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Understanding the times.

Several key technology tools helped mortgage lenders ride herd on a massive wave of refinancings last year. Technology will remain a key ally in the competitive battle for lending market share that lies ahead.

Whether in war or in business, in ancient times or the modern age, the successful implementation of technology gives you a competitive advantage. The history of mankind is replete with examples of civilizations that have used new, high-tech weaponry to defeat their enemies.

While they may not literally be at war, today's mortgage lenders also face intimidating circumstances. In fact, 1998 was one of the most demanding years in recent mortgage history. There was much to conquer: a new refi boom, record sales of existing homes, the availability of automated underwriting systems, the lure of Internet-based "e-commerce," stock market upsets, global economic woes, rising default rates and bankruptcies, B&C market chaos and many other challenges.

So what high-tech "weapons" did lenders use in 1998 to win in their markets? Their technological armaments were many; this article will look at a few examples. By examining the success tools of 1998, we'll get an idea of what lenders need to carry that success into 1999.

Weapon No. 1 - The Implementation of Windows[R]

Microsoft's Windows computer operating system (OS) was a fundamental success tool that helped many lenders deal more effectively with the business challenges of 1998. Windows 95, Windows 98 and their more powerful sibling, Windows NT[R] (renamed "Windows 2000" starting with the upcoming version 5.0), are now the dominant forces in business-PC operating systems.

Yet despite the ever-increasing popularity of Windows 9x and NT, about one in four loan originators was still using Microsoft's obsolete Windows 3.x or MS-DOS operating systems in 1998, according to Fiserv Orlando market research.

"So what?" some may say. "My older system works fine." That may be true right now, but those days are numbered. The questions is: How long do lenders want to continue using an outdated OS for which support may soon be discontinued? Within the next few years, Microsoft will very likely stop supporting MS-DOS[R] and Windows 3.x. That reason alone makes for a compelling case to upgrade.

But there are other good reasons lenders upgraded their PC operating systems to the latest versions of Windows during 1998:

* Improved ease of use. Windows 9x and NT are generally easier to use than either MS-DOS or Windows 3.x. The graphical user interface (GUI) of Windows 9x and NT is more intuitive and logical than the user interfaces of MS-DOS and Windows 3.x. The benefit is that new users can be trained more quickly, thus reducing training costs and boosting efficiency.

* Increased productivity. With Windows 9x and NT, lenders gain the productivity advantage of true "32-bit" computing.

That's because Windows 3.x and MS-DOS can process only 16 pieces (or, "bits") of computer data at once; hence their "16-bit" designation. Windows 9x and NT, on the other hand, can process 32 bits of data in each processing cycle, greatly accelerating most computing processes. And in the world of 32-bit computing, Windows 9x and NT are fully integrated with Microsoft's "Office" suite of products (which is today's most popular business productivity software).

As users of Apple's Macintosh computers have enjoyed for years, PC software that is designed to Microsoft's Office standards provides a common, seamless interface with the Windows OS. This gives lenders the ability to integrate with - not just interface to - a broad spectrum of mortgage-lending functions, including application taking, credit scoring, underwriting, document transfer, e-mailing and much more.

For example, a lender can use the 32-bit capability called multitasking to write a business letter with Microsoft Word while displaying a customer's mortgage application information and processing an automated underwriting transaction. Yes, it's true that lenders invested a significant amount of money to replace or upgrade their PCs in 1998, but most say the long-term productivity gains of 32-bit computing are worth the added expense.

* Greater efficiency. Another benefit of working with Microsoft's 32-bit programs is known as "ODBC compliance." ODBC stands for Open Data Base Connectivity, which is a computer industry interface standard that can facilitate data transfer between applications.

For example, customer information in an ODBC-compliant lending database can be easily transferred between other ODBC-compliant applications (such as Microsoft Word, Excel or Access). ODBC compliance in 32-bit Windows-based mortgage software makes data transfer and information exchange quicker, easier and more efficient.

However, there was - and still is - a significant chink in the armor that lenders discovered last year when upgrading to Windows 9x/NT and Microsoft Office software: While it's certainly very powerful, the Windows/Office world is far from being crash-resistant or bug-free. So 1998's smart lenders invested in a good PC support structure - whether they trained their own staff or retained an outside service. They faithfully installed the various service releases and bug fixes that Microsoft issued.

