Printer Friendly

The MI technology race.

The MI Technology Race

In the course of helping borrowers qualify, mortgage insurance (MI) companies try not to be "an intrusion in the process," says Alfred Scionti, marketing vice president at San Francisco's PMI Mortgage Insurance Company. Providing insurance while making minimal demands on a lender's time or a homebuyer's wallet is the goal of insurers. On top of all that, MI companies try to find other services that they can offer originators and servicers to boost profitability and retain loyal customers.

Technology helps in all these challenges. Whether it is by transmitting insurance certificates through facsimile machines or providing regional economic data, MI companies see automation cementing relationships with their accounts. In fact, most MI executives agree with Miller Warren, Jr., who describes automation more as a customer service tool than a means of cutting internal costs. Warren is corporate information systems senior vice president at Raleigh's GE Mortgage Capital Corporation.

Starting a system 18 years ago was a "very easy decision," Warren notes, due to the "labor-intensive" nature of insurance underwriting. GE Mortgage Insurance Company's (GEMICO) computerization hasn't changed that substantially over the years, he adds.

After loan information is keyed in, underwriters use the computer to analyze risks and then propose ways to help the application approval process. A computer can run through scenarios quickly to see whether, for instance, paying off a car loan might make the application more likely to win approval. In that way, automation makes MI firms more productive and faster, and assists mortgage insurers in being able to "make more intelligent decisions," Warren adds.

The majority of the mortgage insurance industry didn't embrace technology quite as early as GEMICO. But the need for automated processing and intensely accurate risk calculations really only became critical in the last half-dozen years.

MI profits during the 1970s were healthy. During those years, widespread "high appreciation" kept homes virtually assured of not going into foreclosure. PMI did not even have a claims department at that time, Scionti explains. Additionally, underwriters had "less than a 2 percent rejection ration," he recalls.

New risks

But in the mid-1980s, forces changing the mortgage business began eroding MI companies' profits as well. High claims generated from the introduction of teaser-rate ARMs and other creative financing products, coupled with a severe housing recession in the oil patch, turned black ink into red at many of the MI firms.

From 1984 to 1988, MI companies collectively had pre-tax losses of more than $1.5 billion, while pulling in $4.1 billion in premiums, according to Standard & Poor's (S&P) CreditReview report of August 13, 1990. Whereas increasing volume previously had been the main concern of MI firms, quantifying risks became paramount. Scionti explains that PMI began its firm commitment to invest in technology in 1985, because it was seen as a more efficient means of processing the paper and getting a handle on insurance risks, he adds.

Part of this change throughout the industry was due to increased emphasis on volume by originators, which meant that loan quality suffered in some cases. As housing appreciation also became less steady, MI companies found themselves playing more of the role of primary underwriters to protect themselves from claims losses.

From June 1986 to June 1990, S&P's ratings of "AAA" or "AA" MI firms dropped from 93 percent of the mortgage insurance industry to just 62 percent. "Lax underwriting and inadequate pricing" led to this financial crisis, S&P's CreditReview notes.

Beginning in 1985, the industry tightened its underwriting guidelines and raised premiums to recognize the differing degrees of risk associated with new mortgage products and different geographic markets. Financial results since then have improved. Industrywide data published by S&P shows the percent of claims by book of business went from 3.0 percent in 1985 to 0.8 percent in 1986.

In the process of improving financial performance, MI companies have found that it is critical to spot potential risks early. As a result, the amount of 100 percent coverage, that is the insurance that covers the entire loan amount, has dropped from 3.5 percent of their 1983 portfolio to zero by 1989. And policies written for mortgages with loan-to-value (LTV) ratios exceeding 90 percent fell from 45 to 26 percent during that time

However, new risks are constantly appearing. Adjustable and graduated payment loans now make up close to 40 percent of MI risk. S&P Assistant Vice President Robert Green writes that for these loans the "original pricing and ultimate performance of these policies remains a question mark."

