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Marketing mortgages on MARS.

This system may be the prototype for the way mortgages are marketed routinely in the not-too-distant future. It's new-age technology married to mortgage processing, and it even sounds borrower-friendly.

DURING 1992, A NUMBER OF major national lenders began to use the Mortgage Analysis and Reporting System (MARS), a new state-of-the-art system for delivering residential mortgages. MARS is the brainchild of two professors from the Wharton School of the University of Pennsylvania, Jack Guttentag and Gerald Hurst, and a Wharton business school graduate, Allan Redstone, who joined the firm (GHR Systems) in 1988. The MARS system started out very much in the realm of technology, but in time evolved into a solution to a set of very complex business problems.

The original version of MARS focused on mortgage design and counseling using sophisticated graphics. It generated a lot of "oohs" and "ahs," including some from this author when I first saw the system several years ago, but it didn't generate many sales. This was partly because it was a "stand-alone" product for use alongside a lender's existing processing system. Lenders usually don't find stand-alone products that appealing, no matter how slick. In addition, it didn't address some of the most important of lenders' business needs.

But in taking their lumps while canvassing the market, GHR also listened to what some of the more thoughtful market practitioners told them. What they learned was that flexible mortgage design capacity and sophisticated counseling functionality were important, but by themselves, they counted for little. What was needed was to integrate these features into a system that met other important business needs as well.

These needs were spelled out in Guttentag and Redstone's article "In the Year 2002" in the October 1992 issue of Mortgage Banking. They include rapid and error-free information transmission, complete pricing and underwriting, quality control and multi-lender capability.

GHR also realized that the basic MARS architecture they had laid out for mortgage design and counseling could be extended to support all the other features on lenders' wish lists. And so they persevered and set about adding these extensions. The result was the current version of MARS, which has had an altogether different reception than the earlier one.

The MARS system architecture

The MARS system consists of four major components:

MARS Back Office is where mortgage program information is entered. (Usually the computer that MARS Back Office is loaded onto will be located in the lender's main office, and seldom would a lender require more than one such installation.) The mortgage information entered includes the type of program, rates and other terms, qualification requirements, buydown and mortgage insurance options, closing costs and modifications in pricing and qualification requirements associated with different borrower and property characteristics.

MARS Point-of-Sale (POS) is used in dealing with customers at the point-of-sale. Among other things, the originator can counsel actual and potential borrowers, qualify them, register loans, print documents, take applications and transfer them to the lender's processing system and receive status reports on loans in process.

MARS Clearinghouse is a computer network that is accessed by data providers, or in this case lenders, and by data users, who might be loan officers, correspondents or Realtors. Data providers offer mortgage products at terms entered on the clearinghouse computer, provide information on the status of loans in process and receive registrations and applications from data users. Data users are those at the point-of-sale who dial into the clearinghouse to retrieve information on the mortgages being offered and on the status of mortgages in process, and who send registrations and applications to data providers. This system is tied to Compuserve, a national wide-area network, which makes it accessible to both providers and users via local telephone calls.

MARS Interfaces are customized modules that permit information to flow back and forth between the MARS components and a lender's existing pricing, processing and other computer-based systems. The MARS Pricing Interface, for example, automatically transfers mortgage prices from the lender's pricing program (usually spreadsheet-based) into MARS Back Office.

An overview of how information is distributed through the MARS system by a single lender is provided by Figure 1.

* Complete structural and price information about each loan product is entered into MARS Back Office. This is a one-time job with only occasional changes required when nonprice terms are changed or new products are offered.

* Prices in MARS Back Office are updated automatically from the lender's pricing system through the MARS Pricing Interface. This might be done weekly, daily or even more frequently when markets are volatile.

* From the lender's main office (or wherever prices are set), the information in MARS Back Office is uploaded to the MARS Clearinghouse.

* From the lender's origination site, the same information is downloaded to a terminal containing MARS Point-of-Sale.

* Applications and registrations from the origination site can be transferred to the lender's processing system through the MARS Clearinghouse using the MARS "To-Processing" Interface.

* Information regarding the status of applications in process can be transferred from the lender's processing system to the origination site through the MARS Clearinghouse using the MARS "From-Processing" Interface.

