A Glimpse at Web-Enabled Servicing.

Although just in its infancy, the Internet will play a growing role in mortgage servicing in the future.

IN THE MORTGAGE SERVICING WORLD, ERIC JOSHU PROBABLY HAS THE MOST UNLIKELY JOB. While most mortgages in the United States are originated and serviced by private financial institutions, Joshu does the same for the federal government.

* Joshu holds the title of deputy director of the Centralized Servicing Center for the U.S. Department of Agriculture (USDA) Rural Housing Service. He can be found in St. Louis, Missouri, where as part of the Department of Agriculture his agency services direct loans that are made to low- and very-low-income borrowers and families in rural areas.

* One might think the government would have outsourced this work to the private sector, but as Joshu explains, "the reason we service the loans ourselves is because of this very diverse clientele. By definition, we service low-income folks in rural areas who have multiple financial challenges either due to income, language or education barriers. A large portion of our portfolio is elderly. As you can see, our mission is a little different from the private sector."

* The loans Joshu services are a bit different as well. For one thing, the interest rate is modified by a payment-assistance subsidy. Plus, the origination system has to take into account unique government rules and regulations.

Despite these peculiarities and the low income level of the clients, Joshu is already anticipating his business moving to an Internet, or Web-enabled, browser program.

"We have looked at Web-enabled systems, but we do not think we are ready at this time," says Joshu. "We definitely like the concept. In terms of using the Internet, we want to be able in the near future to offer the same services that we have now in a voice-response system [getting payment information, loan status, principal balances, etc.] through Internet accessibility. We want to be able to answer our borrowers' basic questions and have customer-initiated payments through the Internet."

Of the business side of his operations, Joshu says, "we have [more than] Soo rural field officers [who] also originate loans and help provide customer counseling to our borrowers. We would like to use the Internet to give them access to the same information that we have here in St. Louis. When we speak to a borrower, whether in St. Louis or in a field office in rural America, we should all be looking at the same information."

Joshu knows that his agency's change to an Internet-based system is not that far away. The technology to do all this work is already coming into existence and might have been up and running already, but the loan industry's initial infatuation with the Internet was mostly on the origination side and it has taken a bit longer for the servicing end of the business to catch up.

"Clearly, at the very beginning of the Internet technology revolution, the interest was on the sexy side of the business: origination," says Richard Beidl, director of Global Mortgage Lending Practices with Needham, Massachusetts-based TowerGroup, a research, advisory and consulting business. "If you can offer your customer a better origination experience and faster pricing and loan decision, that makes a difference as to how competitive you are in the marketplace. There has been no evidence that a customer will say, 'Well, I'm going to this institution for a loan because I can get my account serviced via the Internet,"' he says.

However, many companies have come to the conclusion that servicing can be a most important part of corporate marketing. If a financial institution originates loans and retains the servicing, it can offer clients the experience of being with the same company over a long period of time--which means the borrower would more than likely return to that same company when considering the next loan if the servicing experience has been good.

Secondly, servicing should be a revenue center--not an expense--for financial institutions, and the expectation is that a Web-enabled system will not only produce better customer service, but will drive down expenses as well.

TowerGroup estimates the typical mortgage servicer, if fully Web-deployed, can offer customers a high level of customer convenience in regard to requesting payoffs, requesting escrow information or changing insurance carriers and the like. On top of that, the servicer could save $5 to 57 a year per loan--which, when translated to million or 2 million loans, is a significant savings.

"The nice thing about the browser interface," says Beidl, "is that a lot of institutions are trying to make it ubiquitous so that not only will it be used for customer access, but it can be rolled out to customer service representatives."

The other important aspect of Web-enabled technology is that it is centralized, says Beidl. "When you have everyone using a client/server system, you not only have to update the client software, but every single workstation. When you upgrade existing software for a Web interface, you do it with one footprint."

Cyber-servicing's late arrival

Despite recent advances, Beidl says, the servicing part of the mortgage industry is still in the early stages of Web-enabled technology developments. "Whether we are at step one or step two out of 10 steps, it's hard to say--but clearly we are at the very beginning of the evolution," he says.

"Servicing vendors have come late to the Internet," says Leilani Allen, a partner with Summer Point Consulting in Mundelein, Illinois. "It's only been in the last year that we can actually contemplate what the Internet means to the servicing business."

