Will a retreating market provide “silver lining” offerings?

 

With ebbing property values, fewer originations, and stalled loan servicing volumes, the invisible hand that turned the crank on the mortgage industry eased back on the pressure. Way back.

 

“All the ‘levers’ that drove high loan volumes and the need for technology ‘got turned off’ ,” says Jeff Lebowitz, founding consultant with Mortech, who built his business in Guilford, Conn., and has recently relocated to Oregon.

 

“Roughly 10% of core technology spending in the mortgage sector disappeared over 2007,” says Lebowitz. And the sudden loss of a rambunctious subprime sector has resulted in an environment where there are more vendors of interesting technology than takers of it.

 

While Lebowitz agrees no one can predict market timing, it will be some time, he and others say, before a stable housing market pushes mortgage-related IT spending up again—probably until the next boom.

 

When pressed, the consultant is firm in his pessimism. “Sure, there will be some down market lenders that need to update their systems,” he says. “There may be some spending related to system consolidation, but that’s all ‘back fill’.”

 

Paul Schaus, president and managing partner with Catalyst Consulting Group, Goodyear,  Ariz., essentially agrees. “There are certainly some progressive banks out there that are doing great financially, which may take the time to make systematic upgrades to their lending environment so they can leverage their strong position and be as choosy as they want. But those banks would be the exception. Most aren’t making IT upgrades. They aren’t spending, period. They are just finding ways to cut back on any extra staff they may have hired during the boom.”

 

In that vast unstoppable cycle that is the economy, “every banker I talked to during the lending boom knew the bottom was going to drop out,” says Schaus. “They were simply surprised that it fell so fast and so far from what seemed liked a very strong period. Eighteen months later, we’re all still wondering.”

 

The widely reported housing and mortgage finance predicament is a study in complication.  “Issues vary from region to region,” says Bert Ely, a banking industry consultant based in Alexandria, Va. “You saw outright fraud in some places and long-term economic decline aggravating the crisis in others,” he says. Certainly, Ely says, not every lender was touched and many continue to deal with the conforming segment that tends to be trouble free.

 

“Securitization won’t be wiped out, but it will shrink,” predicts Ely. “The mortgage finance market is under a great deal of pressure and everything will get conservative.” Now that the “pass the buck” mentality of the recent boom won’t be tolerated, Ely sees the possibility of dominant reversion to portfolio lending.

Needed: case management systems

Peter Davidson, founder of Brooks FI Solutions, Downingtown, Pa., isn’t as vivid in his characterization, yet he agrees that the current market is hard to read. “Under ordinary economic conditions, you might be able to say that we’ve started to recover,” says Davidson. “Yet with oil prices, layoffs, and the stress that the financial services sector is under right now, it’s hard to know how the secondary market will work and what types of products will become more widely used.”

 

Davidson says that there could be a role for automation in a market trying to right itself and avoid foreclosure via “haircuts, workouts, and new arrangements.”

 

“There really aren’t any vendor systems that can support a bank handling any volume of client workouts.” Offering an example, Davidson talked about case management systems that banks could use where the bank cuts interest rates to keep the homeowner in residence but shares upside potential down the line when the property is sold. “That’s the sort of workflow and reporting tools the market could use now,” says Davidson.

 

Not everyone sees IT as a savior in hard times. Some say bankers will remain leery of automated scoring and application approval during this more conservative period, one that requires a personal touch in application review.

 

But one vendor, Overture Technologies, Bethesda, Md., sees this period as offering greater opportunity for expanding the use of rules and instant decision engines. It has coined a term “redecisioning,” for the act of re-executing an automated decision with fresh information at any time during the servicing period of a loan.

 

“It’s conceivable to us that a loss mitigation clerk working with an application service provider (ASP) version of our Mozart system could be walking a consumer through the workout process, in a clear, consistent, repeatable way,” notes Linda Simmons, senior vice-president, business development.

 

Currently, the firm is developing pilots in the higher education sector in which it also operates to test the viability of “a mortgage origination-like process” applied in other types of lending scenarios.

 

While she admits the servicing market is controlled, to some extent, by a few key vendors with aging IT, Overture’s product could, in effect, overlay any of those systems.

Fate of e-mortgages?

While automation efforts connected to Mortgage Industry Standards Maintenance Organization (MISMO) have continued and yielded some mature technology, aggressive moves to cut away paper from the lending process will remain a bastion of the largest, most prosperous leaders.

 

Still, volumes of e-mortgages have crept up steadily prior to the correction, according to the Mortgage Bankers Association.

 

Cleveland-based Amtrust Bank is a wholesaler that has closed over 10,000 mortgage loans using its proprietary eSign closing solution, notes Steve Trayte, vice president, director of credit and technology. A mainstay on mortgage conference panels, Trayte (pronounced like “trait”) is one face of the definite, if under the radar, electronification movement.

 

“Our originators may scan documents or leverage their online channel to gather some information electronically. It differs,” explains Trayte. “By the time it gets to us, the loans are electronic.”

 

Trayte says that given his bank’s business-to-business role in the lending ecosystem, he didn’t feel qualified to speak to overall viability of e-mortgages. Still, when he was asked about technology use, Trayte said that he believed subsequent adjustments to the mortgage industry would result in a more aggressive adoption as a means to control costs. “The market will only get more competitive. You’ll have to upgrade to bring down origination cost.”

 

Cleaning up and clearing off the books

On average, the mortgage industry “replatforms” itself in ten-year cycles, notes Jeff Brunell, partner, with Baltimore-based EAG Consultants. Originators struggle to plan ahead for a cost and volume environment that is hard to predict. Right now, Brunell, says, especially among those most affected by subprime, the focus is on regrouping and survival. “Many banks are cleaning up their portfolios and trying to get clarity on their actual risk profile.”

 

Bouncing back from a credit crises that was partially created by easy money and increasingly obtuse derivative products, lenders will also be attracted to analytics that can help them better predict a potential problem.

 

The EAG consultant agrees that technology-guided workouts will be increasingly important.

 

This period of retrenchment has some lenders re-evaluating processes, lending guidelines, and products.

 

“Even among lenders that only deal with conforming mortgages there will be a simplification of the product line over time,” says Tom Mataconis, senior executive and North American lead for Credit Services at Accenture, located in Charlotte. “Many lenders will be looking at all the variety of product in their system and questioning whether it makes sense to have that much complexity,” says Mataconis. “Over the next several months they will be asking hard questions about what adds value.”

 

The Accenture executive adds that lenders who aren’t in trouble want to simplify by creating cleaner environments and collapse as much as possible into fewer platforms.

Better customer service

For originators untouched by subprime and its problems, improving the lending environment can mean a lower cost per loan and a superior customer service experience, according to Mataconis.

 

From the average customer’s perspective, the Accenture consultant relates, there is a “black hole” aspect to mortgage origination that’s never gone away, even with the advent of internet self service for some aspects of banking.

 

“It can be a frustrating experience if you have a question about the status of your application,” he says.

Having a case management system that would allow both call center and branch employees to look up a customer file and easily check the status of the process would make routine customer check-ins less stressful. “When I was applying for my last mortgage, it could take days to get an answer about the status of the application. A case management system would have helped.” BJ

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