A multiple lender system

Multiple lender capacity is a critical feature of the MARS system architecture. The system can deliver loans from multiple lenders to the point-of-sale without hurting service quality. Each lender on the system uploads product information to the clearinghouse. In the multi-lender application, the user at the point-of-sale downloads information, in a single pass, from all the lenders who have authorized that specific user. An application or registration from the origination site is routed through the clearinghouse to the processing system of the particular lender whose product has been registered. And status information is received at the origination site, covering any or all loans from all lenders doing business with the user, in a uniform format.

Complete program specification is another critical feature of the system. MARS allows lenders to define all the quantifiable features of any type of loan program in MARS Back Office, and then to use this information in MARS POS to counsel and qualify customers, register and take applications quickly and without error.

MARS accommodates every type of mortgage and, within mortgage type categories, a wide range of variants off the standard design. For any loan program, rate/price modifications can be specified based on rate-lock period, LTV, loan size, the state and/or zip code of the prospective property, borrower characteristics, property characteristics, branch designation and interactions between these factors. Any loan program can include permanent and temporary "buy-downs" (such as 3-2-1, 2-1, or "compressed") and mortgage insurance options. Underwriting requirements can be modified in the same way as prices for any characteristics or combination of characteristics of borrowers, properties or geographical area specified by the lender.

The ability to price completely

The complete program specification feature of MARS allows lenders to define prices and underwriting requirements in a way that reflects all the information the lenders have available. The following examples illustrate some adjustments made by lenders using the system:

* On mortgage type A, points vary among 43 geographical areas defined in terms of zip codes. On mortgage B, points vary among 13 areas.

* On mortgage C, points rise by 0.125 percent for each 20-day extension of the rate-lock period beyond 30 days, whereas for mortgage D, the comparable increments are 0.175 percent for each 15-day extension beyond 20 days.

* On mortgage E, condo loans are illegal everywhere, but on mortgage F, condo loans are legal in 35 of 65 areas; however in 21 of those 35 areas, mortgage F condo loans carry a 0.5 percent increment over the base rate and a 90 percent maximum LTV; while in the remaining 14 areas, they carry a 1 percent rate increment and an 80 percent maximum LTV.

* Nine rate-point combinations are offered, with the higher rate loans carrying larger increments in points for successive 15-day extensions of the rate-lock period.

* Investor loans carry a 0.5 percent rate increment; condo loans carry a 0.25 percent rate increment, and investor condo loans carry a 1.1 percent rate increment, except in Philadelphia where they are illegal.

Price adjustments at the point-of-sale

The ability to price completely wouldn't be worth much if loan officers were overwhelmed with complexity at the point-of-sale and had to fumble to find the terms applicable to a particular customer. The result would be delays and mistakes that would trash the system. But that doesn't happen because this point-of-sale system is extremely easy to use.

While loan officers have access to the full range of terms and requirements for each loan product--which in some cases may fill 10 or more screens of data--they never have to look at it unless they want to. MARS finds the right terms for a particular transaction automatically, as soon as the loan officer enters the needed information about the customer. For example, to get the right terms on any loans listed above, the loan officer need only enter the zip code of the property, the customer's desired rate-lock period, whether it's a condo, and whether the borrower is an investor. MARS does the rest.

Counseling capacity

The system deals with four broad categories of customers: information seekers, shoppers, buyers and refinancing owners.

Information seekers are looking for quick answers about prices and terms. Loan officers help them using the MARS Electronic Product Manual (EPM), which allows immediate responses to price and product questions, adjusted for specifications as to borrower/property/loan type/area and the like, which the customer provides.

For example, using EPM, a loan officer with a substantial menu of products could answer the following question in about 20 seconds:

What is the lowest initial rate you have on a one-year ARM with no points, $250,000 loan amount with 90 percent LTV, 45-day commitment lock, on a single-family detached, for occupancy, located in zip code 19481?

Customers who want information about loans for which they qualify are divided into shoppers who have not yet purchased and are interested (among other things) in how much they can spend; and buyers who have purchased a house and are looking for the most advantageous way of financing it. In the MARS system, counseling and qualification constitute a single process, so both shoppers and buyers are counseled only for products and terms for which they qualify.

