Is the industry finally ready for online execution?

Ten years ago, several corporations, including Ultraprise Corporation's ultraprise.com and Pedestal Capital (both now defunct), were blazing a path to revolutionize mortgage banking in the secondary markets by allowing online execution of trades of closed loans. Both of these systems were similar, but I will speak to ultraprise.com. It was created during the height of the dot-com boom and was meant to create a new online business-to-business (B2B) marketplace for the secondary mortgage markets. The assets on the platforms needed to be closed whole loans, but they could be traded on a flow or bulk/pool basis.

In the case of ultraprise.com, there was a bid/counter bid/auction functionality that would allow buyers to compete for the pools of loans. However, there were many technical challenges, including a complete lack of data standardization in the secondary markets--think Microsoft[R] Excel [TM] and "tape cracking." Whether the actual (paper) assets matched the online datasets used for decision-making was another challenge.

Aside from the technical challenges, the larger challenge was to be able to change the mindsets of the traders who were users of the system. Traders were then, and remain today, very relationship-based, and they were used to flying back and forth to structure deals using Excel and e-mail, then letting someone else sort through the certification of the pool against any dataset they made an execution decision on.

Data quality and related issues grew into more of a problem in the recent boom years (2003-2005) with the rapid growth of private-label securities, providing more outlets for deals equating to more competition. In this environment, the competition was so fierce that people would rush to close deals and would execute decisions with even less upfront information at the loan level out of necessity.

All through this, there still was not a standardized industry utility for handling the transactions--something the stock market has had for years in the Depository Trust & Clearing Corporation, New York. Many consider solutions such as those provided by ultraprise.com and Pedestal to have been 10 to 15 years ahead of their time.

Hindsight is always 20/20, which brings us to the present. Last October, as part of the Emergency Economic Stabilization Act, the U.S. Treasury Department issued a request for proposal (RFP) with an insane two-day deadline for a financial institution and any number of its designees to be an asset manager for hundreds of billions of dollars of distressed loan assets.

Not surprisingly, there was a broad range of requirements that the institution needed to meet to be eligible to respond to the RFP, which included asset-management services, acquisition methods, communications methods, reporting and dashboards, custodial services, whole-loan analysis mechanisms and much more. I thought one particular part of the RFP was relevant to this column's discussion, which is excerpted below (full text can be found at www.treas.gov/press/releases/ hp1185.htm):

"IV. Services and Requirements

Through this notice, the Treasury seeks responses from financial institutions qualified to provide asset-management services for a highly complex portfolio of mortgage whole loans. The selected financial institutions must provide, subcontract or otherwise source the asset-management services identified in this notice, and will be required to:

Pre- and Post-Transactional Diligence

* Conduct preliminary pre-transaction diligence on loans and portfolios of loans, and report on actual and represented loan characteristics and exceptions to transaction guidelines.

* Conduct deeper post-transaction reviews of purchased loans and portfolios of loans.

Whole-Loan Transactional Infrastructure

* Receive and process data files with descriptions of loans and portfolios of loans from potentially hundreds or thousands of financial institutions offering loans.

* Ensure that smaller financial institutions, including but not limited to community banks and credit unions, have access to the infrastructure and can proffer loans for sale to the Treasury.

* Analyze, standardize and convey the data into systems and reports as necessary.

* Execute the whole-loan acquisition transactions."

From a technology perspective, it appeared that the government was looking for a robust transaction platform for the purposes of observing, acquiring, trading and reporting on whole closed-loan assets. What if an ultraprise.com or Pedestal existed today? Both companies were created to serve as new B2B marketplaces for the mortgage marketplace. Arguably, they were both ahead of their time in 1997, but what about now?

Aside from building such a platform from scratch, one could be theoretically "bolted together" from pieces that exist today. Without such a platform, there are going to be a lot of Excel files flying back and forth, and data integrity, rekeying and related error conditions could exist with the implemented solution.

That said, there are still challenges with this model. Without widespread use of standardized eMortgages, any online solution would have to have touch points back to the actual paper parts of the assets being acquired. This is of particular importance with distressed or nonperforming assets, and leads to paper-based custodial services (also referenced in the RFP) and the related certification and checking requirements. However, the last decade has not only brought about a steady and methodical increase in eMortgages (witness the MERS[R] eRegistry numbers that are posted from time to time), but also a plethora of interesting ways to employ and utilize imaging and workflow technologies to gradually move more of the certification functionality online.

If the industry were to take or build the transactional (think eBay[R]) functionality of ultraprise.com/Pedestal and bolt that together with existing document transfer and management hubs/services, while also utilizing existing electronic "binder" standards to hold the hybrid asset together, and combine it with existing ways to store and retain the electronic files (with or without enforceable eMortgages), what emerges is a very robust, completely online solution. Conceivably, such a solution could meet Treasury's requirements and really streamline the process while providing increased data integrity through careful workflow design and technology utilization.

This system and process could then be used as an example to the rest of the industry--and can be used when we are done sorting out the distressed asset problem and the cycle resets to normal. Industry participants then would be able to transact business more quickly, more efficiently and with fewer errors.

Gabe Minton is an independent mortgage consultant. He can be reached at [e-mail].