High-Tech, High-Talk in Demand
Loan service providers seeking connection through flexible, web-based architecture

Talking about the latest technology trends in the mortgage industry is a little bit like discussing what’s the best new car to buy.

There’s no one-size-fits-all answer. If you’re an octogenarian with diminished reflexes and you only need to drive to the supermarket and your doctors’ appointments nearby, getting a Hummer doesn’t make sense. If you’re on a fixed income and have no investments or other significant assets, how do you pay for that Cadillac Escalade?

By the same token, the wide variety of data requirements among lenders argues against a cookie-cutter approach to purchasing and using technology. Lenders who fall in love with the newest whiz-bang, next-generation LOS system make a terrible mistake if they don’t match the system’s performance capabilities with the needs of their business model before spending the money. You can catch an awful case of buyer’s remorse if your IT staff can’t provide the necessary tech support for the software. If you’ve got low-tech clients who won’t rest until they’ve got the completed loan documents in their hands, is that e-signing application right for you?

This fascination with bells and whistles misses the point. “You can’t just offer technology to customers and say ‘here, make it work,’ ” states Tim Anderson, Executive Vice President for Business Development at Dexma, Inc. “you have to work with them on a business solution, then train them and show them how the technology can implement the solution.”

Anderson thinks the first, and most critical investment lenders should make is in the provider, not the product. “Pick a vendor that not only understands technology but also the business goals you’re trying to achieve through a technology solution. That task isn’t a technology decision.” In this approach, lenders are buying a blueprint, not a box. “You investment’s going into a plan to set up business solutions combining technology and the services linked to those solutions,” explains John Barnes, Dexma’s Vice President for Product Management.

It’s not just the vendor and the lender’s IT professionals who need to be tech-savvy. While they don’t have to know what a programmer or support technician knows, the people at the top should have a global grasp of what technology can do for their particular businesses. “They don’t truly understand how technology can be used in their organizations,” reports Ed Jones, President and CEO of ARC Systems, Inc. “So we get into situations where people have purchased a very sophisticated system but they don’t really know how to integrate it into their workflow or their daily activities. There needs to be education at the lender level which not only brings in the IT people but also brings management and others up to speed as to what these systems can do in order to make informed choices. They need to become much smarter and see with much more depth and insight how these systems are appropriate for their operation.”

Dave Williamson, Senior Vice President of The Performance Group, would take things a step further. He wants lenders to think of business processes as technology assets instead of product systems and IT staffs. “Think of complementing or even replacing your IT committee with a business process committee that would obviously look at all the implications of having the correct technology to enable your processes,” he advises. “But then put the management focus where it should be: on your business process, what it’s costing you and what you can do to improve your process so that it drives better cycle times. That should drive more customer satisfaction and, hopefully, more business to the table for you.”

Lenders are coming around to realize and accept this, and for those that do, what seems most important is finding a technology that lets everybody along the loan transaction chain easily talk to, and share information with one another on-line. The concepts entering into this conversation are buzzwords like collaboration, integrated service connections, web-based interfaces and loosely-coupled service architecture. They’re all about facilitating and speeding up electronic connections among all the players to save time and money while not compromising the integrity of the data.

This has taken on special importance as the loan market continues to soften and upward interest rate pressures intensify. Under those conditions, the smart technology buy has to make it easier for lenders to do business with their customers and partners – brokers, consumers, mortgage insurance companies, credit agencies, title services, appraisers and the like. That’s what a good web-centric LOS can do. “I want a tool in front of me that allows me to do as much as possible to complete a loan file, to order products and to interact with people electronically and automatically,” summarizes Brad Eaton, Mortgage Products Manager at a la mode, which develops real estate software.

Technology that streamlines procedures and makes them more efficient could seal the deal in today’s lending environment, according to Greg Smith, President and CEO of Advectis. “Lenders are coming to us and saying, ‘I see the world has changed dramatically in the last two-and-a-half years, so we need to figure out how to take our costs per loan down and to offer services to our channel partners that makes things easier for them, so that if the price is the same, they’ll give me the loan.’ ”

What’s being mentioned most often is the movement taking place to loosely-coupled, service-oriented architecture and away from monolithic, closed applications like the old legacy LOS systems. Those systems, with their proprietary interfaces, were entirely self-contained, with their own workflow, rules, and basic tool kits for building and modifying screens.

Take pricing, for instance. Most lenders today still do things the old-fashioned way, and separate their pricing information for their customer-facing websites, their POS applications and their LOS systems among three different sets of either staff or administrative tools. “It’s a huge duplication of effort,” says David Aach, President of Palisades Technology Partners, “and requires that every time they want to introduce a new product they have to work in at least three places rather than just one.”