In addition, they subscribed to leading PC magazines (such as PC Computing or PC World) and read them carefully. That way they were able to stay current with the latest updates and bug fixes.

A big question in 1998 was whether lenders should upgrade to Windows 98, the latest and greatest version of Microsoft's 32-bit OS. Some made the plunge; most didn't. Yet almost all of today's new PCs have Windows 98 pre-installed, so lenders who bought new hardware had to make sure their support staff was trained on the new OS.

Lenders who considered upgrading existing machines to Windows 98 had to weigh several cost factors: the software upgrade itself (about $100), the increased hard-disk space (up to 355 MB), and the need for a fast CPU (a 133-MHz Pentium is about the minimum).

They also had to decide whether they needed Windows 98's new integrated features, including a built-in Internet browser, DVD support, and a number of other flashy "goodies." This double-whammy of cost and complexity stopped many from installing Windows 98.

But possibly the biggest roadblock to the widespread installation of Windows 98 has been its spotty reliability. Consider this quote from PC Computing: "Don't expect miracles - for all its improvements, Windows 98 is not far removed from Windows 95, and that means it's still far from crashproof. For the best multitasking performance and [better] crash protection, skip Windows 98 and head for Windows NT" (July 1998, p. 81). Even as we enter 1999, problems continue to plague Windows 98; and the OS has not been widely accepted in the business world.

A number of 1998's PC-savvy lenders noted that Windows 98 is the last version in the Windows 9x series. In a few years Microsoft will phase out Windows 9x in favor of a more friendly Windows NT/2000. For that reason, some moved directly to Windows NT, despite the additional hardware upgrades required.

Whatever you decide to do in 1999, be sure to consult with your PC specialist or Information Systems department before you make any OS decisions.

Weapon No. 2 - Internet-based mortgage origination

The Internet was one of 1998's hottest trends, and something that no forward-thinking mortgage lender could afford to ignore. According to a report by industry analysts Callahan and Associates, the public's use of the Internet as a medium for handling banking and financial transactions has grown a staggering 332 percent in the last year alone.

Although only a tiny fraction of Internet-based financial transactions completed in 1998 were mortgage related, most experts feel that the Internet will play a significant role in the mortgage origination world of the future.

Mortgage brokers did a significant part of their business via the Internet in 1998, and more consumers than ever before turned to Internet-based mortgage services last year for their speed and convenience.

However, the strongest area of future growth in Internet commerce will not be with consumers - it will be in the area of business-to-business transactions. Around the world, organizations are expanding their business-to-business Internet presence at a logarithmic rate. Companies are setting up special, private, protected Web sites for access only by their vendors, suppliers, business partners and business clients.

According to Internet specialists George McGrath and Peter Blank of Osgood O'Donnell & Walsh, these areas of red-hot Internet commerce, called extranets, are expected to boost total Internet-based business-to-business revenues from about $18 billion in 1997 to well in excess of $100 billion by the year 2000.

There's no question that the Internet had a noteworthy impact on the 1998 residential mortgage industry, especially in the area of online application taking. However, industry watchers remain sharply divided on exactly how strong a presence the Internet will have in the near future. Some skeptics have observed that despite its remarkable advances, the truly widespread acceptance of home-based banking and financial services may not be seen for years.

Home-based computerized financial management will likely remain the province of a relatively elite group of computer-literate professionals until:

* More households get computers and online access. Current best estimates indicate that as many as 40 percent of American homes do not have computers, and as many as 75 percent do not have Internet access. However, strong sales of easy-to-use, Internet-friendly PCs - such as Apple's hot new iMac computer - are changing those percentages by the month.

* Electronic financial transactions become less fee-intensive. An online financial transaction can cost an organization as little as one-tenth as much as a person-to-person transaction. Yet many financial-service providers insist on charging high fees to their online clients. Reasonable fee structures will go a long way toward getting customers onto the Internet.

Not everyone is bullish on the future of the Internet in the mortgage industry. I spoke with a mortgage-lending representative from Minneapolis-based Metro Community Bank, a young, thriving Minnesota bank that has eagerly adopted the very latest in PC-based, client/server computing technology. Despite the bank's high-tech focus, he feels that when it comes to getting a mortgage on one's primary residence, computerized delivery systems will have a hard time replacing person-to-person contact. "No matter what their age or background," he says, "I believe most folks are just more comfortable dealing with a real person when they're going through the mortgage process."

