Great strides in industry automation.
IT TOOK JUST TWO HOURS ON JULY 27 FOR MONTEREY MORTGAGE IN GILROY, CALIFORNIA, TO APPROVE A LOAN WITH A WHOLESALE LENDER ON A $230,000 HOME. Additionally, that wholesale firm--Walnut Creek-based Monument Mortgage, Inc.--knew at the time of approval that the mortgage would be purchased by Freddie Mac.
Making it work was a seamless movement from the originations software on Monterey Mortgage owner Kent Miller's laptop computer to Freddie Mac's automated underwriting system, the wholesale lender and a credit reporting bureau. Less than a week later, the loan closed.
Miller says that the system is ideal for working with "a relocating buyer who is only in one day from out of town." Lenders can quickly give a loan approval, along with a complete list of needed documents.
Contour Software, Inc. President Scott Cooley--whose Silicon Valley company supplied Miller's origination software--terms Freddie Mac's system "absolutely fantastic. It's the biggest change since loan processing became automated--I can't say enough about it."
Cooley is impressed because instead of just automating guidelines, Freddie Mac's Loan Prospector "looks at the borrower and the loan, and then determines how to process: What documents are required, what needs to be verified and what the processor and underwriter need to know." Jane Dwight, Freddie Mac's director of automated underwriting, notes that the system can rule out the need for documentation that normally would be required under traditional underwriting techniques.
Freddie Mac plans to make the system available to seller/servicers "early in 1995," says Dwight. By the end of that year, she says the agency hopes 80 percent of its business will be coming through the automated underwriting system.
According to a source working on Loan Prospector, Freddie Mac hopes the software eventually will approve 60 percent of all applications, while referring one-fourth of the files to an underwriter for closer review--and suggesting a cautious approach on the remaining 15 percent.
Fannie Mae also is poised to introduce an automated underwriting system. Currently the agency's "Desktop Underwriter" software is being tested with nine lenders, and it will become available more widely "in early to mid-1995," according to Jayne Shontell, senior vice president for financial and information services.
"Desktop Originator" loan application software developed by Fannie Mae also is being tested. "Getting data [in] electronic [form] at the frontend, and keeping it electronic" is the agency's goal, says Richard Amatucci, vice president for industry technology initiatives.
Despite these efficiencies, "there is concern regarding the ultimate intent of the agencies" with their technology initiatives, says a mortgage industry insider.
Many lenders voice concerns about the GSE's pivotal role in defining the industry's technological future. For instance, one mortgage technology executive wonders if Fannie Mae and Freddie Mac "are offering a turn-key environment to channel business their way." Lenders also are asking if the agencies might eventually use automated underwriting capabilities to take loan applications directly from consumers or from real estate agents.
But at the recent Mortgage Bankers Association of America (MBA) annual convention, Freddie Mac Chairman and CEO Leland Brendsel told attendees to "count on Freddie Mac to empower your business, not replace you." Additionally, Fannie Mae Chairman and CEO James A. Johnson gave "an irrevocable promise: as the industry changes, the one thing that will not change is our relationship with you.
"Fannie Mae will in no way, shape or form ever dictate use of the system," Shontell adds. "Customers will pay for it, and it will compete on its own merits. If it's useful, it will thrive; if not, it won't." She also notes that Fannie Mae is not chartered to be a mortgage originator.
Both GSEs add that their automated underwriting software will be available only to approved seller/servicers, although those customers then could pass on use of the system to a mortgage broker or real estate agent from whom loans are obtained. Fannie Mae is also making its "Desktop Counselor" educational software available to nonprofit groups involved with providing low- to moderate-income housing initiatives.
By improving efficiencies and lowering the overall cost of home lending, Fannie Mae hopes lenders will find that "originating $50,000 to $60,000 mortgages can be profitable," adds Amatucci
Fannie Mae's goal is to cut $1,000 off the cost of loan origination by the end of the decade. But to do so, one industry observer notes that most lenders will need to reduce loan officer compensation--because it is the highest single cost component in the origination process. Instead of earning income and paying originators, firms could be sending fees to Freddie and Fannie for the use of their automated underwriting systems, he adds.
Automating the industry "will weed out competitors unwilling to change," says Jeffrey A. Lebowitz, a principal at Strategic Systems Partners in Chevy Chase, Maryland. He notes that lower origination volume this year has done little to stop the purchase of new technology.
"It's a sign of maturity in the industry," Lebowitz explains. "Technology now is seen as playing an integral role--most companies may not have said that a few years ago."
He also notes that systems are becoming more flexible, allowing lenders "to use multiple vendors and meld 'the best of the breed' into one system." Yet lenders going through mergers report frustrations at trying to get the results they want from existing loan production and processing systems--which now are inadequate or incompatible with each other.