GEMICO's Warren admits the "past isn't a help" when trying to underwrite some of the loans available today. PMI Claims Vice President Gene Campion says the firm tries to find loans with similar characteristics when new products appear. Certain mortgage products have been found to produce more claims than anticipated when the policies were initially priced.

Green adds that mortgage volume could decrease due to demographic shifts in the population. If appreciation also slows and problem loans increase during this period of slower demand, MI firms could see a drop-off in new business, while claims on older policies may start to climb.

Automation's ability to help identify risks, while also serving customers efficiently, makes it key for future MI industry success. Consequently, MGIC's Automated Services Manager Richard Lembach says the industry will end up with everything from loan applications to servicing transfers occurring electronically. Lembach notes that the less lenders have to contend with photocopying and mailing actual documents, the less time it will take for transactions to occur.

MI firms such as Milwaukee-based Mortgage Guaranty Insurance Company (MGIC) are thus taking automation into areas ranging from data transmission to policy approval with the help of software tools. Artificial intelligence (AI) is also starting to play a role in the industry. Yet MI companies say they will continue dealing with lenders who don't even own a computer and say that pricing will continue to be based on risk. "If the lender doesn't have a PC, there is no way that affects our ability to do business," says PMI's Campion.

But at the same time, MIs are aware of the current trend in the market toward large lenders and servicers. As a result, their most-advanced services will be taken advantage of by these giant firms, which are also highly computerized.

Electronic access

Yet many of the advances in automation occurring inside MI firms don't require any particular technological capability at mortgage firms. For instance, MI companies are offering faster claims processing and telephone status checks of insurance.

"Whoever offers the best customer service should have a leg up" on competing MI firms, says GEMICO's Warren. One method for improving response times is by storing electronic images of all loan documents. "You never have to pull a loan" out of a file cabinet, since "documents are in the computer," he notes.

Whenever a servicer calls about a loan, a GEMICO representative can call up documents for that specific mortgage. GEMICO is heading towards an "integrated image environment," Warren says. By that he means that all documents will be available onscreen in every department of the firm.

But to implement this program, GEMICO is starting from the "back end," explains Warren. As claims come into the mailroom they are imaged into GEMICO's mainframe computer and then electronically routed to the appropriate area within claims.

Imaging captures both the document itself and pulls the data elements off the page for use in the company's database. What that means is that while claims analysts are verifying signatures, underwriters are able to analyze the characteristics of all claims. Besides making information available in different forms, imaging is faster and more accurate than keying data into the system. In fact, imaging a page is done in less time than it would take to photocopy it.

A similar system at PMI gives Servicing Analyst Eric Whitworth "total command at your finger tips. You can track any source of information customers want," and provide it "in a matter of seconds," Whitworth says.

When PMI gets a Notice of Default, that loan file usually will be imaged into the mainframe system. Then analysts have all the tools necessary to try to get the loan reinstated. Whitworth, for instance, has eight windows on his 19-inch computer screen that can show documents, offer data analysis or provide form letters.

With just a few keystrokes Whitworth can write to a delinquent borrower suggesting he contact the servicer to see if a repayment plan can be worked out. Selling the home also is suggested as an option, and Whitworth urges the borrower to call PMI if he has questions about his options.

After taking this action, Whitworth can have the system remind him to follow up again on a specific day. In one morning, he can work through more than 100 documents queued on his computer. And the system helps manage routine follow-up. For instance, requests for documents are mailed regularly until those files are sent to PMI. At that point, a letter goes out confirming receipt of the requested materials. Or when a claims check is sent, the cover letter automatically breaks down the amount, describing exactly what the funds cover.

Claims processors have more control over their work with the help of technology. And managers can monitor the electronic flow of work from their offices. Campion notes that management can be more hands-on with such a system. "We manage the process," he claims. "It doesn't manage us."