According to the American Banker (August 24, 1998; p. 9), fewer than 1 percent of all mortgages were completed online during 1998. Estimates in the growth of Internet-based mortgage closings in the next four to six years are all over the map; from 5 percent to 12 percent to as much as 40 percent.

Another problem with moving loan origination and processing functions to the Internet is the staggering expense of developing and maintaining the kind of sophisticated, interactive Web site that enables the full spectrum of mortgage commerce to take place. Today it would cost more than $1 million and would take hundreds of hours to develop such a Web site, according to trade press reports.

Jane Pitts, vice president at Stephens Federal Bank in Toccoa, Georgia, also sees limitations in public acceptance of the faceless medium of the Internet as a loan-origination vehicle. "We're not afraid of today's technology trends," she says. "In fact, we're always looking for ways to use technology tools to increase our efficiency and improve our customer service. However, we don't want to overuse technology and lose the personal, caring touch that we're known for."

One Internet concern that many shared in 1998 was the issue of security - and it's still an issue to be addressed in 1999. However, while some financial-service providers are anxious about the security of information disclosure over the Internet, most of their worst fears are now groundless. A variety of secure information-transmission schemes exist and can be adopted with relative ease. The primary challenge is that no clear industry standard has emerged to help drive the technology forward.

Weapon No. 3 - Accelerated Loan Processing

Technology can be the great equalizer, leveling the playing field between the underdog and the top dog. And one of the best aspects of applying technological tools to mortgage-related processes is the increasing speed with which mortgage-lending services and products can now be made available to consumers.

Here is just a partial list of the many ways that technology helped make mortgage lenders more productive in 1998 by reducing the cycle time involved in originating, processing and closing mortgage loans:

* Techno-literate mortgage lenders increasingly relied on instantaneous, electronic credit scoring and underwriting approval methods. Many of today's leading loan origination and processing software packages now provide seamless automated interfaces to leading underwriters (such as Freddie Mac and Fannie Mae). Automated underwriting technology benefited lenders by, among other things, reducing interest rate exposure, increasing closing rates and reducing risk of investor fallout.

* Freddie Mac and Fannie Mae further streamlined the appraisal process by permitting the use of what some call "mini-appraisals," or "drive-bys." With digital photography, appraisers can take brilliant color photos and transmit them instantly to the office via a cell-phone connection to a network or the Internet.

* The closing process was accelerated through the advent of secure document delivery technology (often Internet- or network-based), which is now being implemented by title companies, attorneys and other closing parties.

Stephens Federal's Pitts serves a scenic, growing bedroom community northeast of Atlanta. "In our market," Pitts says, "our customers have many mortgage providers to choose from. Our desire is to use advanced yet practical technology to give us a professional, competitive edge - to make us stand out from the competition."

Pitts says that Stephens Federal's decision to install easyLENDER[R] software from Fiserv Orlando has enhanced the bank's ability to meet its customers' most important mortgage lending needs.

"For example," she says, "some mortgage lenders in our area continue to take mortgage applications by hand, which is a tiring and tedious process for both the customer and the loan officer. In contrast, we take the customer's application electronically with our software, which greatly simplifies and accelerates the process. Also, our software enables us to instantly deliver detailed rate comparisons. Our customers appreciate the professionalism, speed and efficiency that we gain from easyLENDER."

Metro Community Bank agrees that the best technology is that which allows lenders to retain their human touch. "The main trend that we observe," a representative states, "is that the function of the loan officer is becoming more automated. That's not to say that we see the person of the loan officer being removed from the lending process. Rather, the result of effectively automating a loan officer's functions is that lenders can be better equipped to respond to the needs of their customers in a more timely manner."

With all the complexity of the mortgage lending process (application, approval, underwriting, appraisal, title searches, closing, ad infinitum), it will never be as fast and simple as consumer lending; but lenders increasingly used modern technology in 1998 to reduce the cycle time involved in mortgage lending. Look for this trend to continue in 1999 and into the new millennium.

Weapon No. 4 - Year 2000 Awareness

Sometimes the best offense is a good defense. That combat concept has never been more true than when addressing the upcoming potential problems of the Year 2000 (commonly referred to as Y2K).

Like the giant comets that threatened Earth in the 1998 blockbuster films Deep Impact and Armageddon, the threat of Y2K disaster looms ever nearer - and forward-thinking lenders started dealing with Y2K in 1998, if not sooner.