But the more flexible architecture that the-future-is-now lender will have shares services like pricing, compliance, fee calculation and document decisioning among multiple applications. “Each of those services would be shared between retail and wholesale LOS, a customer-facing website and a broker portal,” points out Aach. “With this architecture, you can maintain information in one place instead of multiple places.”

Interfacing those legacy systems – whether origination or servicing – through the Internet to obtain those services gives the lender a real-time competitive advantage. “This ability to couple and uncouple, very quickly, lets you take advantage of the best market deal out there at the moment,” declares Dan McLaughlin, Executive Vice President of the Product Division at MERS. This can be done seamlessly because the mortgage industry is embracing the MISMO-XML standards for these web services interfaces. McLaughlin goes so far as to say that the MISMO-XML standards for data delivery are indispensable to a mortgage company remaining competitive and the most important technology product innovation for the industry in the past five years. By his estimate, MISMO-XML impacts some 70 percent of all mortgage company transactions.

Technology innovation is more than just an inside baseball concern for loan professionals. The borrower has to be the ultimate beneficiary of all this accelerated and simplified information distribution. MortgageHub COO Chetan Patel, for one, sees self-service applications for borrowers as something in which lenders must invest over the next two years. “Lenders need to offer applications that will help borrowers access servicing data anytime, anywhere,” he states. And while the Internet is one obvious access point, Patel also predicts that Voice Reorganization Units (VRU) will be the other.

Connectivity and finding the technology to create the business solutions you need are the industry’s macro technology issues. But there is a rough consensus on some other trends which will have a significant influence on the evolution of mortgage technology, and on the industry itself. There’s a fondness for automated underwriting and combined Business Process Management/workflow tools; an expectation that slackening loan volumes will give lenders the incentive to evaluate and make technology investments for their operations; and a sense that the paperless transaction may be inevitable, but it’s hardly immediate.

Not all new technology systems are can meet the business process needs of the lenders who purchase them. Making the necessary modifications in procedures to accomplish this goal is where automated workflow technologies come in. WellFoundDecade’s Brian Fitzpatrick likes Business Process Management (BPM) technology for this purpose.

Take an LOS system which can’t handle all of its embedded processes. “With BPM and workflow technologies I can lift those processes out of that system and the system simply becomes an actor in the process,” Fitzpatrick informs. When a web-based loan comes in, the service architecture lets the lender do things like order credit or appraisals and run automated underwriting tasks outside of the LOS system and then return the data to the LOS. It’s because of capabilities like this that Fitzpatrick expects BPM to be a technology investment leader.

And, since today’s workflow automation systems eliminate the middleman, that’s a personnel cost lenders don’t have. “This new level of automated workflow technology gives the lenders that use it a significant cost advantage of hundreds of dollars of savings per loan,” enthuses Cy Brinn, CEO of GHR Systems. “So lenders that don’t yet have it will be at a competitive disadvantage.”

Among other things, automated underwriting systems are being utilized on the servicing end of things to provide more accurate and more efficient evaluation of loan pools to cope with potential credit problems. Jones prefers them to mathematical modeling. “We can do soft pulls on credit so it doesn’t impact a client’s FICO score. The ability to reevaluate an entire pool more effectively is definitely there.

The non-prime market is a target of opportunity for this technology, too, because the potential customer base for non-prime loans is expanding. “It’s not just people with marginal credit, but somebody who needs a jumbo, somebody looking to move upscale with a larger home and the conventional programs aren’t a good fit,” suggests Jack Luhtanen, CEO of Dynatek, Inc. “As the industry and borrowers demand more of those loans, you’ll see more of them going through those automated underwriting systems.” Another reason for this, says Jones, is that these systems simplify for loan officers the difficult process of learning non-prime underwriting capabilities. “Automated underwriting makes it almost transparent,” he adds. “It will give them back a whole host of products, whether conventional or non-prime, without any more effort to learn new information.”

Literally, it’s almost a no-brainer, to Commerce Velocity CEO Umesh Verma. “These systems have been able to provide a good portion of the thinking for underwriters.”

Yet, even though automated underwriting is widely used, Luhtanen doesn’t think it’s wisely used. “If you surveyed customers or lenders and asked, ‘how many of you are using Fannie (Mae’s Desktop Underwriter) or Freddie (Mae’s Loan Prospector)?’ every one of them would raise their hands,” he maintains. “But if you asked ‘how many of you have put out LP or DU or one of the other automated systems to your people in the field, out to the point of sale, out to the loan officer?’ a lot of those hands drop.”

Lenders and vendors believe, on the whole, that the mortgage industry will spend more on technology this year – in some cases to install entirely new systems, in others to augment previous investments. “Because of the large number of originations that mortgage lenders experienced in 2003 and 2004, companies didn’t have time to complete technology projects,” Verma observes. “That will change in 2005.”

