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The great industry data bank.

The Great Industry Data Bank

The large secondary market agencies probably have a better view of the extent of automation in the mortgage business than just about anybody. They deal on a regular basis with thousands of seller/servicers who boast widely varying degrees of automation in their operations.

These same secondary market agencies, along with HUD, collect tons of data every working day about loans and lenders. As central collectors of information about the industry, these entities have the potential to gather, sort and interpret huge bodies of information that can help lenders do a better job. As it turns out, this data is being fashioned into some very useful management information with the help of technology. We polled some representatives at Freddie Mac, Fannie Mae and HUD to find out what they are doing with the data they collect to help the industry manage better.

Considerable attention has been paid to the small number of leading-edge companies that have put a hefty capital investment into state-of-the-art technology. But what about the vast majority of lenders - how much technology is at work today in their day-to-day operations?

While there are without question some mortgage companies who have jumped on the technology bandwagon in a big way, there are also numerous smaller originators out there who are operating with a relatively small amount of help in-house from sophisticated technology. Service bureaus bridge the gap when it comes to investor reporting demands and the many other aspects of servicing that cry out for help from automated systems. But in the origination side of the business it is a different story. So when it comes to new reporting demands that are placed on originators, such as extending reporting under the Home Mortgage Disclosure Act (HMDA), some companies are better prepared than others to comply. HUD has witnessed this first hand, according to Bill Shaw, acting director of Information Systems at HUD.

H. Marc Helm, executive vice president of Houston-based Barron Financial Group and chairman of the Technology Task Force sponsored by the Mortgage Bankers Association of America (MBA), says, "Technology is not for everybody. That's a fact. It's a constructive fact."

But things are changing in the business and technology is taking on critical new importance. Helm says that for a long time the business has been filled with bright, aspiring managers finding better ways to get things done. Up until now, the majority of those "better ways" were good ideas cooked up inside some manager's head on ways to more productively manage divisions, products and people. Now, Helm says, better ways are increasingly revolving around the application of technology.

Helm, as head of a technology task force for the industry, says one of his real concerns is that "right now you have a very small populus buying into technology" as a crucial management solution. He says the technology message has to be brought to many more of those who are today's chief executives and chief financial officers.

And the fact that technology is unevenly distributed throughout the industry traces as much to the way vendors market products as it does to the awareness of top management about the benefits of technology. Helm says that "technology is made available but it is geared to the largest shops because they have the bucks to do it." He adds that one of his goals as head of the task force is to make the agencies and vendors understand that "they can't give us a carte blanche card that applies to all members."

The origination side of the business is just beginning to have its technology needs fulfilled. Servicing for a long time was the primary beneficiary of investments in technology. This is understandable if you put yourself in the shoes of a mortgage lending executive assessing the competing needs of these two aspects of the business.

Production staff have had to wait in line for technology investments because servicing was a natural target for heavy investments in systems, and companies only have so much working capital to draw upon. Gregory Samp, executive vice president of residential loans at Sibley Mortgage Corporation in Rochester, New York, and vice chair of the Technology Task Force, says, "Most data processing is concentrated first on the areas of need - what can't be done without it. So the loan administration area is always the first area to be automated. Next, comes secondary marketing," he explains.

Since most origination tasks can be performed manually, and later transferred onto secondary marketing and servicing systems, it usually flunks any needs-test that management may apply. And in tight economic times like these, origination automation goals are likely to remain a step-child when compared to the loan administration side.

Secondary market agencies deal every day with this stratification in the industry between the technology "haves" and "have-nots." Freddie Mac and Fannie Mae need to cope with everyone from the small proportion of lenders automated from application through payoff to the few using nothing more sophisticated than an IBM Selectric typewriter.

"We have big lenders, some of whom are advanced technologically and smaller lenders using service bureaus. What we need is a variety of ways to communicate with all of them. That's why we continue to have our own data-entry center so they can send us information on paper," explains Fannie Mae Senior Vice President and Chief Information Officer William E. Kelvie.

Yes, neatness counts

One area at FHA that reflects the uneven distribution of technology in the industry is in the reports required by HMDA. For the first time, independent mortgage bankers have been required to comply with HMDA by disclosing information about loan applicants.

Errors, particularly the low-tech, keypunch variety, are one of the biggest technology problems facing HUD today. The errors seem relatively simple: a lender identifies the sex of the borrower with an "M" or "F" instead of the correct code: a 1 or 2. Unfortunately, the computer recognizes only numbers and not letters in the field identifying the sex of the borrower and rejects the tape. And when a lender sends in incorrect information on paper, someone has to go back and correct the entry by hand, HUD's Shaw says.

To make it easier for lenders to report, Shaw has been looking at a HMDA software program developed by the Office of the Comptroller of the Currency. "We'd like to make it available to any lender who wants it. The program has all the error spot-checks built in," he says.