"But wait," some may say, "we don't have a mainframe computer - do I need to worry about Y2K?" You betcha! According to an article in PC Week magazine (June 29, 1998; p. 83), 1998 was the year for users of personal computers to start taking aggressive action to deal with potential Y2K issues that could "wreak havoc" on their businesses.

Background: Y2K computer problems are rooted in the fact that many computer chips and programs compute dates in two-digit form; e.g., 1998 is "98" and 2000 is "00." However, when the "00" date clicks over at 12:00 a.m. on January 1, 2000, many computer systems will think it's the year 1900. Interest calculations, tax assessments and a host of other computerized math functions may go haywire - or even cause some PCs to crash - if the problem isn't fixed.

Many think that only software programs (often called "applications") are at risk. Not so. Computer systems often contain embedded hardware chips with date fields, such as the ROM BIOS chip in most PCs.

Experts have identified at least three critical date-related situations that many ROM BIOS chips cannot handle: the rollover from Dec. 31, 1999, to Jan. 1, 2000; the ability to retain the year 2000 when restarted (and not revert to either 1900 or the IBM PC "birth date" of 1980); and the ability to handle the leap-year date in the year 2000.

There are even a few things to worry about before the year 2000: Because of the way certain specialized computer systems measure dates, potentially serious problems could occur on April 9, 1999; September 9, 1999; and October 9, 1999.

Lenders should also be sure to check the Y2K conformance of any computer-related device that plugs into a wall or has an LCD or LED readout (such as modems, switches, routers, hubs and other computer network components).

The Y2K problem has special relevance for those who exchange PC-based data files with other companies and other computer systems. Simply verifying that your computer applications are Y2K compliant is not enough.

"You can't assume that all data files produced with a compliant application have compliant data in them - it is an unsafe assumption," says Plesant Park, the Y2K project office manager at Topeka, Kansas-based Western Resources Inc., a firm that develops monitored security devices for commercial use. Like computer viruses, potentially problematic two-digit dates can be spread to other computer systems by (for example) a spreadsheet file that includes "bad" dates or even by an errant data file downloaded from the Internet.

In 1998, forward-thinking lenders also began checking with their suppliers, vendors and business partners to ensure that they are Y2K compliant. Title companies, appraisers, credit bureaus, insurance companies, accounting firms, payroll and pension processors and others could put lenders at risk if they're not Y2K-ready.

What about you? Have you verified that the air conditioning and elevator service in your multistory office building is Y2K ready? What about your telephone system and your electrical power provider? Are they Y2K compliant? It's up to you to make certain that all critical business systems in your office and your office building won't shut you down at the turn of the millennium - or sooner.

Industry experts are especially concerned that smaller companies are not allocating sufficient resources to solve their potential Y2K problems. "Act now!" they urge. Y2K issues may take many months to correct, so it's vital to avoid further delay.

Sharpen your swords

Last year was an exciting year. And with many economists and market analysts predicting some level of mortgage downturn in 1999, it looks as though the coming year will be pretty challenging, too. This article can serve to remind and encourage you to stay on top of technology issues.

Industry experts agree that, when used properly and effectively, mortgage automation technology can make you more competitive, more responsive and more profitable.

To win in today's battle for the mortgage market, you need the weapons of technology. You can't afford to ignore the trends that are shaping the modern business environment. To ensure maximum efficiency, compliance and competitiveness, invest in thoroughly modern loan origination and processing hardware, software and services.

Sharpening your technological edge will help you provide better customer service and faster turnaround. But because technological superiority always requires an investment, be sure to shop for affordable, comprehensive and flexible technology solutions.

Make technology decisions with the future in mind, so you won't be playing catch-up when you can least afford it. Remember that your customers will gravitate toward the lender who can provide the fastest, easiest, most affordable and most efficient service.

Will that lender be you?

Jeff Berg is marketing manager for Fiserv Orlando, the Orlando, Florida-based business unit of Fiserv, Inc., a billion-dollar global leader in banking and financial technology software and services, Fiserv Orlando is the developer of easyLENDER[R] for Windows, The author has worked with and written about high technology and the computer industry for 20 years, and has followed banking technology since the early 1980s, His articles have been featured in a broad range of national publications.
COPYRIGHT 1999 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1999 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:use of technology in mortgage banking
Author:Berg, Jeff
Publication:Mortgage Banking
Date:Feb 1, 1999
Previous Article:In good times and bad.
Next Article:A history of mortgage reform.

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