The servicing enterprise is, at its core, one big accounting function, according to Allen. "That's 80 percent of the game. If you do not get that right, then it does not matter what else you do. Everything else is sideline. If you are talking about the Internet and technology, you have to do something to affect that 80 percent of activity--which I do not see happening yet," she says.

Where Allen does see progress is in two areas, she says: bringing information to the consumer and business-to-business back office. Interaction with the consumer basically means handling the phone calls that come in from borrowers. "This is pure cost to servicers, because mostly it entails simple responses such as, 'Here is where we sent your taxes,' or 'Here is when we paid your insurance,"' Allen says. "This is something the Internet can handle well, and if each phone call represents $5 in cost, then every one of those phone calls that can be prevented goes to the bottom line."

In regard to business-to-business, Allen says the Internet can be a real help in specific situations, such as when a mortgage goes into default and foreclosure. "When this happens, there are a lot of people to coordinate [with]--such as agencies, foreclosure attorneys, internal personnel, etc.--and being able to send data over the Internet, being able to transfer files, makes a whole lot of sense," she says.

Unlike the origination world, where there is a variety of vendors and a lot of product, once a mortgage lender picks a servicing vendor it tends to stay there--so the incentive for technological innovation has not been as intense as on the origination side. Frankly, says Allen, "there had been a lot of complacency on the part of these vendors. It's only been in the last couple of years that companies [developing servicing systems for lenders] have become more viable competitors."

Two of the leading players making headway in the arena of Internet servicing initiatives are ALLTEL Information Services, Jacksonville, Florida, and Fiserv Mortgage Servicing Systems, South Bend, Indiana.

By taking a closer look at one of these big two in servicing technology, you can get a sense of how the Internet is figuring increasingly in the technology development plans for servicers.

Fiserv, for example, is operating on the following dictum: The momentum of the Internet's impact on business-to-business exchanges in the financial industry is unstoppable. The future of the mortgage sector, in turn, will be dependent on shared databases and shared access, which the servicing platform must facilitate via the Internet.

According to Sadu Thinakal, president of Fiserv Mortgage Servicing Systems, a division of Fiserv Inc., Brookfield, Wisconsin, the following is the case:

* Internet-related technology is truly a transformational technology, providing significant operational efficiencies and business advantages;

* the Internet platform will be the universal computing architecture around which all the other systems will evolve, and the browser will be the universal computer-human interface; and

* the leading companies are embracing this vision and investing in and deploying Web-centric solutions in all spheres of financial services, including mortgage servicing.

Formed in 1996, Calmco Servicing LP, Austin, Texas, specializes in subprime mortgage servicing. On June 27, it converted to Fiserv's MortgageServ[TM] System, making it the first mortgage servicing company to go live with this Web-enabled version of the company's Mortgage Loan Servicing system. MortgageServ employs a point-and-click operation of browser navigation and networks the workflow management, default mitigation, private-label subservicing and subprime functionality in a real-time system.

Within MortgageServ is an integrated module for a mortgage-specific data warehouse. And to meet servicers' needs for increased revenue, the system also integrates a blended call center.

Calmco selected MortgageServ for a number of reasons, according to John Scattergood, senior vice president of information technology for Calmco. "The industry is headed toward a browser interface using a thin client model [no technology on client systems]," he says. "When we looked at the various systems out there on the market, MortgageServ was further along than anyone else."

Calmco, says Scattergood, was basically looking to hold down costs. "In a client/server environment, programs are stored and executed in both the file server and at the desktop. The programs we were executing at the desktop required more and more horsepower, and the cost of buying higher-end PCs and maintaining those PCs was getting out of control."

In an application service provider (ASP) environment, programs are stored and executed on a central, high-end file server, with keystrokes and mouse clicks at the desktop, so companies can get the same level of performance with a low-end PC.

Also making the conversion to MortgageServ is CitiFinancial, Hanover, Maryland, which holds a $5.5 billion portfolio of mortgages. "Fiserv has been our biggest venture into the Internet," says Bill Vassalotti, director of the Mortgage Service Center for CitiFinancial. "We are converting to their Web-based system. What we have today was developed from our consumer system and cannot handle the real estate servicing at the volumes we are lending."

