The Great Recession was bad enough. The worst downturn since at least 1947 had, by May 2011, prompted consumers to each forego $7,300 in spending, according to the Federal Reserve Bank of San Francisco. But in the eyes of some, Washington’s response in recent years has been even worse than the poor home lending practices that helped cause the recession. New government oversight of lenders, notably through the Dodd-Frank Act, has contributed to a paucity of bank startups this decade, many experts agree.
But Mortgage Contracting Services is proof that one person’s lemons can be another’s lemonade. This past summer, MCS moved its headquarters to a 120,000-square-foot facility in Lewisville, nearly doubling the size of its former home in Plano. The new digs can accommodate 720 employees, up from 450.
MCS, which turned 30 this year, spent most of its first 20 years as a small player in the then-sleepy business of helping banks inspect and preserve homes that had gone into foreclosure. The company took advantage of a once-in-a-lifetime business surge it saw during the downturn to become, according to one of its investors, a national player and the No. 2 in its industry. With help from two private equity firms that own substantial stakes in it—Chicago’s Concentric Equity Partners and London’s TDR Capital (the majority owner)—the business now called MCS Group has used acquisitions to bolster its service offerings on the foreclosure side, along with adding services tied to lenders making home loans, such as valuations, title, and closing.
“In the past, we were involved in one specific circumstance only. Now we can effectively play a role throughout the process,” says Caroline Reaves, who has been CEO of MCS since 2009.
Mortgage defaults are at pre-recession levels, leaving the industry flooded with rivals.
MCS had two locations and 100 employees when Reaves first joined the business in March 2007. It now has closer to 800 between its Lewisville base and operations centers in Tampa, Fla., and Ruston, La. Annual revenue has climbed 86 percent since Reaves’ first year as CEO.
“MCS has grown over 10 times in size since we originally invested in 2005,” says Ian Ross, a partner at Concentric Equity. “A best-case scenario would be for the company to evolve into a large, diversified technology-enabled services business operating in multiple verticals.”
Building a strong business creates multiple options down the road, Ross added. “We’ll evaluate those if or when the time is appropriate,” he says. “MCS has a lot of potential.”
As with most outsourcing shops, MCS makes money by helping lenders cut expenses. Dodd-Frank and an international set of regulations from 2011, known as Basel III, forced banks to spend more on compliance by adding rules in corporate governance and risk management, according to Viraj D’Costa, industry research analyst at IBISWorld, a Los Angeles-based market research firm. Simultaneously, Dodd-Frank and Basel III imposed higher requirements on capital reserves, essentially forcing banks to hold more money as financial backstops against losses. Money that banks hold in reserve is capital they can’t lend and thus can’t use to make more money.
The higher compliance costs and reduced money for lending “negatively affects revenue and profit, and drives consolidation in the industry,” D’Costa says.
“Banks are inclined to outsource services that would increase in-house employment costs significantly. In particular, banks outsource services such as appraisal, credit scoring, verification, inspection and document collection.”
Mortgage lenders are also contending with everything from price wars to additional rules from a new federal agency, the Consumer Financial Protection Bureau, that imposes penalties for failing to follow regulatory requirements, according to Anupam Jain, practice director at the Everest Group, a Dallas-based consulting and research firm. “Mortgage outsourcing aims to help banks and mortgage companies succeed in this more competitive landscape so as to maintain the lowest cost per loan, handle more loan cases, and maintain a loyal customer base,” says Jain, who is located in India.
For now, lenders most frequently outsource jobs that are “process-driven and transactional in nature,” such as loan and payment processing, customer service, and account closure. He says tasks that entail more judgment–like evaluating credit or collateral, underwriting, and foreclosure– are more likely to stay in-house.
But that may change, as more of the transactional-oriented work that outsourcers take care of increasingly gets done through automation. “This is shifting the focus of service providers toward handling judgment-intensive pieces,” Jain says. “The adoption of technology and analytics is further enabling them to take this path.”
Seizing the Moment
MCS has been laying the groundwork for its current success for more than a decade. In 2006 and 2007, the company spent more than $30 million building and rolling out an internal technology system that essentially automates most of the company’s interactions with clients and vendors. Called MCS360, the system does everything from accepting customers’ work orders to assigning outside providers to perform given work. It also runs quality-control checks to ensure everything gets done properly.
“MCS’ investment in technology has been critical in allowing the business to efficiently process large numbers of transactions annually. Over 4 million inspections were completed in 2015 alone,” says Mark Budd, a partner at TDR Capital, the London private equity firm.
MCS’ information technology systems have also passed “the most rigorous security and compliance audits” from the largest mortgage-servicing firms, which handle the majority of jobs that need doing as borrowers pay back their home loans, according to Budd. “This differentiates MCS from its smaller peers,” he says.
TDR came into the MCS picture in October 2013, when it bought a controlling stake in the Texas business. As part of that deal, TDR combined MCS with the U.S. piece of one of its European businesses, which provided various products and services for maintaining vacant properties. Reaves and her team have been busy since then, getting three other acquisitions done.
In March, for instance, MCS paid an undisclosed sum for Austin’s Epic Real Estate Solutions, giving it a toehold in areas like title insurance, services for loan document signing, and flood certifications. “We have made enormous investments in technology, personnel, and infrastructure to ensure that our clients don’t have to worry about whether they comply with all the various regulations they are subject to,” says Chad Mosley, who was promoted in April to chief operating officer of MCS.
Mosley also oversees the company’s valuation, title, and vacant property security businesses. “With hundreds of thousands of properties under our management in the property preservation space, and with our work providing valuations on thousands more, we maintain a robust system of quality control that ensures our clients get great service,” Mosley says.
Although MCS’ growth in recent years suggests the company is doing something right, analysts caution that players in its space will face hurdles going forward. To be sure, banks and other lenders appear ready to rely more heavily on mortgage outsourcing shops than they have before. “We see the mortgage operations market becoming more broad-based in the work sought from lenders,” says Reetika Joshi, research director at Cambridge, Mass.-based HfS Research, which studies the outsourcing industry. “Several lenders in our research described their mortgage processes as complex, broken, and in need of help to compete with non-traditional lenders and faster cycle times,” she says.
But Ed Delgado, president and CEO of the Dallas-based Five Star Institute, notes that mortgage defaults are below pre-recession levels. This has left MCS’ industry flooded with rivals that are competing for a shrinking pool of default business.
“In an overcrowded market, only the strongest and most efficient companies will thrive,” says Delgado, whose organization provides education and networking services to people in the default-servicing field.
Although the demand for quality and effective preservation services has increased, the pricing model has not, Delgado adds. “Companies like MCS that invest heavily in technology and information management must remain in a constant state of readiness to remain competitive.”
Going forward, MCS will aim to grab bigger pieces of the markets it plays in, and to move into lines of business that fit with what it currently does. Reaves says: “We’ll consider adding complementary product lines with similar business models.”