Matthew Broderick, who developed the HomeNet CLO, has since joined GHR. Broderick sees this single process as a major conceptual advance over the counseling systems used by HomeNet and others. These other systems require borrowers to choose a loan type and desired loan features and then check to see if they qualify, whereas the MARS system requires no prior choices. What it does is allow the customer to compare alternative programs with respect to a wide variety of performance criteria that the borrower can select, such as:

* Maximum affordable sale price (for shoppers only);

* Initial required cash investment;

* Initial monthly housing expense;

* Future housing expenses, including alternative scenarios for ARMs;

* Effective interest cost (or total interest payments) over the borrower's expected time horizon, including alternative scenarios for ARMs;

* Future loan balance/equity in house, including alternative scenarios for ARMs.

From side-by-side comparisons of different programs with respect to these types of performance measures, the borrower can make a choice.

Loan officers can tell shoppers not only how much they can afford to pay using each mortgage program, but also how much cash they need to afford a home at a certain price. These are far more than rough estimates because they take into account not only prospective borrower's (and co-borrower's) available cash, income and exiting debt, but also any special property/borrower characteristics that affect loan terms, gifts or seller contributions and detailed closing cost estimates based on state and/or zip code of the property.

Loan officers can qualify buyers in the manner the consumer prefers:

* By desired LTV;

* By desired loan amount;

* By the desired down payment amount in dollars;

* By total cash outlay the buyer wants to make in the transaction (covering points, mortgage insurance and all other settlement costs as well as down payment);

* By searching for the minimum cash investment possible in the transaction.

For refinancing homeowners not wanting to take out any cash, the system computes the new loan amount (for every selected refinance program) that exactly pays off the old loan, plus all refinance charges. For those wanting cash, the system offers three ways to qualify:

* "Specify cash out"--MARS computes the new loan amount that results in the specified cash out after paying off the old loan and all refinance charges;

* "Maximum cash out"--MARS computes the maximum cash out possible for all selected programs;

* "Specify new loan amount."

However the customer qualifies, the system compares the existing mortgage to new mortgage options, with respect to the same features that are available to shoppers and buyers. MARS also shows the "break-even period" for each new mortgage--the period that the owner will have to retain the mortgage to realize a cost savings from the refinance.

Quality control and cost

Quality control is reflected in the overall system design of MARS, as well as in the thousands of details that makes up a mortgage delivery system.

Information input--Putting information into a system entails significant cost to the extent that it must be done manually and it is a major potential source of errors that can be costly to fix. But the MARS system minimizes these problems, both at the back office level and at the point-of-sale:

* Complete loan program specification from MARS Back Office to MARS POS avoids the need for subsequent telephone calls or faxes for information that's been omitted;

* Daily price updates are entered into MARS Back Office automatically through a pricing interface, avoiding the possibility of input error.

* At the point-of-sale, loan officers key in only transaction-specific information that is available then, and no piece of information has to be keyed in more than once.

* Product-selection mistakes at the point-of-sale are minimized because MARS (rather than the user) finds the appropriate prices and underwriting requirements, and MARS does not allow the counselor to select a loan for which the borrower does not qualify.

* MARS POS will not export an application to processing until it runs a gamut of more than 400 consistency and completeness checks.

Price and program validity--Commitments issued against lapsed prices are the bane of mortgage banking. This system provides complete protection against this.

* Prices in MARS POS have expiration dates and times, after which they are not useable. Then the loan officer must download a new set of prices from the MARS Clearinghouse.

* When a loan is registered from MARS POS, the mortgage program ID in the registration is checked against the file for that mortgage program in the clearinghouse. If there is a discrepancy in terms, the loan officer receives a message to that effect and is told to download the mortgage program files from the clearinghouse and requalify the borrower.

Information transmission--The clearinghouse uses state-of-the-art compression and error-correction techniques to ensure extremely high data reliability, even in remote areas with poor local telephone line quality. A file of 10 mortgage programs, including all the information described earlier, takes less than 20 seconds to download error-free. Daily updates are often faster because the clearinghouse only transfers products that have been changed since the previous downloading of information.

