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An underlying theme in this month's column is that the controlled application of technology fundamentally can change the economic profile of running a mortgage company. Technology as a tool can recast the flow of work to more efficiently process and close a loan. An automated system can add the capacity to bring the collection, storage and formatting of data that is critical to timely management decisions. Technology applied is the instrument that can shorten the distance between a loan application and the delivery of an appropriate product to a satisfied customer.

All these things are true. Yet, investment in technology may prove a sterile use of scarce capital. Worse, abortive installations of automated systems may become disruptive, cancerous to the fabric of a mortgage banker's basic operations. How can the power of technology simultaneously have latent in it the forces of creation and destruction?

The ideal use of technology is when technology can be managed to support a mortgage company's fundamental business strategy; not having to bend the way business is done to conform to rigidities built into any system.

Two software companies that excelled in providing systems flexible enough to be molded to the shape of any mortgage company's operating style were Saddlebrook and Fannie Mae Software Systems. System M and Mortracs/MPC were designed to be "softened." These systems can be modified to accommodate any lenders' product, document, calculation or procedural requirements. In a market that changes from month to month, from county to county, from firm to firm, flexibility of implementation should be the singular feature sought in a mortgage system.

According to the Mortgage Banking Automation Study, published by SSP/RES Research, Fannie Mae Software Systems (8.7 percent) and Saddlebrook (4.3 percent) ranked number two and three behind Lomas and Nettleton Information Systems (10.1 percent) in share of origination systems installed in the mortgage industry. Yet, by the fourth quarter of 1989, Saddlebrook and Fannie Mae Software Systems (in the first quarter of 1989) had ceased operation. Fannie Mae Software Systems' assets were subsequently purchased by Stockholder Systems Inc. of Norcross, Georgia. The assets of Saddlebrook were bought up out of bankruptcy by Sanchez Computer Associates, Malvern, Pennsylvania. How is it that two leaders in providing appropriate technology to the industry ceased to exist?

The passing of Saddlebrook and Fannie Mae Software stems from a complex set of events and circumstances. Saddlebrook became financially over-extended in developing a comprehensive, integrated package of thrift software. Fannie Mae Software was seriously overstaffed and had difficulty moving its software to the new IBM AS400 line of mini-computers. These fundamental problems caused Saddlebrook investors and Fannie Mae to call it quits. But, was there an inherent flaw in offering software too flexible to be properly managed by the average mortgage company?

Dana Fairfax, an expert in supporting installation of Saddlebrook's System M, points out, "In my experience, management of mortgage companies chronically underestimate what is required to implement a flexible loan processing system. Installation of a system radically alters all aspects of loan processing operations. Putting in a system requires the full-time dedication of the best of a firm's production people, for as long as a year. I often see lenders, particularly smaller organizations, unable to free up resources to staff properly an implementation team."

Fairfax continues, "The decision to acquire a system is made by senior management. The branch people are the real users of technology. They often are not made part of the purchase decision. Worse yet, users are frequently inadequately trained. Eventually the system is seen as failing ... not that the software in inherently faulty."

Janice Neumeyer, formerly a manager of customer support and training for Fannie Mae Software, concurs with Fairfax's observation, "We would train key people to install and use Mortracs. We would see the trained people leave ... take a job with another mortgage company ... and Mortracs would be shelved. It turned out that the system was never enculturated into operations. In a small shop, if the one person who had a stake in the success of the system left, we got reports that, `the software doesn't work."'

Neumeyer added, "The software did not fail. We could not get management to understand the larger meaning of system. It involves the whole organization; systems encompass the whole pattern of work."

Greg Ryan, marketing manager at Sanchez Computer concludes, "Along with the marketing of System M we offer complete `cradle-to-tomb support services.' If small companies behave as if technology does not matter, technology will fail them; and, the trend toward industry consolidation will continue."

If large companies are able to harness the power of technological innovation, one has to wonder if smaller companies, with fewer resources, will be able to compete.

An old solution with a new face is gaining favor among medium and smaller lenders ... third-party, technology-based processing and closing services. Rather than bringing state-of-the-art technology in-house, lenders have begun "renting" the expertise of specialized suppliers of processing and closing services.

Tom Steinmetz, president of Mortgage Banking Systems, McLean, Virginia, makes the judgment, "Software vendors are too often like publishers, once off the press, the user is on his/her own with the product. Vendors are often uninformed about the intricacies of mortgage banking and cannot properly support the mortgage company with integrating a system into its operation. We find that smaller companies [closing less than 100 loans per month] cannot afford the specialized expertise to properly run a complex system by themselves. Vendors lose money trying to answer questions and solving problems confronting day-to-day systems users."

Steinmetz adds, "[At MBS] we install a micro-computer and laser printer with our service - Doc Prep Plus - in the branch. We load the specific forms and calculations needed in the market in which the branch is located and we keep the lender current with regulatory and product changes. We spread the cost of specialized expertise over our entire base of customers. We eliminate expensive redundancies common in the business."

Another supplier of third-party closing services, Ruth Thompson of Desert Document Services, Phoenix, rounds out Steinmetz's reasoning, "Lenders will be reluctant to add staff overhead in the uncertain mortgage market of the "nervous nineties." With our automated closing service, we convert fixed costs to variable [costs]. By subscribing to our service, lenders benefit from the most up-to-date mortgage technology and pay only by the use."

The conclusions of Steinmetz and Thompson apparently are shared by major companies in the industry. GE Mortgage Insurance and Prudential's Residential Services Corporation of America, have launched new businesses to provide processing and closing services to lenders who prefer not to invest heavily in operations.

There is a compelling logic for lenders to rent specialized skills they cannot afford to add in staff. They avoid making large investments and the operational risk of an implementation failure.

Management evangelist Tom Peters is quoted as saying, "Tom survive, you must seriously consider subcontracting every task in the enterprise." With his advice it may be that one management problem will be traded for another - it may be worth the risk.

If technology remains the exclusive province of larger lenders, allowing only them to successfully manage the entire mortgage process and control the economies of automation, then smaller lenders in the end may never be able to compete on equal terms. In that case, technology will aid in the transformation of the industry into a land of giants.
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Title Annotation:mortgage banks
Author:Lebowitz, Jeffrey A.
Publication:Mortgage Banking
Article Type:column
Date:Feb 1, 1990
Previous Article:The billion dollar S&L resolution man.
Next Article:Economic trends.

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