Artificial intelligence

Appraisals represent the documents that are "toughest to transmit electronically," says Roger Haughton, group vice president of insurance operations at PMI. Determining what data elements on appraisals are essential is the first step to finding a way to send them electronically, he adds. But when PMI asked its chief appraiser what information was necessary, the answer was "all of it."

Yet, in the second quarter of this year PMI expects to roll out an artificial intelligence (AI)-based system that sends appraisal data along with an electronic insurance application. Underwriting Vice President Claude Seaman explains that artificial intelligence "captures the knowledge of an expert into a computer." He adds that it includes the expert's "intuitive sense, not just a database." In that way, PMI hopes to "share the thinking of our very strongest people with everyone," Seaman adds.

Vice President of Operations Patricia Mikel says that giving the AI program many examples of insurance applications and labeling them "good, fair or poor" enables the system to teach itself how to underwrite. PMI currently is testing the system in selected markets, by seeing how its decisions compare with those made by underwriters.

PMI hopes artificial intelligence will be able to transmit and interpret 75 percent of all the company's appraisals. Those requiring review by an underwriter generally would need knowledge of a specific area. For instance, an underwriter would be asked to judge if a comparable sale several miles away is valid. And if artificial intelligence proves a success in evaluating appraisals, PMI expects to try it in other areas.

Saving paper

By its very nature, paperwork is manual. Removing much of it increases efficiency. PMI Claims Adjuster Nora Peterson says the time needed to process claims is reduced by 75 percent with an automated claim for loss (ACL) worksheet. Campion adds that in 1983, claims required "45 days to perfect, and another 45 days to pay." Now, he says, all is done in half the time.

ACL has been in use since 1984. Claims data is downloaded from PMI's mainframe into the adjuster's workstation. After capturing such information as interest rate, loan balance and foreclosure cost, the ACL "recalculates the lender's math," says Campion. Peterson explains that previously adjusters did that task on a piece of paper. ACL calculates the best settlement method for PMI and automatically "writes the lender a check" or informs the lender that PMI will take over the property, Campion adds.

PMI first looked at microfiche technology in 1985, explains Campion, before purchasing optical disk storage equipment. Although the cost was $1 million, Campion adds that the system will pay for itself in 18 to 24 months. Most of the savings are recognized through improved customer service, which can be seen in terms of less time looking for files, and less staff time lost to telephone tag.

MI companies make technology investments based on the expectation that their systems will be able to grow, rather than become obsolete. As a result, purchasing and development decisions are made very carefully. GEMICO spent close to two years considering imaging systems before installing one towards the end of 1990. Within two years, Warren expects to have the technology installed in the firm's branch offices.

New applications are tied into today's equipment, rather than replacing it. For instance, PMI also expects to be able to receive facsimile transmissions directly into the optical disk system. In that way, documents don't even need to be imaged. In addition, PMI says it soon will be able to send facsimile letters electronically to servicers concerning delinquent loans, thus avoiding the step of printing them first.

Data from clients

Time is saved for both MI companies and servicers when large amounts of necessary data are transmitted electronically, rather than on traditional paper forms. Generally the transfer occurs on computer tape. In 1989, PMI shut down three branches that had been processing delinquencies. Each of them had 17 four-drawer file cabinets. Today, about two-thirds of PMI's delinquencies are reported by magnetic tape from servicers, Campion notes.

MGIC's Lembach adds that big servicers needed "man-weeks a month" to report delinquencies manually. About 100 servicers and three service bureaus report delinquencies on magnetic tape to MGIC, accounting for 30 percent of all MGIC's delinquency reports. Magnetic tapes also are beginning to be used by MGIC to correct loan numbers and in servicing transfers, Lembach says.

But the most-accepted function of tape transfers is with insurance renewal billings. Rather than manually looking up each loan, deciding whether to renew, update a form and cut a check, all is done automatically. Automation brings in 55 percent of MGIC's renewals and is used by 300 servicers. To ensure the tape's accuracy, both the servicer and MGIC make their own calculations and then compare the reports.

