A bad connection.

Ask most mortgage brokers or correspondents what floats their boat, and they'll tell you customer service and quick turnaround time from their wholesalers. Ask any wholesaler the same question, and they'll say complete information and viable loans - lots of them.

Yet, in many respects, communications between wholesalers and brokers/correspondents have resembled a fishing trip gone bad: wholesalers casting a wide net of programs and rates only to catch one loan.

From rate distribution through loan purchase, brokers/correspondents and wholesalers have historically played a low-tech, hit-or-miss game of tag to convey vital information and make the loan wholesaling process happen. With the advent of automated underwriting services, the question of broker communications takes on new relevance: to gain the efficiencies associated with underwriting early in the origination process, brokers need to be part of the wholesaler's reengineered business operation.

There are a number of reasons broker-wholesaler communication inefficiencies have been perpetuated. The reasons range from the retail production emphasis of origination systems that lack wholesale lending functionality, to the proliferation of broker-targeted software packages that don't interface with wholesaler systems, to painfully slow adoption of EDI standards. This article doesn't provide a sure-fire solution to all these communication ills, but it suggests some alternative broker communications scenarios that have been aided and abetted by technology.

For the sake of defining broker communications, the following functional activities exist:

* Registration where brokers/correspondents supply the wholesaler with enough loan information to price the loan. This function is typically accomplished by filling out paperwork and faxing, or by phone.

* Rate communication where wholesalers make available their most current loan products and rates to all participating broker organizations.

* Rate lock-in where brokers affix a firm interest rate to the borrower's loan and alert the wholesaler of their intent to deliver a loan at that interest rate.

* Loan file submission where the loan file with complete documentation is handed over from the broker to the wholesaler.

* Interim communications, including wholesalers confirming the terms of the lock, as well as loan status updates, additional information needs and conditions for underwriting review and approval.

Communication scenarios vary widely, but generally the business transaction is initiated when the broker calls the wholesaler with a potential loan and supplies enough information to lock in that loan. After that, the wholesaler may not hear again from the broker until the loan file comes in the door. If the lock expires and no loan file materializes, the deal's off. But when the file arrives, the wholesaler kicks into high gear to underwrite and fund the loan as soon as possible.

Brokers may or may not have their own loan origination systems to manage and track loan progress. But even when they do, it's rare that these systems prove directly compatible with the wholesaler's system. So the wholesaler is faced with duplicate data entry to set up the loan on its system and perform the underwriting.

Problems from a wholesaler's perspective

From a wholesaler's perspective, problems impeding the flow of information between wholesalers and their brokers usually fall within these defined categories:

* Data issues - inconsistent data formats between systems that result in re-keying data received from brokers and the receipt of incomplete data.

* Timing concerns - timeliness in distributing rates, registering loans, locking in prices and sending confirmations.

* Management information - lack of access to pipeline projections, funding results and broker performance.

The broker sees the flip side of the coin, in many cases dealing with information overload from its wholesalers. "We're in the information business, and it boils down to determining what the best use of our time is," says Bert Morrison, owner of Quality Funding Group, a midsize broker organization in San Diego, California. "We spend a lot of time sifting through information that we don't use."

Ari Moses, president of Union Federal Mortgage Corporation in New York, echoes that sentiment. "We're being inundated with paper - I go through a roll of fax paper a day and receive everything from rates to promotional materials to solicitations for software by vendors who are being sponsored by the wholesaler."

What's led to the current state of affairs? From a technological standpoint, the communications component of the broker-wholesaler relationship has been vastly underserved and inconsistently addressed industrywide. With the popularization of wholesale lending in the mid-1980s, telephone and mail were the main communication vehicles among wholesalers, brokers and correspondents. Then came the use of the fax machine, which became an office staple like the telephone.

The preferred method of communicating quickly shifted to fax services, particularly broadcast faxing for rate distribution. This remains the most widely used means of rate communication today even among some of the wholesaling giants. Broadcast fax is relatively inexpensive and convenient for the wholesaler, but multiply one daily broadcast fax sheet by a double- or triple-digit number of wholesalers, add regular promotional fliers and messages, and the broker has a mountain of paper to sift through. The wholesaler may ultimately suffer too, as its rate sheet becomes just another page in the paper shuffle.

Some of the wholesaling giants, determined to reduce operating costs and enhance customer service, have streamlined communications between their brokers by offering them proprietary systems to send in loan information, view rates and loan status, and in rare cases, actually lock in a loan. In addition, certain loan-origination system vendor software offers scaled-down versions of the loan application that can be used in the field. These systems typically have been modeled after retail production needs, however, and rarely enable rate lock-in or provide tracking of other information such as loan status. And they still require modem access to telephone lines, which can be difficult for mobile brokers to achieve. Cellular communications have made some inroads, most notably with BankAmerica's AMIE system, which the wholesale giant is currently rolling out to its brokers. But even for BankAmerica, broadcast fax remains the primary means for rate distribution.