"You don't want to be wed to a proprietary technology" if a better solution comes along later, says William Newman, vice president and head of national wholesale lending at InterFirst, a division of Standard Federal Bank in Ann Arbor, Michigan.
Newman urges caution when a vendor says that a certain application is possible, but then adds, "'You're the first company who will be doing that, though.' You have to test what vendors say. Often what they say you can do with the software, you can't do so well." InterFirst is working to combine its originations, processing and automated underwriting software. At the same time, it wants to electronically link with its retail offices and mortgage broker clients.
Newman, however, does not want "to figure out how to maintain an interface with thousands of brokers." Because his concern is shared by many other lenders--as well as by mortgage insurers and credit reporting firms--the mortgage banking industry is adopting a number of Electronic Data Interchange (EDI) standards for data transmission, based on the American National Standards Institute's (ANSI) X12 format.
EDI for a number of different data-exchange transactions has been adopted by the secondary marketing agencies, service vendors and the MBA to establish industrywide communications standards. The automotive and other industries for years have used EDI to help manufacturers order from suppliers.
Industry work groups decide how to standardize commonly used forms and send the proposed transaction set to ANSI for approval. "Typically it takes 16 to 18 months to go from a work group to having an accepted X12 standard," says Daniel R. McLaughlin, director of technology initiatives for MBA. At the MBA annual convention in Boston, at a panel session on technology initiatives, it was announced that 13 transaction sets have been approved by ANSI, one (on servicing transfers) is on hold, and 9 more are in development. Of that total, 13 deal with production and 10 with servicing.
McLaughlin says that by the end of 1994, the following processes will be approved for electronic transmission:
* credit report order and report;
* hazard insurance invoice and payment;
* mortgage insurance application and response;
* mortgage insurance claim; * default status;
* FHA mortgage record change;
* title insurance order and response;
* investor reporting;
* loan application.
By using electronic mail, an automated clearinghouse for funds transfer, along with EDI, "lenders can routinely do all their business electronically," he says. McLaughlin adds that "no one has been using those technologies in a coordinated fashion until very recently." But having more transactions approved for EDI makes the initial investment and training time easier to commit to.
EDI can now be used by lenders to electronically submit FHA claims, says Tom Meehan, senior business systems consultant at BancPLUS Mortgage Corporation in San Antonio. Meehan notes that when the BancPLUS system was totally paper-driven, it took 28 days to receive funds from HUD. Now it takes seven he says.
"We have more than $10 million a month in claims," says Meehan. "It's a very significant savings for us." BancPLUS earned back the capital investment required to start using EDI in less than six months, he adds.
However, BancPLUS had to change some of its internal procedures to implement EDI. Meehan says claims with errors since have dropped from more than 10 percent to less than 5 percent.
BancPLUS also is using EDI for hazard insurance renewals. "We can process an electronic invoice five times faster than a paper one," Meehan explains. "We don't have to touch each one."
"Electronic payment orders" are used to avoid the possibility of errors due to rekeying data. Even the accounting systems of both the insurance firm and BancPLUS are automatically updated after the transfer. Meehan notes that these automated procedures eventually will be used to pay monthly private and FHA mortgage insurance premiums.
By the end of September 1995, HUD hopes to be receiving most of its claims on-line--and saving $10 million annually because of that, says John Buck, senior staff consultant at The Orkand Corporation in Silver Spring, Maryland. Orkand is consulting with HUD and its customers regarding the implementation of EDI.
HUD also is working on the automation of default reports, mortgage record changes and MIP payments, Buck says. Although Fannie Mae and Freddie Mac have plans to make electronic communication mandatory on certain transaction sets--such as investor reporting--HUD, at this time, is hoping to encourage voluntary compliance with EDI standards, he adds.
Putting it together
How to integrate EDI into your own environment, is an issue confronting lenders, Newman says. "Even after standards are agreed on, with the proliferation of systems out there, it will take some time before everyone can work together," adds Stan Pachura, manager, information systems, at Key-Corp Mortgage, Inc. in Buffalo.
Many lenders have developed their own proprietary systems, he notes, and even established software vendors have fairly small market shares. A solution for making all those pieces work together might come first from a software company that doesn't have a mortgage industry background, Pachura notes.
Kent Miller, a mortgage broker, now uses technology for prequalifications to prepare fliers for Realtors--and for communication with wholesalers. "Now you don't need to call up and talk to somebody," he explains, in order to get loan status, leave messages with underwriters, obtain pricing and lock in rates.
"The technology's out there to do about anything you want to," he adds. "Limitations are in your mind." Miller notes, for instance, that "you could do a 10-minute multimedia presentation on loans with a CD-ROM." But a problem is finding people with technical competence who can help lenders put systems together. "Utilizing it is the key," says Miller.
