A rising star in Flagstar: this regional bank became a national powerhouse by harnessing technology.
Snapshot of a leader
It started out with Hammond Mortgage, Oak Hills Mortgage and First Security Mortgage, three small origination shops writing agency paper in the Midwest during the 1960s. But Hammond was an entrepreneur, and by 1987 he was successful enough to form a federal savings bank and rolled his mortgage assets into First Security Savings Bank, Bloomfield Hills, Michigan.
A community bank operating initially in Michigan, the enterprise expanded its branch banking operations into Indiana and Georgia, but pushed its mortgage unit--the core of its enterprise--much harder. By 1992, Thomas Hammond was providing loans on a wholesale basis to originators nationwide. That's when he encountered a problem.
It turned out there were a lot of financial services firms operating around the country during the 1990s that had "security" in their names. In fact, in 1994, Hammond bought one when he acquired Security Savings Bank, Jackson, Mississippi, the firm's only acquisition to date.
Hammond realized that the company needed a new name--one that would distinguish it anywhere in the country. In 1996, the company name was changed to Flagstar Bancorp from First Security to better reflect its diversified businesses and national reach.
Hammond took Flagstar public in 1997, and initially listed the company on the Nasdaq. By 2000, the firm relocated into a 380,000-square-foot facility in Troy, Michigan, where it is now headquartered. In 2001, Flagstar moved its listing to the New York Stock Exchange (NYSE). Today, it is included in the S & P (Standard & Poor's) Small Cap 600, Russell 2000 and NYSE Composite indexes.
According to Flagstar, in 2005 it originated $28 billion in mortgages, making it the seventh-largest loan seller to Fannie Mae. The company reports it originated $4.6 billion in the most recent quarter, ending Sept. 30, 2006.
The company currently services $24 billion in loans, including $14.8 billion in loans serviced for others, and is ranked a Tier One platinum servicer by Freddie Mac. It also holds a $1.3 billion commercial real estate servicing portfolio.
The majority of Flagstar's loan originations come in from a network of some 4,000 brokers (10,000 are approved), operating in all 50 states. These brokers delivered 57.1 percent of the bank's total production volume in 2005. In addition, Flagstar works with some 900 correspondent lenders across the country (1,500 are approved), which accounted for 28.7 percent of total originations in 2005.
Only 14.2 percent of its 2005 origination volume came from its banking centers, and the 90 additional home-loan centers it maintains in 22 states. But that is going to change. According to Hammond, his firm will be expanding its retail lending operations.
Flagstar's philosophy of technology
Talking to Flagstar executives about technology is like talking to them about customer service. In fact, it's exactly the same: They won't talk about one without the other.
"At the end of the day, it all comes down to customer service," says W. Steven Brooks, Flagstar's executive vice president in charge of lending. He adds it's all about these questions: "How are you providing service to your customers? And how do you measure that?"
At Flagstar, one of the most important metrics for measuring customer service is speed. Faster loan approvals and lower cycle times equate to more satisfied customers, and Flagstar knows it. To get that speed, the company declared war on paper more than a decade ago.
"This isn't something we started doing yesterday," Brooks says. "Tom [Hammond] talks about the paperless office today the same way he talked about it back in 1995."
Technically speaking, Flagstar wasn't really paperless in 1995, but it was already on the road there. The bank was scanning documents in 1995, primarily for storage and retention. It wasn't until 1999 that it was capable of adding these scanned documents into an electronic workflow. Brooks says that was where the efficiencies really kicked in.
"It's not just scanning," Brooks says. "It's about capturing the documents and then doing something with them, routing them though your workflow to the people who need them."
By 2000, the company was exporting images to investors. And by 2005, Flagstar had added a paperless file manager and the capability to auto-label incoming documents as part of a complete digital document-transfer platform.
According to Brooks, who started out with the company as a retail loan officer and worked his way up to a corner office, Flagstar doesn't tolerate paper and it won't listen to excuses related to it.
"Lost document?" he quips in response to one of the most common reasons for delays in the mortgage process. "I haven't heard that one since 1995."