Quality Funding's Bert Morrison praises on-line rate services such as those offered through MixStar, a mortgage industry information exchange service offered over America Online and based in Newport Beach, California, but sees them as only part of the solution. "Preferred broker organizations need to be given a communications medium that's effective. Some of the wholesalers I work with have figured out the process so that I need minimal interaction to do business with them. Lenders with whom we have the best relationship are those who understand what loan programs they're best at and sell these the hardest; who are accessible; who provide information in a format we can use; who give us the latest technology and who have a system of communicating whereby problem resolution in any functional area, such as lock-in, is a breeze."

Electronic receipt of information is even more critical to brokers when locking in rates. Rate lock-in is often accomplished via fax, with confirmation not being received back for up to 48 hours. Brokers don't want to risk the possibility of the wholesaler not receiving the fax, especially if the market is moving, so they wind up resorting to telephone calls for peace of mind. The ability to lock in rates on-line and receive immediate electronic confirmation solves this problem. Even for those wholesalers who don't allow brokers to lock in online, they can provide on-line confirmation of a telephone-based rate lock-in.

Automation's promise

Given that competitors' prices are near parity and margins are growing even thinner in the increasingly commodity-like business environment of wholesale lending, wholesalers must either find ways to remain profitable or leave the business. Automation promises competitive advantages that can enable wholesalers to differentiate themselves through factors such as customer service and operating efficiency, making it easier for their correspondents to do business with them rather than another wholesaler.

"To stay competitive, wholesalers have to offer something in addition to the latest loan product that realizes a very brief window of opportunity. That 'something' is technology that makes the process of communicating easier, quicker and cheaper for everybody concerned," says Joe Loper, executive vice president of Temple-Inland Mortgage Corporation's Wholesale Operations in Austin, Texas. "We've embraced technology as a means to satisfy an obvious need to reduce the labor intensity of this business and to speed operations. You almost have to have same-day loan underwriting now to be competitive."

The technology improvements Temple-Inland has adopted to help its brokers and correspondent lenders stay in the business loop include an automated underwriting support module that enables the wholesaler to manage and track the activities around underwriting loans submitted by its brokers. For example, when a loan is underwritten, the system immediately faxes out an approval to the broker without any manual intervention. Faxes are also automatically sent out to brokers listing outstanding items for underwriting review. This system enhancement has proven a highly effective, low-cost tool for keeping lines of communication open and underscores a growing trend toward analysis and support tools in underwriting that extend their benefits to the broker.

Another emerging technology that supports communication between wholesalers and brokers during the underwriting process is video teleconferencing, which connects the broker and borrower sitting in one room with the wholesaler's underwriter off-site. In conjunction with origination system functionality that enables key underwriting information to be electronically transmitted to the underwriter, video technology provides the human touch. It allows contact with a person, not a machine, who can explain the underwriting process and potentially provide a comfort level to anxious borrowers.

Employees at New York-based Union Federal Mortgage Corporation are excited by the potential of this technology, which is being offered by one of their wholesalers. "We really believe that in addition to improving the information flow between broker and wholesaler, video teleconferencing will enhance the underwriting process itself," says Union Federal President Moses. The underwriter will be receiving borrower and loan information, submitting it to Loan Prospector[SM], Freddie Mac's automated underwriting service, and receiving a credit decision response during the video teleconferencing session.

Without a means of effectively connecting the wholesaler and the broker through technology, however, adoption of automated underwriting services could suffer. "Until a viable interface between brokers and wholesalers is available, use of automated underwriting systems won't be as widespread," says Sterling Edmunds, Crestar Mortgage's executive vice president of the production group. "Crestar Mortgage was the first lender in the country to go live on Fannie Mae's Desktop Originator[SM] system, but we can't fully realize the efficiencies of this system until we finish building our automated interface."

Edmunds sees automated underwriting spurring a change in the wholesale origination process in a way that could end up making it look much like retail. "Brokers will take applications on laptop computers and be able to download them to the wholesaler's automated underwriting system, receiving an answer back immediately. The quality control process will be moved forward to occur before closing."

The establishment of such close communication between brokers and wholesalers around the underwriting function is particularly timely, given indications that wholesale loans sold into the secondary market appear to experience a much higher level of default than retail loans. During the October Mortgage Bankers Association of America (MBA) Annual Convention in San Diego, Fannie Mae's Chairman James Johnson commented that his corporation has seen significantly higher default levels in the wholesale versus retail loans it has purchased. Better, more timely communications between brokers and wholesalers can play an important role in improving loan problems by helping to spot problems earlier.