Some firms implementing new technology first must go through a change in corporate culture or uproot old work regimens and mind-sets. Patricia A. Mikel, vice president of customer technology at PMI Mortgage Insurance Company in San Francisco, notes that at times lenders purchasing automated underwriting systems must get their staffs "to learn how to use a mouse."
PMI works closely with lenders purchasing its pmiAURA automated underwriting system--both to set up the technology and to redesign their workflow around it, Mikel says. She adds that lenders have needed anywhere from 120 days to close to a year to get up on the system.
Automated underwriting systems can employ a variety of means--including credit scoring, rules, statistics and teaching the system to make the same judgments a good underwriter would. Currently 22 lenders are using pmiAURA, and others are licensing the decision model "engine" and building their own screens and forms around that.
Mikel notes that it is possible for lenders using pmiAURA to pay a per-transaction fee, and thus reduce the investment for acquiring this technology.
Another system about to be made available to lenders is GENIUS from GE Capital Mortgage Corporation in Raleigh, North Carolina. After a low-cost test period of three months, GENIUS users will pay a $40,000 licensing fee over two years.
Judy Johnston, director of customer technology programs, says that since putting GENIUS in GE Mortgage Insurance Company branches in July 1993, underwriters have seen a 20 percent productivity rise. She also notes that early delinquencies are four times higher on loans that underwriters approved after receiving strong reservations from GENIUS on those applications
Johnston foresees that the emergence of automated underwriting systems--and the resulting fast closings--could also change borrower expectations. Perhaps because they are aware of this potential competitive edge, Johnston says "lenders are a lot more interested in automated underwriting now than they were eight months ago."
One mortgage banker who plans on using technology to help gain an edge is Bill Dallas, president and CEO of The Franklin Group in Westlake Village, California. His firm's stated goal is to start giving loan decisions at the time of application by mid-January 1995.
Exploiting the technology
Yet lenders complain that getting a loan decision in a few minutes still doesn't reduce the work they must do, if investors demand that paper copies of verifications and appraisals be kept on file. Fannie Mae's Shontell points out that lenders can change their own procedures-for example, by acquiring alternative documentation at the time of the application--to help make technological changes work for them.
"Just automating today's process," says one secondary market observer, "is like paving the cow path."
"Automated underwriting is a tool," adds Kevin Cademartori, vice president of strategic technology at Mortgage Guaranty Insurance Corporation (MGIC) in Milwaukee. "It is a means to the end of productivity and higher levels of underwriting quality. If you try to deploy automated underwriting without rethinking your business processes, you will never fully exploit the technology."
He adds that because automated underwriting systems need a lot of information, "data collection becomes very important, both in terms of quality and quantity." Yet because information gathering occurs "upstream from the underwriter," the whole process often needs to be reengineered.
MGIC now approves 30 percent to 40 percent of its business through automated underwriting on "Aquarius," which is soon to be offered to lenders. Mortgage insurance applications that aren't approved by Aquarius "are referred to an underwriter with a pointed message" concerning the problem areas, says Steve Blose, vice president of product development. "It's directed underwriting."
An underwriter could also tell the automated underwriting system to disregard a late credit card payment, or delete some incorrect credit report information, and then run the system again to see if approval is granted. Doing so takes minutes--or less.
But firms need to establish EDI connections before implementing automated underwriting, so that information from credit bureaus, mortgage insurance companies and others can be fed into the electronic underwriting system.
Lenders can link directly with vendors by using EDI or proprietary software, or go through a value-added network (VAN) that supplies the necessary communications software to connect the parties and transfer data.
EDI uses "translation software" and "mapping software" to pull information from one system's data base into the right places in different systems. Some software vendors add that the mapping process is more difficult than it was first assumed to be. "It's not rocket science," Cademartori explains. "It's work."
EDI translation software for a mainframe can cost $30,000 to $40,000, says BancPLUS' Meehan. BancPLUS decided to do all its EDI communications on a PC for now, because translation software for that platform costs just $3,000 to $4,000. "We'll outgrow it," he adds, "but then we will be able to justify spending more."
Lenders can avoid the need for translation software by doing EDI transactions through a VAN.
Freddie Mac earlier this year announced its GoldWorks VAN, which will link "everyone from the homebuyer to the investor," according to President David Glenn. Besides giving access to Freddie Mac--including its automated underwriting service--the system will provide a gateway to other industry products and services. GoldWorks will be available to lenders nationally early in 1995, Freddie Mac officials say.
Fannie Mae also is introducing its MORNET EDI network, which initially will provide gateways to more than 30 mortgage industry service providers, says Shontell. Fees are based on the amount of time spent on the system, she adds. MORNET EDI lets lenders translate their data into EDI form and allows them to import EDI-based information into their systems.