Flexible mortgage design

As noted earlier, MARS began life partly as a mortgage design tool. Hence, even before any of the other components of the system were developed, it had the capacity to define (in addition to all the products found in the market today) "price level-adjusted mortgages," "combo mortgages," "dual index mortgages" and other exotics that have not made a major dent in the U.S. market yet.

It is easy to underestimate the importance of flexible mortgage design capacity in a loan delivery system. All systems have the capacity to deal with today's products, but what will happen if the market demands a different type of instrument tomorrow? Systems in which the mortgage design feature has been "hard wired" for today's products will require substantial and costly modifications. The MARS system will not have that problem.

MARS loan officer

As Guttentag and Redstone pointed out in the October issue, commissioned loan officers are a costly method of marketing mortgages, largely because their productivity is so low. The MARS system, however, makes possible a substantial increase in their productivity. Several major firms are equipping their loan officers with laptop computers loaded with MARS POS, modems and printers. It's expected that in the future, these loan officers will be operating entirely out of their homes. The following might be a typical day in the life of such a loan officer.

* In the morning from her home, she dials into the clearinghouse for price updates and for the day's leads, which have been received at the central office and distributed to the most convenient loan officer.

* Calling on a lead, she counsels, qualifies, takes the application and prints out the opening documents for the customer's signature. This might be done at the borrower's home or place of business, the loan officer's home or at a Realtor's office.

* On the way home (or to the next lead), she drops the documents in the mail.

* Wherever convenient, she connects the modem and sends the loan registration and the application to the processing center through the clearinghouse. Since only a local telephone call is involved, the customer may be happy to have this done from that location.

* When the loan officer gets home, she finds messages on her answering machine inquiring about the status of loans in process. So she dials the clearinghouse again to get status updates, which she can immediately convey to her customers.

The MARS-based CLO

CLOs are systems for providing loan offerings of multiple lenders via computer terminals in Realtors' offices. Beyond that, they have ranged widely in scope, from simple bulletin boards that posted rates and little more, to complete origination systems that included processing, underwriting and closing. Many of the best known of these networks have come and gone (e.g., Shelternet, Loan Express and Compufund), but a few, such as Rennie Mae and HomeNet, have hung on without having a major market impact.

It seems likely that within the next year at least one MARS-based CLO will begin operations on a national basis. The MARS-based CLO will not have the multiple system deficiencies that have limited the scope and impact of past and existing CLOs.

All-inclusive versus selective architecture--GHR's Broderick makes the point that all past and existing CLOs have been all-inclusive in the sense that if there are 30 lenders on the CLO, the loans offered by all 30 are carried on the terminals of every participating Realtor. An all-inclusive architecture has serious drawbacks:

* Individual Realtors get access to offerings of lenders who pay to be listed; these are not necessarily the lenders with whom they want to do business.

* Lenders get access to the Realtors on the system, who are not necessarily the Realtors with whom they want to do business.

* The number of lenders that can be accommodated on the system is limited by loan menu congestion.

The MARS system architecture is selective in the sense that Realtors can select the lenders who will be represented on their terminals and vice versa. Lender A's programs are distributed only to those Realtors with whom Lender A does business. Lender B's programs are distributed to the Realtors with whom Lender B does business, and so on. Hence, the system supports and reinforces existing business relationships between lenders and Realtors, rather than forcing these relationships into a fixed form. Even Realtors located in different offices within the same Realtor firm can elect to deal with different lenders. Further, there is no limit on the total number of lenders that can be accommodated within a given CLO structure.

The selective architecture of the MARS system lends itself to a national CLO within a single administrative entity. The complete pricing and flexible mortgage design capacities of MARS would also facilitate a national CLO, because lenders can easily incorporate different product offerings and prices at Realtor locations in different areas.

System component integration--CLO designers must decide how they are going to deal with the fact that participating lenders use incompatible processing systems in their non-CLO operations. In the past, there seemed to be only two options, neither attractive. The CLO could require that lenders on the CLO all use the same system, in which case lenders were forced to operate two systems; or the CLO could allow lenders to use their own systems, in which case both lenders and Realtors had to forgo the important potential benefits associated with an integrated system.