The prospect of fewer loans and slimmer margins means fewer people, research and development costs, giving lenders the breather they need to take stock of their technology status. “The really successful, forward-thinking mortgage originators will reinvest some of the profits they’ve made in the last few years to revamp and enhance their technical systems,” offers Eaton.

Anderson warns lenders that they’ll have to pay a big technology price to absorb a 1-2 Federal regulatory punch. The first blow, Sarbanes-Oxley and its compliance requirements, has already been delivered; the second, the prospective reform of RESPA (Real Estate Settlement Procedures Act), is winding up. Anderson estimates that Sarbanes-Oxley’s impact is “probably bigger than Y2K. That, alone, will determine that the regulatory cost of technology investments will go very high. If RESPA happens, that’s going to be another big investment to meet its requirement.”

Because there is so much focus now on web-based, service-oriented architectures and increasingly sophisticated LOS systems, more money will be poured into those kinds of investments this year. But there’s also a large question hanging over the investment decision: are we better off with what we already have, or do we really need new systems?

TPG surveyed 30 of its industry clients and associates on the subject. “What we heard over and over was not so much about investments in new technology as much as a re-examination of technology already purchased to make sure it fit business process needs,” reports Williamson.

Fitzpatrick’s response suggests the answer isn’t clear cut for lenders.

“If they have the right kind of architecture, if it’s service-oriented, if they have BPM, in many cases they don’t have to scrap their investment in an existing LOS. We’ve had three major lenders decide not to go off their 25-year-old mainframe loan processing systems.”

Why didn’t they, given all the great, new web-based LOS stuff out there? “Many of these big organizations running 25-to-30-year-old LOS systems are deathly afraid to make the change because they know these systems can handle their volume effectively,” Fitzpatrick answers. “But what they’re missing is a lot of new business processes. They can’t really change the processes they have and they can’t take advantage of paperless mortgages.”

Speaking of paperless mortgages, asking how long before they account for half of all loan originations is a cart-before-the-horse question. “The industry doesn’t really know what paperless is,” laughs Smith. “One would say it’s a fully-deployed e-mortgage with no paper involved anywhere. Another would say an e-mortgage only happens at the closing table and everything in front is paper. Another would say that there’s going to be a hybrid.”

Because so much of the main source documentation on the borrower is only available in paper, Smith believes the paperless mortgage for half the industry is seven or more years away, and that progress towards it will be piecemeal as better decisioning systems requiring less paper are developed. “If we’re waiting for this to happen cold turkey, though, we’ll be waiting a long time,” he says. McLaughlin concurs, thinking the process will take closer to a decade.

Generally speaking, predictions fall within the 5-10-year range. Different things will make it a slow evolution – that technologies aren’t seamlessly integrated yet and their implementation for a paperless mortgage is difficult; that lenders haven’t taken a holistic look at how they’ll eliminate paper all along the way; and that lenders and consumers alike have to embrace the concept. “The industry supports it, the law supports it, the technology supports it, but now the lenders have to change their behavior and that’s hard for a lot of them to do,” contends Fitzpatrick. E-mortgages with digital signatures could make loans paperless in as little as three years, according to Luhtanen, but “consumers will want a piece of paper that says this is my mortgage, I can pull it out when I want, it’s not just electronic, I think the computers are going to crash and I won’t be able to see it. It’s the touchy-feely part of that.”

Whatever the pace of technology change, it will be too fast for some lenders, especially smaller ones, to keep up. That, and the typical effects of a cyclical downturn will keep consolidation activity going in 2005.

That activity will be heavy, in Patel’s opinion, partly because technology will be a driving force behind consolidation that will move some companies to a different market level more that can accommodate more solutions growth. “The complementary services that will help create a true STP (Straight Through Processing) solution or at least move technology vendors further on the automated processing continuum will always point to the consideration of consolidation because it makes good business sense.”

Brinn’s take is that consolidation for tech vendors themselves will accelerate as the year goes on and 2006 looms. He points to the small size (fewer than 50 employees) and single-product focus of most mortgage technology companies as the reasons. “Their business model doesn’t afford them the ability to reinvest in product development and upgrades, but because the rate of technology change is so rapid, it’s necessary to invest in continually upgrading your product.”

The trend will continue towards fewer and larger lenders, too. “This is clearly going to be an industry where the big get bigger,” pronounces Aach. “There’s obviously huge economies of scale and huge opportunities for cross-sell, so holding onto a customer base and selling more products to your existing customer is the strategy and lends itself to continued acquisition and consolidation.”

At times uncertainly, or gamely, or enthusiastically, the members of this industry are riding their technology train to the future. The only thing that might derail some of them is if they don’t know how to steer it. Or, as Anderson says, “If you just sell people technology it’s like giving ‘em a loaded gun; you don’t know what they’re going to do with it if they haven’t been trained.”