While the Flagstar paperless back office may be "legendary," as one mortgage industry trade publication once put it, paperless lending initiatives are only one place technology is being employed in the bank.
Whether it's an innovative partner-rating system to allow Flagstar to rank its third-party loan originators or an online loan-status tool that has almost eliminated incoming broker information calls, the Flagstar philosophy is to apply technology to anything that will increase service levels to its customers--whether they be borrowers, brokers or correspondent lenders.
The Flagstar loan flow
Flagstar has systematically worked to make every part of the mortgage transaction electronic. Today, Flagstar's centralized mortgage loan-processing facility is paper-free. There are no paper files on the desks. There is no file room for them in the building. And there are no clerks to file them, lose them or find them again.
From the moment the loan enters the pipeline through to funding and post-closing, the file stays electronic.
Flagstar accomplishes this through full integrations with San Jose, California-based Calyx Software's, Dublin, California-based Ellie Mae Inc.'s and Kirkland, Washington-based Byte Software's loan origination systems (LOSes). Brooks says these three systems together serve the vast majority of the broker market. When a broker registers the loan with Flagstar, a single button uploads all the data from one of these three origination systems. If the broker uses a different loan origination system, a quick trip to Flagstar's interactive wholesale mortgage Web site provides a pull-down menu, allowing the broker to choose its LOS and upload the file to Flagstar in its native format. Bottom line: Flagstar employees almost never key in data.
Loan decisioning is handled by automated underwriting (AU) engines. Fraud and collateral valuation is handled by business logic that calls upon a customized version of Agoura Hills, California-based Interthinx's DISSCO[sm] fraud tool and a cascade of 12 different automated valuation models (AVMs).
Flagstar processors are positioned in front of dual-screen computer displays, one showing the data provided electronically by the broker's LOS and the other showing an image of the original document providing those data. Making sure they match up is the primary function of the Flagstar mortgage loan underwriter. Instead of chasing paper around the office for a couple of weeks, Flagstar underwriters can approve a loan for funding in a couple of hours.
As a Flagstar underwriter confirms that the data in the system match the information on the scanned document, the loan is pushed further down the line toward closing. At the same time, a little checkmark appears on a special Web page the broker can use to check the ongoing status of the loan. The broker gets an e-mail automatically to confirm the checkmark is there.
For lenders on the path to paperless lending, Flagstar may sound like Nirvana. But according to Brooks, Flagstar isn't satisfied yet. Moving a loan through the system in two hours is good, but instantaneous is better.
He says brokers like to work electronically as the loan moves through the pipeline, but when the deal closes, almost all of Flagstar's 4,000 brokers hit the "print" button and paper out. The same is true for the title companies and closing agents involved in the deals.
All the paper that the company has worked for 10 years to keep out of the process comes spitting back out of laser printers all over the country. It's a situation Flagstar is determined to change.
Taking the industry to the next level
Flagstar is ready to take its business to the next level with an all-electronic loan-processing system it says can scale to handle $150 billion worth of mortgages--about three times the $56.4 billion the company originated at the peak of the most recent refi boom in 2003.
Of the 17 functions Flagstar has identified in the process of originating and funding a loan--from registering the loan through to post-closing--only two require Flagstar employees. The rest of the process is automated or dependent upon the broker.
Hammond believes this is important, as he senses another refinance boom in the near future. But as chairman of a publicly traded company, he's careful about his forward-looking statements.
Brooks talks about the scalability built into the company's lending platform as well, but he also points out that with nearly 85 percent of the company's loan volume currently coming from the wholesale and correspondent channels, Flagstar needs to help its partners gain the efficiencies that come from living fully in the paperless world. And he adds that the loan originators that work with Flagstar today are ready to go to that next level.
He points out that brokers clearly appreciate the work Flagstar has already done. The company received the highest average rating in providing electronic services to brokers, according to a 2004 survey of mortgage brokers sponsored by Inside Mortgage Finance and conducted by Campbell Communications Inc., Washington, D.C.