One of the features that appealed to Vassalotti was the fact that on the asset-management side, CitiFinancial can use the Internet for dealing with Realtors and attorneys. "It is a great way for us to communicate with our vendors and, hopefully at some point, with our clients. We have not gotten to using the Internet for clients to be able to look at statements and things like that."

CitiFinancial expects to complete its conversion in the early part of 2001. Despite its change of systems, Vassalotti says, "we are going to have to continue to hold [onto] some of the non-Internet system because not everyone is going to have the ability to do business the way we want them to do it. Technology changes rapidly, so the ability to stay up with technology is always an issue."

SouthTrust Mortgage Corporation, Birmingham, Alabama, originated more than $2 billion worth of production last year, and currently services a $10 billion portfolio, according to Michael Cerase, vice president of loan operations for SouthTrust. The company has not made the switch to a browser-based system, although it is seriously looking at it for a number of reasons--including the fact that being Web-enabled allows third-party providers into that part of the database that affects them so they can key in information and send it to SouthTrust.

"Specifically, I'm talking about such entities as foreclosure attorneys," says Cerase. "Heretofore, they have to [send] paper and my people have to key it in. This way, you are outsourcing the work, because their people would key it in."

There are two other features involving the Internet that are also appealing to Cerase. The first is consumer access. "The Internet has the ability to take the routine business of servicing and shift it away from the cost structure, because so much of [servicing] cost is related to personnel. If you shift it out to the Internet, where the customer has access to the information, he or she can read it, hopefully understand it, and then you save on the telephone calls that no longer come in," says Cerase.

Secondly, Cerase sees a big advantage with the Internet on the business side of the operations. "With a browser-based system, it doesn't matter if an employee is on-site or not, because that whole mainframe and application system is on the Internet. It can be accessed and run off-site. Being browser-based makes the functionality available outside your natural servicing center," he says.

Bob Rosen, executive vice president of loan administration and operations for Fleet Mortgage Group, Columbia, South Carolina, likes the concept of Internet-based applications, but says he thinks that on a general level, the servicing end of the business will migrate very slowly in that direction. Even three to five years from now, Rosen says, servicers will be communicating by Internet with only 15 to 30 percent of their customers.

"You need the younger generation that has grown up on this stuff to become a large majority of the household owners," says Rosen. "There are still a lot of old fogeys who do not necessarily want to go on the Internet every day and pay their bills. There is always going to be a small percentage who want to deal with a third-party adviser in the traditional way."

Fleet Mortgage Group services about 1.6 million loans nationwide and outsources much of its mortgage servicing technology development to Fiserv.

"We have discussed the browser technology that a lot of people are investing dollars, time and resources in, and it looks to be pretty exciting," says Rosen. "There is a lot of new technology out there and a good part of the business is moving toward the Internet. But there are a lot of complicated processes that need to be on the mainframe.

As an example, Rosen says, when Fleet gets a report from Fannie Mae or Freddie Mac, the process is very complicated and requires integral mathematical transactions and formulas with a lot of data passing back and forth between investors. "This is not a process you want to put on the Internet," he says.

The servicing business will not become fully Internet-based for another five to 10 years, Rosen says.

While that may or may not be true, Thinakal would argue that the merits of a browser-based system are too numerous to overlook. "The continued development of servicing systems is fueled by the work-sharing capabilities of the Internet, which allows minute-to-minute operational adjustments to facilitate workflow and customer service responses," he says. "It addresses the most pressing needs of servicers: cost containment, revenue enhancement, customer retention, asset/risk management and service excellence."

There are two principal advantages to being Internet-enabled, says Thinakal. First, it provides the added efficiencies of work-sharing, which lowers operational costs. In particular, being Internet-enabled allows any size servicer to compete in profitability and customer service through work-sharing and real-time information sharing; allows for ultimate control of work shifting or sharing; and provides portability that eliminates the need to supply software copies to multiple desktops.

Secondly, being Internet-enabled offers users connectivity to unlimited third parties. That means consumers can connect with servicers 24 hours a day, seven days a week; it enables shared databases in default; brings unlimited capacity for networking; and puts a world of information at the fingertips.

"The servicing industry will be migrating to Internet-enabled systems," predicts Thinakal.

Steve Bergsman is a freelance writer based in Mesa, Arizona.