Thirty service bureaus and servicing software vendors offer the capability of developing these reports electronically as a standard feature. MGIC works with servicers and software companies, notes Lembach, to develop these applications. Lembach adds that MGIC encourages and assists firms interested in adding tape-to-tape conversion to their servicing operations.

Setting standards

Although the MI companies interviewed are starting their imaging programs in the claims department, their goal is to have all files computerized starting from the time of initial application. MGIC considers "automation to be the future of the financial services business," explains Senior Vice President Curt Culver. He envisions "paperless loan transactions between ourselves and the lenders we deal with."

"We need the right information, not a lot of paper," agrees PMI's Haughton. But uniform standards must be reached on Electronic Data Interchange (EDI), Culver adds. Lenders with different computer systems "each speak a foreign language" when attempts are made to communicate electronically, he says.

MGIC's Lembach anticipates industrywide standards for electronic MI applications being set "one year from now." But he expects it will take five or more years to enable full loan packages to be transferred electronically between lenders and MI firms.

But that timetable doesn't keep MI companies from investing heavily in technology in the meantime. PMI's Scionti admits there is "definitely a high cost with being on the cutting edge." And he notes that firms that delay buying until a particular technology application is in wide use enjoy discounts analogous to those available to consumers who didn't purchase VCRs when they first came out.

Besides spending more, automation leaders often go through periods of trial-and-error before finding an efficient way to accomplish their goals. Yet, in a business where most of the products being offered are similar, finding a way to deliver better service is considered worth the cost. Furthermore, for mortgage insurers, automation helps control risks - an essential element in any insurance venture. PMI executives note that as a result of their investment in technology, allowing them to underwrite more accurately, and thus price more efficiently, they've been able to reduce premiums in nine states last year.

Underwriting advances

Can computer software truly replace policy underwriters? This became a very real question to underwriters at PMI in 1987, when the company unveiled its Automated Underwriting Risk Analysis (AURA) system. "Underwriters thought they were being replaced," recalls Haughton.

But he explains that PMI's intent was to provide underwriters more time for analyzing regional markets and more complex risks. No cuts in underwriting staff have been made after implementing the AURA system, adds Seaman. He says PMI is able to handle more policies with the same number of underwriters, however.

When PMI suffered along with the rest of the industry in 1985, a "commitment to technology" was made, Seaman says. AURA was a priority that grew out of that commitment. It took more than a year to develop and employs actuarial and statistical techniques that PMI's parent, Northbrook, Illinois-based Allstate Insurance, was able to provide. Rather than using a simpler matrix approach to underwriting, AURA looks at all the elements in the file and considers how they interact, explains Director of Underwriting Kathleen Schroeder.

AURA was tested by having it work "side-by-side" with underwriters, Haughton adds. As the underwriters saw that AURA agreed with their assessments, the system was accepted.

What's more, PMI doesn't need to go through the traditional practice of hiring part-time underwriters to help during the busy summer months. Today, 60 percent of all PMI's policies are approved through AURA. It is designed to keep underwriters from having to spend time on routine cases that quite obviously meet company standards. However, AURA doesn't reject any files. Questionable applications are instead referred to an underwriter.

PMI's Mikel notes that one of the benefits is that the computer is "absolutely objective." Also, she says, "no one from sales can lean on it," and it doesn't suffer from "Monday morning blues."

Field connections

Speed is another obvious advantage offered by computers. In field offices, loan application data from lenders is entered in five to ten minutes, says PMI Underwriting System Specialist Terri Baker. When submitted on a new simplified application called "Quick App," same-day approval comes just a few minutes later on what's called a "Goldrush Express," which was introduced in 1988. Last year the Quick App accounted for almost 20 percent of PMI's policies.

Other MIs have similar systems. For instance, GEMICO's field offices are connected by phone lines to the company's IBM mainframe computer. Underwriters work with the software that holds criteria for different loan types. Warren says the setup allows for consistent underwriting standards that lenders appreciate, but still allows flexible decisions to be made by underwriters when the situation is warranted.