However, Meehan notes that VANs are too expensive for sending large amounts of data, such as investor reporting information. A point-to-point file transfer is done by BanePLUS for those tasks.
Additionally, Fannie Mae's MORNET Plus network, in operation for more than a year, is bringing in more than half of the agency's cash commitments. Fannie Mae's "Desktop Trader" software is used to provide real-time pricing and allow for electronic commitments on MORNET Plus, says Shontell. (Freddie Mac also has the capability to offer cash commitments electronically through its Gold Connection service, which can be accessed over its Gold-Works network.)
Because MORNET Plus is an open system, outside vendors are adding features such as on-line compliance guides, financial market information and electronic fax capabilities that allow lenders "to translate their commitment into a rate sheet, and fax that to all their offices," Shontell adds.
Since July, Computer Power, Inc. (CPI) of Jacksonville, Florida, has been operating its InterChange VAN--offering services ranging from access to fraud detection data bases (at $5 per loan) to automated underwriting. EDI mapping and transmittal capabilities also "free the service provider from being in the communications business," says Joe Filoseta, senior vice president, business development.
InterChange has been operating since July 1994. Roughly 20 vendors and more than 30 lenders are signed up, he adds. Through its electronic mail features, brokers can get loan status from lenders, or mortgage bankers can link with their branches and business partners, says Filoseta.
If connected by satellite hookup, the basic cost for InterChange is $250 per month for a leased line. Dial-up access also is available for $25 monthly.
In addition, VAN users pay fees for the value-added services and a data charge for sending a transaction. Filoseta estimates a lender could do its mortgage insurance, credit report and flood insurance business--as well as request appraisals--on 1,000 loans a month for a cost of "$3,500 plus communications costs."
An electronic mall
Former Shearson Lehman Hutton Mortgage Corporation Chairman Walter Blass describes the Newport Beach, California-based MixStar VAN that he is starting as "an electronic mall that rents you space." So far, 20 lenders and 5 industry support groups--including the Mortgage Bankers Association--have agreed to be on the system.
Early next year, MixStar will be available nationally. Blass plans to offer one month's service free.
"Ninety to 95 percent of the people in the industry have a relationship with two to five of the system's charter members," Blass contends. He is counting on those 25 members to send letters to their customers, urging them to use MixStar in order to access their services.
However, he says MixStar "is not necessarily transaction-driven." Pricing, procedures and information on whom to contact at companies will make the system emphasize "human-to-human" communication, rather than "machine-to-machine" data exchanges.
Companies can send electronic mail to all their customers by just pushing one button, according to Blass. Costs for such services will be "a fraction" of broadcast faxing, he says.
Monthly charges will be $70, plus $9.95 for the first five hours spent on MixStar. After that, time will cost $3.50 per hour. There is no initial sign-up fee.
Generally, it will be possible to get on MixStar with a local phone call, because it is part of the 1.1 million-member America Online computer network. MixStar subscribers thus can enjoy the benefits of all America Online services, although America Online customers will not be able to enter the MixStar world.
Large vendors can, for a fee, design custom screens on the system to describe their services. For instance, a lender could tell what type of loans it's looking for or even electronically provide a form for becoming an approved broker. Custom sections will cost $3,000 to $10,000 to build, Blass adds. Smaller firms can simply use the no-cost message boards to attract business on MixStar.
Anticipated future enhancements to the pmiAURA and Aquarius systems involve allowing automated underwriting to approve nonconforming and government loan applications. Both Fannie Mae's and Freddie Mac's systems also eventually will be able to underwrite loan applications for special low-to moderate-income homebuyer products. For instance, future enhancements to the "Loan Prospector" software will allow Freddie Mac to guarantee purchase of loans offered in just a single county.
Newman sees the day coming when "the consumer will go into an office, sit at a terminal and someone will be there to help him" apply for a loan. Yet MGIC's Cademartori says that predictions about the arrival of a "'dial a mortgage' are overstated. With technology we tend to either do nothing, or else paint incredibly dramatic scenarios of the future."
He believes "there will be plenty of 'high-touch' people for years to come. Hopefully, technology will increase productivity, the quality of service and profits. But there's so much work to do to take advantage of the juncture we're at now."
Mortgage broker Kent Miller adds that "most deals are still not cookie cutters. You can't just be a computer operator; the nuances require time in the trenches and education."
He adds that "for the short term, automation is an additional tool. But in five years, who knows how we'll be working?"
Howard Schneider is a freelance writer based in Ojai, California.
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|Title Annotation:||mortgage banking|
|Article Type:||Cover Story|
|Date:||Nov 1, 1994|
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