But reporting errors are not automatically eliminated just because a lender has sophisticated technology. Similar kinds of errors have been found when lenders transmit default information electronically. In this area, FHA's software keeps track of the default entries attempted by lenders and rejected by FHA. Recently, Shaw found one lender with 3,000 bad entries. The problem? The lender made a data processing change that added a dash in the case number.

Looking for standards

Part of what is hampering the transmission of data electronically on a broader scale is a lack of uniform standards. Today, every agency and Wall Street firm makes its own transmission rules and then updates them constantly, says Freddie Mac Automated Customer Support Department Head Mark Fleming. No one seems to be able to agree on the correct format and content for electronic data transmission throughout the mortgage banking industry. Freddie Mac would like to see everyone agree on a single format for transmitting a loan application or a servicing portfolio.

"We're hoping within the next three to five years to have standard delivery," Fleming says. But the process involves consensus building that takes time. "Ideally, what we want is an industry consensus that we're not leaving out data someone really wants."

The answer man

If there's one thing technology has brought to the mortgage banking industry, it's the ability to collect millions of items of individual data about borrowers, lenders and loans.

At FHA, Shaw has assembled the largest database available on FHA borrowers. He can stratify that data any way you want it. Need to know how many single mothers took FHA mortgages in Cook County, IL? Shaw can tell you.

He'd like to see FHA go a step beyond past experience and use the database to predict foreclosures at the time a mortgage is originated. Like the credit scoring used by card issuers, HUD could potentially sift through many homebuyers' characteristics to identify a borrower's default potential.

"You'd take test data - a sample of cases that went bad and a sample that stayed good. As the loans are being processed you would put in certain information, and the system would tell you the probability of the loan going bad," he explains.

While HUD hasn't had the staff to work on such a project in recent years, in preliminary tests, the agency was running about a 70 percent correct rate in projecting defaults. If completed, Shaw would like to see the system used as an underwriting aid. "I would never want to see it as a final decision-maker" Shaw adds, acknowledging the potential for discrimination inherent in such a system.

Freddie Mac has also experimented with underwriting calls made by artificial intelligence, says Assistant Division Head of Information Systems and Services Robert Shotwell. After an 18-month pilot project, the corporation decided it could get good results, as long as it fed the program massive amounts of information.

"But it was almost more expensive to take the massive underwriting files, extract that data and key it in and let the system underwrite it, than it was to have an underwriter do it," Shotwell says.

Again, the problem is standardization. Having the information collected and transmitted to the agency in a standard format would help alleviate that barrier, Shotwell adds.

The good news: it works for you

Despite the barriers to effective data collection, the agencies do manage to generate a great deal of statistical information lenders can use in their day-to-day operations.

Care to check up on the competition? HUD will soon be publishing data on all single-family insured originations, early defaults and foreclosures broken down by lender and by census tract, over a rolling five-year period. With 4,000 people and 1,200 households in the average census tract, that data should help lenders assess their market share in a given area.

Last year's housing act requires HUD to make this data publicly available this year. The law requires statistics on the name of the lender and every census tract where the lender originated one or more loans; the total number of mortgages originated in each census tract; the total of defaults and foreclosures in each census tract; and the percentages of loans in default and foreclosure in each census area and overall.

"Right now we have set up the tables basically by lending institution, by census tract. Next, we'll flip the thing and ask [which lenders are] in every census tract. I don't know if we have enough money for it, but it's definetely in the plan," Shaw says.

Freddie Mac recently purchased a "nine-gigabyte Teradata computer," says Fleming, (there's 1,000 megabytes in a gigabyte) "to hold its loan-level information. Then it trained 100 employees to go after the data for lenders and investors.

Reports that would take three or four hours to run are now available in minutes. Need to compare your deliveries against your outstanding commitments, or to pull default data on single-family ARMs with buy-downs? With the Teradata computer, operators at Freddie Mac headquarters in Reston, Virginia and at the regional offices will be able to give you the data.

"What we aspire to [do] is to make the reporting more than that. MIDANET reporting should generate reports for you. If it's useful to us, it's useful to our customers. If we're doing it for ourselves we'd like to share that capability," says Fleming.

FHA, too is updating it's ability to access information. It recently hooked up a number of its field offices to the Insurance in Force System that handles accounting and billings. Before, lenders that had to call headquarters to double-check a case number or replace a certificate of insurance can now work with the local office, instead.

And after a brief hiatus, FHA is also again publishing FHA Trends and Home Reports that break down the characteristics of home buyers and loan volume by county. The agency also offers county tables showing the volume, terminations and insurance in force for individual areas. To get on the distribution list for the reports, write to: Dr. Bill Shaw, Room 9245, HUD, 451 7th St., S.W., Washington, D.C. 20410.

The bad news

Unfortunately, the data knife has a double-edged blade. The better the agencies become at manipulating data, the more they may be tempted to use it to closely scrutinize everything a lender does. And public availability of some formerly confidential business data may stir up tempests based on misperceptions of what the data represent.