PMI also has developed lender networking capabilities that let a loan originator with a laptop computer get a conditional approval of insurance in minutes.

Automation also is changing the ways that MI companies deliver certificates. Again, the driving force behind the changes is a desire for more speed. "The most important word in mortgage insurance is `turnaround,'" explains Kevin Cademartori, program manager for electronic market programs at MGIC.

He adds that mailing a commitment certificate means the process will take "at least overnight" - and more time is required if changes are necessary. Today, more than half of MGIC's certificates are sent electronically, Cademartori explains.

Account executives in field offices work with lenders to set up certificate delivery in the way that is best for them. All this is done electronically through MGIC/Link. Close to 2,500 lenders are on MGIC/Link, says Associate Program Manager David Greco.

MGIC/Link can send certificates over a phone line directly into a lender's personal computer (PC), to a facsimile machine or to an ECHO electronic mailbox.

Phyllis Bement, vice president at Minneapolis' Norwest Mortgage, Inc., says speedy delivery is a help to lenders. Many times at the last minute there is a change in loan amount, she explains. When that happens, the Norwest office closing the mortgage can call MGIC to get approval for the adjusted amount.

And the loan closing won't be delayed, Bement adds. Right after approval, a new insurance certificate will come to that Norwest office over MGIC/Link and be printed on the computer system there.

In addition, MGIC/Link's PC software enables originators to access reports from MGIC's mainframe computer, Cademartori explains. Lenders can find answers to questions about policy status, premium rates, insurance underwriting guidelines, ARM indexes and employee names. And messages can be sent to and received from MGIC employees through the system's electronic mail feature.

MGIC pays for all costs connected with these services, including phone line charges. According to Greco, the firm treats electronic communications like mail. "You don't send it `postage due,'" he explains.

GEMICO's Warren adds that his certificates can be mailed, delivered by courier or sent by facsimile immediately after approval. One keystroke on GEMICO's computer sends the certificate to a lender's facsimile machine. No hard copy is needed by the MI firm.

Other services

Lembach adds that MGIC now offers 12 hours a day of customer service phone help, in order to "serve both coasts." Functions that can be done by phone include servicing transfers, loan number corrections and verifications of coverage. Since MGIC performs those services more than half a million times a year, the ability to do them over the phone streamlines operations.

Sharing information on real estate markets with lenders is another service MI firms supply. Such data are gathered primarily to assess risks in local areas. For instance, an MI company will be interested in knowing how long homes stay on the market in a certain area. Looking at employment and demographic trends, as well as comparing the number of building permits to population growth, also helps MIs predict regional real estate trends.

In addition to sharing their thoughts about regions with their lender clients, MI companies will do "portfolio audits." Here a lender will be told how its loans compare to others insured by the MI. Specific mortgage risk factors that the lender might not be aware of also will be disclosed.

Today's MIs aren't wasting any time getting up to speed in the race for technology. It's the way of the future for those moving forward with a competitive edge. The balance the MIs are striving for, improved customer service and more careful underwriting, while maintaining competitive pricing, should lead to faster, more efficient service and help ensure the soundness of the mortgage insurance industry.

Howard Schneider is a freelance writer, based in Ojai, California, specializing in real estate issues.
COPYRIGHT 1991 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:mortgage insurance companies
Author:Schneider, Howard
Publication:Mortgage Banking
Article Type:Cover Story
Date:Mar 1, 1991
Previous Article:Boardroom view.
Next Article:The great industry data bank.

Related Articles
Mortgage insurers and HMDA.
Private mortgage insurance.
Exploring new territory.
Major moves ahead for MIs.
Investigating captive mortgage reinsurance.
New directions for mortgage insurers.
A mighty year for MI.
Mortgage insurance 101: with rates rising and appreciation slowing, now might be a good time to give mortgage insurance another look. Add to that the...
Back to basics.
FICS' Loan Producer interfaces with Triad.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters