of the twenty diagrams of this appendix is a typical integration assessment for each of the over 200 processes. These rankings provide clear evidence and a starting point for teams trying to determine where to start and how to progress within a survival integration initiative. Of course, each organization will need to examine the criteria to ensure that it meets its own unique set of circumstances and “As‐Is” baselines. Lastly, they are meant to be intuitive to ensure that organizations clearly understand which processes have the best valuation, which are more intricate (i.e., where to get the fastest return), and what challenges they create for sustainability, adaptability, and consistency. Not for Reproduction, Reuse, Copying or Transmittal Without Prior Written Approval Governed by International Copyright Laws and Protections, ©2007 ‐ 2008, All Rights Reserved

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Low

Integration / Migration Time

Research & Analytics

Integration Governance Demands

Low to Moderate Finance & Admin.

Personnel / Cultural Challenges

M oderate

Integration Innovation Potential

Inf ormatio n Technology

Benefits of Integration

M oderate to High

FSI / Mortgage Banking Legal

Integration Risks

High Process Complexity

Compliance & Risks

Integration Scalability Constraints

Legend

Marketing & PR

Integration / Market Differentiation

Process Characteristics Human Resources

M odeling & Benchmarking

Risk Management

Fraud Mgt. / Variance Analysis Compliance and Risks

Communication Management Company Internalization / Messaging Reinforcement Breach / Incident Management Risk Identification, Planning & Mitigation Hedging Policy Management Regulatory, Fiscal Strategy & Alignment Business Continuity Planning

Figure 27 ‐‐ Compliance and Risk Management

As late as 2002, complex compliance and risk management processes within this category were once considered “not ready for global sourcing.” With a great understanding of the new regulatory requirements, increased knowledge specializations, and a greater poll of skilled resources KPS efforts are now becoming more commonplace. Selection of providers will be driven by SME’s within the sourcing organization as advisors frequently lack the industry expertise needed for selection.

Research & Analytics

Low

Compliance and Customer Fulfillment

Integration Governance Demands

Low to Moderate Finance & Admin.

Integration / Migration Time

Moderate

Personnel / Cultural Challenges

Inf ormatio n Technology

Benefits of Integration

Moderate to High

FSI / Mortgage Banking Legal

Integration Risks

High

Process Complexity

Compliance & Risks

Integration Innovation Potential

Legend

Marketing & PR

Integration Scalability Constraints

Human Resources

Integration / Market Differentiation

Process Characteristics

Customer Complaint Mgt. Regulatory Liaison & Review Reporting

Compliance and Risks

Conformance Testing & Audits Adherence: - Consumer Disclosures - Fraud, Certifications & Discrimination - Charges & Lending - RESPA / Settlement - Privacy Confidence Assessments & Performance Measurements Exceptions & Escalations Source: Innovative Relevance

Figure 28 ‐‐ Compliance and Customer Fulfillment

Regulations governing customer interaction and loan fulfillment are not as complex or variable as the aforementioned compliance category. However, these processes are still challenging for organizations that lack sufficient discipline and rigor required for global sourcing. Many of these processes represent the latter stage BPS efforts. For integration initiatives, these should represent the starting subset for innovation and benefits within the compliance sourcing efforts.

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Challenging

132 186 182

183 133 205 203 181 198 62 54

204 106

185 73

31 119 82 109 61 147 41 52 120 68

136 171 199

141

Composite Ranking

192

116

193

102 139 115

190

196

16 85 69

173

137 96 100 99 47 127 49 179 14 86 72 165 33 45 71 79 32 13 163 65 138 64 108 18 2 118 80 93 75 129 17 25 94 130 110 15 59 105 144 142 21 1 184 125 114 175 104

117 113

97 200 191 189 154 6 5 84 56 101 111 112 46 38 36 60 95 11 3 4 122 67 44 26 19 149 92 88 66 20 22 70 12 8 121

180

98 63 134 39 40 42 87 35 37 81 124

27 9

76 77

167 74 135

166

28 55

169 23 156 24 155 29 30 170 131 168

202 194 176

126 123 201 43 197 160 177

90 148 145 172 157

178

128

107 103

162

187

161 195 89 164

10 130 174 151 153 143 158 146

159 78

188 150 51

152

Nominal Complexity Straightforward

Difficult Source: Innovative Relevance

Figure 53 ‐‐ Comprehensive Composite Process Rankings

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Author Bios Mark P. Dangelo is the managing principal and creator of Innovative Relevance organization, books, and intellectual capital. For over 25 years, Dangelo has worked as a practitioner domestically and internationally assisting hundreds of clients recognize and profit from globalized operations, technologies, and workforces. He has advised numerous Fortune 500 firms and their executives on M&A efforts, transformations, operational efficiencies, and organizational restructurings. Within the mortgage and FSI markets, Dangelo’s experience and qualifications have been created from a hands‐on, pragmatic foundation of business and technology assignments and clients. His thought leadership, expertise, and corporate brand (i.e., Innovative Relevance®) are recognizable within several industries due to association publications, articles, speaking, podcasting, and books.

Mark P. Dangelo

Dangelo works independently with a host of international individuals and organizations helping teams understand the relevant application of innovative ideas. Within the industry, his writings have mushroomed into a widely read association column, industry blog, tradeshow appearances, and a 2007 communication leadership role within MBA ResTech. Dangelo is also educated in equity markets including his studies for Series 7 and 63. He holds a Bachelors of Science in Computer Science and a Masters in Business.

Rick Grant is founder, director and principal of Jim Thorpe, Pa.‐based Rick Grant & Associates (RGA).He is responsible for the company’s overall business strategy and continuous client expansion, and guides the leadership team, overseeing the development and timely execution of company initiatives. Grant has more than 25 years experience with multi‐media technologies and journalism. His accomplishments include the creative concept, design, content development and production of Internet marketing collateral (podcasts, Blogs, webinars, etc.). His roles include audio/video producer, online producer and host of a live radio show. As a journalist, Grant held the title of editor for multiple publications. His articles have been featured in national newspaper, magazine and online publications and he is recognized as one the first bloggers in the financial industry. Grant continues to provide his insight and expertise as a frequent contributing writer for top financial publications, as a featured speaker and host at national conferences and seminars.

Rick Grant

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