A MARS-based CLO allows lenders to use their existing processing systems, but can tie them together through interfaces so the benefits of an electronically integrated system can be enjoyed by both lenders and Realtors. For example, Realtors can get application status information using a uniform format, despite the fact that the different lenders with which the Realtor deals use different processing systems. Realtors may obtain status reports on individual loans or a wide variety of general reports on all loans in process. Similarly, lenders can register loans and transfer applications electronically from the terminal in the Realtor's office into their own processing systems.

Operating efficiency and functionality--Realtors would enjoy the same operating advantages of the MARS system as other users. These include powerful counseling capacity; ease of use; error-free, rapid and complete information transmission; up-to-date prices; immediate document distribution and requests for credit reports, appraisals and the like from the brokerage office; and continual access to application status at the Realtor's office. In addition, applications and registrations taken at the Realtor's office will be transferred electronically to the individual lender's own processing system.

The MARS-based wholesaler-correspondent relationship

The rapid growth of wholesaler-correspondent relationships in recent years reflects the many advantages of this mode of delivering mortgages. Yet, the system has some serious weaknesses as well, which is partly why several national wholesalers soon will begin distributing information to correspondents using MARS. The following are some of the major problems associated with the current methods of disseminating wholesaler-correspondent information and how MARS deals with them:

Current: The formats used to provide information to correspondents, both in the technical manual and daily price sheets, vary from wholesaler to wholesaler. This creates numerous problems for correspondents in retrieving technical information about particular products and comparing the offerings of different wholesalers.

MARS: Information received from wholesalers is in a uniform format. Hence, confusion is minimized about the similarities and differences between mortgages from the same wholesaler, and across mortgages from different wholesalers.

Current: Because of the complexity of product information, correspondents sometimes commit to make loans at prices that no longer apply or loans that do not conform in other respects to wholesaler requirements. Such loans will be rejected by the wholesaler.

MARS: Correspondents using MARS POS cannot register a loan that does not meet the wholesaler's requirements, as explained earlier.

Current: Correspondents often register the same loan with more than one wholesaler, which increases the difficulty that wholesalers have in managing their pipelines.

MARS: Immediate electronic confirmation that a loan registration meets the wholesaler's requirements removes much of the incentive for duplicate registrations. If needed, a procedure for capturing and reporting multiple registrations can be instituted when a critical mass of wholesalers is on the MARS system.

Current: Because the information received from wholesalers is on hard copy, it must be further processed by the correspondent (by calculator or computer) in order to generate information required by customers, such as amortization schedules, disclosure documents, etc. The task of keying in data from different wholesalers who use different data formats is time consuming and error prone.

MARS: Information received from wholesalers is not only in a uniform format, but is all ready to be used for counseling and qualifying customers, taking applications, and the like. The full power of MARS POS is available to each correspondent.

Current: Because the information covering all mortgage programs and all modifications is voluminous, the information delivered by the current method of distribution typically is incomplete. Rate sheets, for example, may contain only the rates for the most popular mortgage programs. Updates on other programs must be obtained by telephone, which can cause errors.

MARS: Program information distributed through the MARS system is complete. Hence, correspondents have much less need to call wholesalers for updates, amplification and clarification.

What makes the MARS system exciting is its capacity to accommodate new and better ways of doing business. Embedded in the system is a vision of how rational lenders would want to operate if they were not subject to system constraints. Complete pricing is an obvious illustration of this principle, but there are many less obvious ones that lenders discover as they work with the MARS system. (For example, they may discover that there are substantial benefits in shifting functions out of processing to the point-of-sale, a shift that MARS accommodates.) What makes the MARS system practical is that it allows lenders to improve their efficiency while keeping the way they do business unchanged. Forays into the future can be taken a step at a time, which is (understandably) the way most lenders want to do it.

Jeff Lebowitz is president of Strategic Systems Partners, Chevy Chase, Maryland.
COPYRIGHT 1992 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Mortgage Analysis and Reporting System
Author:Lebowitz, Jeff
Publication:Mortgage Banking
Article Type:Cover Story
Date:Nov 1, 1992
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