The importance of a system interface

Temple-Inland is in the process of automating its system interfaces with its brokers to improve the wholesale origination process. "Our approach has been to leverage the fact that many brokers are using the Contour loan origination system. So we determined [it would be desirable] to build an interface from Contour to our internal origination system to transmit information for evaluation by our underwriter," says Loper.

From a business standpoint, such an interface makes practical sense. Receiving this underwriting information earlier in the process enables the wholesaler to do a pre-review for underwriting and have more and better information in the loan pipeline, potentially reducing the level of loan fallout. The wholesaler also can let the broker know early on, based on the information submitted, if more or less documentation is needed.

From a technical perspective, however, implementing such an interface requires significant analysis and design because of the great variability that exists among data storage schemes of different loan origination systems. For example, the Contour origination system allows the data entry of unlimited debts, while the internal system Temple-Inland uses accepts only nine debts.

To resolve this incompatibility, any debts beyond eight in the Contour system were added together as debt number nine and flagged in Temple-Inland's system as a composite total. A report was then generated for the underwriter showing all of the actual debt detail. In addition, information that did not translate, such as product codes, was accommodated via a custom-developed screen. This screen displayed product information from the Contour system so that a Temple-Inland representative receiving the loan information could select the appropriate product code.

The issue of how to accommodate multiple submissions of the same loan file for underwriting approval also needed to be resolved. Once the file had been received and reviewed, Temple-Inland needed to ensure that certain information was not overwritten if the file were resubmitted. To tackle this problem, a report was generated for the underwriter indicating what information had changed. And if the paper loan file had been received, the new electronic submission would not be accepted.

The appeal of EDI

Such is the dilemma of developing proprietary interfaces, a dilemma the industry-sponsored EDI initiative seeks to resolve. Given that we currently live in a world of nonstandard data formats and structures, the prospect of two different systems talking to each other is not as easy as mapping a data field in one system to a data field in another system. Often, a direct field-to-field correspondence does not exist. Proprietary interfaces between vendor origination systems used by brokers and internal wholesaler systems can be further complicated by the fact that not all versions of a vendor's system are necessarily compatible with the interface. And nothing is to say that brokers using the same system are all using the same version.

In the world of standardized EDI transactions, such interfacing nightmares will be put to rest. Under EDI, all systems will conform to data exchange standards, regardless of the disparity with their internal data structures. Establishment of a one-to-one data field correspondence between dissimilar systems, something that is central to the EDI concept, will become a reality as system vendors increasingly implement X.12 capabilities. Adoption and real production use of the established X.12 standards has been proclaimed the top priority in 1996 for the MBA Technology Committee. However, while awaiting widespread EDI adoption, wholesalers and brokers will continue to implement alternative solutions to enable communications.

One such alternative is what Quality Funding's Morrison calls the "total-solution approach." In this approach, Quality Funding takes its top 20 brokers and meets with them to define a process and accompanying technological support that offers the best solution.

Some wholesalers have capitalized on this concept of giving their brokers tools to communicate more efficiently with them, thereby securing a competitive advantage. Witness Countrywide Funding Corporation, Pasadena, whose Direct Line Plus program is designed to enable brokers to perform delegated underwriting.

"Wholesalers are investigating if they can provide additional functionality that is applicable only to that wholesaler and that gives them a distinct advantage in the quality, timeliness or consistency of service," says Michael Gordon, president of C.C. Pace Systems, a mortgage industry technology consulting firm based in Fairfax, Virginia. "Even if this niche eventually dissolves as the competition scurries to imitate, you may have built up some customer loyalty that holds you over until you've implemented something new to keep you ahead of the game."

In assessing the current marketplace, we found that multiple alternatives exist that could improve broker-wholesaler communications, with technology being the tool to enable these improvements. Standardized EDI will ultimately lay the framework for facilitating communications. But even within the world of standardization, wholesalers will need to make an investment in technology to differentiate themselves and achieve a competitive advantage in today's increasingly commodity-like business of mortgage lending.

This isn't to say that wholesalers should blindly spend on technology in the hopes of hooking more broker-supplied loan business. "You have to be careful," warns Temple-Inland's Loper. "You can spend millions on technology and not get your money's worth. You need to realistically balance the desire to be a leader with the need to watch the bottom line."

Indeed, technology is an expensive investment, and wholesalers need to be savvy consumers. However, those who choose to invest nothing will ultimately find themselves trying to catch fish with no gear and no bait. The result: No loans will bite.

Julie Thompson is a managing consultant and Craig Hughes is the managing director of the Primary Mortgage Market business unit of C.C. Pace Systems, a Fairfax, Virginia-based technology consulting firm that specializes in the design and development of real estate finance technology solutions.