Brooks tells the story of how Flagstar offered to let correspondent lenders scan in their own closing documents and upload them to the Flagstar system automatically instead of faxing them in and then paying courier fees to send in the originals.
"When we made that available, it was surprising how many correspondent lenders took advantage of it," Brooks says. "It was clear that these efficiencies are important to brokers. With 37 percent of our customers scanning in the documents now, we know they're ready for the next step."
In September, Flagstar opened up its digital document-transfer platform to correspondent lenders, allowing them to transfer files electronically regardless of the paperless solution they were using to get the electronic information--including those offered by Alpharetta, Georgia-based Advectis Inc.; Vienna, Virginia-based VirPack; and Hackensack, New Jersey-based PaperClip Software Inc. Today, nearly half of Flagstar's correspondent lenders are sending their loan packages in electronically.
Brooks says these initiatives have been "wildly popular. [Loan originators] want to be paperless," he adds.
But to get to the next level, the industry needs technology that hasn't been developed yet. So, Flagstar is beta testing its new eClosing module. Pilot programs with some of the bank's top customers are expected during the first quarter of 2007.
The institution is working with both Fannie Mae and Freddie Mac, and hopes to provide a system that will produce fully electronic mortgages by working seamlessly with some of the nation's top mortgage loan-closing systems, including those provided by Fiserv Inc., Brookfield, Wisconsin; The First American Corporation, Santa Ana, California; and Stewart Information Services Corporation, Houston.
"Our goal is to make our new eClosing platform compatible with any system," Brooks says. "We'd like it to be neutral."
Brooks says Flagstar is the obvious lender to go completely paperless, because it already has most of the rest of the process digitized. In addition, the company's imaging platform is proven and scalable. Producing SMART Docs[TM] won't be much more difficult than the printer command language (PCL) that Flagstar is using today. All the bank will require in the short term is an original note, but Brooks says that will change when Flagstar decides what it will do for an eNote repository solution.
"We're working with both agencies to finalize the last pieces that we have to build," Brooks says.
But even then, Flagstar won't be satisfied. The company is putting the finishing touches on an automated system to compare the HUD-1 settlement statement to the Truth-in-Lending Act (TILA) statement in post-closing, a process that now takes too much time and can lead to compliance problems if improperly performed.
"We have this whole automated service to empower all the players in the deal, but in funding we have to stop the transaction and look at the final HUD-1 and TILA statement to make sure they're in compliance," Brooks says. "It's another review step that can lead to delays at the closing table. Borrowers don't like delays at the closing table."
When the new system goes into pilot this month, Flagstar will be able to send the title company an e-mail that includes an embedded link. The title company can then follow the link back to certify that the information in Flagstar's system matches what was signed at the closing table.
Looking toward the future
Like those in any publicly traded company, Flagstar executives get wary whenever they are asked about the future. But they'll still answer the question. During a presentation company management gave in September during its investor and analyst day, a number of initiatives and goals for the future were described.
First, the company wants to take its underwriting function to the next level. Having employees compare electronic data and imaging documents on side-by-side flat panels is good, but interactive loan underwriting with video conferencing would be better.
Second, the firm is dedicated to completing the work on its own eClosing platform that will allow the bank to more effectively handle loan closings around the country, making full use of electronic documents and eSignatures.
Finally, Flagstar is dedicated to helping the other loan originators it depends upon for loan volume to fully embrace electronic lending. In that respect, the company plans to be an evangelist for the paperless mortgage--waving its flag, so to speak, in the hope that other originators will rally to it and take the industry to the next level.
Brooks is positive about the outcome, because he says Flagstar customers already see the value and want the same efficiencies for themselves. But then, Brooks seems to be perennially positive when it comes to technology and its benefits, which is probably why he has advanced so far within Flagstar.
"I live it and breathe it," he says. "I'm one of those people on the business unit side who has always been a big believer in change."
Rick Grant is a freelance writer based in Jim Thorpe, Pennsylvania. He specializes in writing about technology for the financial services industry. He can be reached at email@example.com.