New reporting requirements from last year's housing bill have FHA publishing default rates and loan origination figures by lender, by census tract.

Already, Shaw is hearing complaints from lenders that feel publicizing such information is like forcing them to publicize trade secrets. "I've taken over 1,200 phone calls [from lenders] and some of them are not very pleasant," he says.

Tracking defaults isn't new to FHA. The agency's default monitoring system already tracks claims by year, by lender. It's information the single-family division of FHA wants to start using to "ping" lenders with above-average claim rates for their areas, Shaw says.

What's ahead

So where's the leading edge of technology for Freddie Mac, HUD and Fannie Mae?

For Freddie Mac, the focus is not out somewhere on the horizon at all. "We're not in the business of doing research and development. Our strategy is not to be on the leading edge but to be a follower," says Shotwell.

Despite Shotwell's modesty, Freddie Mac is working with sophisticated imaging technology in a joint project with the Resolution Trust Corporation (RTC) and a private-sector firm. Some of the most sophisticated mortgage banking firms are also taking advantage of this promising form of technology in their own operations. Mortgage insurers also are integrating imaging technology into their businesses.

The Freddie Mac pilot project incorporates the use of scanning technology where the computer examines images of documents and checks for certain pieces of data. "It's smart enough to look for a space where a signature or endorsement has to exist and see that there's nothing there and immediately flag that," says Fleming.

When RTC whole loan portfolios go up for sale, purchasers need to see a tremendous amount of information about the properties and borrowers before making a bid. "Imaging becomes a vehicle for transferring that information," Shotwell says.

Sending the loan portfolio on disk to potential buyers, rather than sending the buyers to portfolio could work for purchases, but due diligence is still a hands-on business, Shotwell says. "There's something that you get while you're there, it's a confidence level that you don't see when you look at the files" on an optical disk, he explains.

Another new technology, hypertext, has also caught the corporation's eye. Hypertext could provide electronic access to the selling and servicing guide and help lenders by locating all the references to certain words like "multi-family LTVs."

"The computer can be a real nice assistant for finding all the explicit references to the words `loan-to-value ratios.' It's a lot more efficient way of storing, accessing and updating," says Fleming. "Again, it's an example of something that other businesses have made work. We're not trying to do R&D on something that hasn't proven itself already."

Other projects are closer to completion. By mid-year, for instance, Freddie Mac plans to offer 24-hour access to the latest pool factors. Foreign and West Coast investors now struggling with access only during East Coast business hours will welcome the change.

Also in the year ahead, Freddie Mac plans to speed up the process of getting prices from dealers passed along to customers. Those customers will also be able to use their PCs to not only get those rates faster, but to take the next step, too. "You'll be able to just sit at your desk, log onto MIDANET, see the price and enter into a commitment," promises Fleming.

On the servicing side, Freddie Mac plans to offer a new decision-support tool to help manage servicing portfolios. The software will let servicers check their portfolio's statistics against others in the region, or by product. And with delinquent loans, the system will help servicers decide whether to try and bring the loan current or to turn it over to Freddie Mac, Fleming says.

At Fannie Mae, they're looking at a variety of things, primarily putting more effort into the MORNET system, but also at scanning and optical disk technologies, says Kelvie.

The corporation sees a potential for artificial intelligence in underwriting. "We're looking at experimenting with it, but not aggressively and nothing near-term" is likely to come about, he says.

HUD has signed a $500 million data-processing contract with Martin Marietta Corporation. The 12-year agreement calls on Martin Marietta to consolidate all of HUD's data-processing operations in one location, integrate its systems and consolidate its teleprocessing network.

"They will maintain the state-of-the-art," says Shaw. "But while the department has some of the latest equipment around, the problem is the priority of getting anything done." Areas like financial controls are taking precedence following the so-called "Robin HUD" financial scandal.

Shaw's lament is probably a familiar one to private-sector firms where management sometimes views technology as a budgetary black hole.

"The systems for loan origination do not necessarily have the same maturity that the loan administration systems have," notes Samp. When Sibley automated its system in 1986, the firm chose its software vendor from among three finalists. Today, the two losing finalists are out of business.

This lack of staying power, leadership and standardization has worked against some software producers in their attempts to create links between secondary, servicing and origination programs, Samp points out.

So for many lenders today, the answer to keeping up with technology is, similar to HUD's approach - let someone else handle it. By turning to a service bureau, many a lender has escaped the capital investment required to chase the state-of-the-art.

And Shaw says he loves getting service bureau tapes carrying information from more than one servicer. Helps keep down the paper level, he says.

Dona DeZube is a freelance financial writer based in Columbia, Maryland.
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.

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Title Annotation:mortgage banking industry
Author:DeZube, Dona
Publication:Mortgage Banking
Article Type:Cover Story
Date:Mar 1, 1991
Previous Article:The MI technology race.
Next Article:Portraits of technology.

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