The mortgage technology industry assesses the opportunities the current mortgage crisis presents for re-shaping and rebuilding the industry.

There may be many culprits toward whom the finger of blame could be pointed for the mortgage crisis that has been grabbing headlines for months on end. Some blame regulators and investors who may have exhibited lax oversight; others point to overzealous borrowers and lenders, looking to take advantage of the frenzy caused by low interest rates. The soon-to-be-emeritus editor of Mortgage Technology magazine Scott Kersnar holds technology partly to blame for the subprime mortgage mess. Automation made the barrier to entry low and fostered chronic over-capacity, he wrote in a recent editorial.

Regardless of who’s to blame, vendors of the technology that has made great strides in streamlining and automating the mortgage processes of old insist that technology has the potential to play a key role going forward. With the right technology in place, the industry that emerges from this crisis can be more streamlined and better equipped to identify and serve the right clients from loan origination through mortgage default management.

Originating the Loan

Automation starts at the beginning.

“We believe that to enable lenders to do the best job possible, it is important to have a system in place from the moment you start to work with a prospective borrower,” says Cyrus M. Brinn, president of Metavante Lending Solutions.

With a minimum amount of information input into a loan origination system, loan officers can now determine whether a prospective borrower will qualify for a loan product, what product might be the best fit, and what signs might indicate that a borrower might not be a good fit for a loan product.

“Of particular importance, given what has happened in the market, is how our product enables our customers to filter out prospective borrowers where a loan is not a good fit. For brokers using prudent lending practices, our products can ensure that a loan to a particular borrower would fit with high-cost lending regulations in each of the 50 states,” Brinn says. “This technology enables our customers to keep from putting problems in the loan origination pipeline.”

The loan origination system accesses a third-party database that reviews the rules required for compliance with high-cost lending legislation, such as whether the rates are too high, and signal if the loan is out of compliance.

In terms of efficiency, this type of technology also allows a loan officer to enter a subset of information and let potential borrowers know at point-of-sale whether or not they qualify for products. It also generally broadens the breadth of products that are offered. Many loan officers have a handful of favorite products that they are well versed in, and tend to gravitate toward selling those products they know. With automation, a potential borrower’s needs are automatically measured against the full breadth of products available, which may result in matches with products that might not have been considered by the loan officer independently.

Fiserv’s Gary Jones, senior vice president product and technology for loan origination products within Fiserv Lending Solutions, notes that as lenders may seek to take advantage of the economy’s downturn to upgrade in efficiency, there has been a focus on paperless lending.

“Imaging has been integrated into the processing platform that supports the entire e-mortgage out to the borrowers, all the way through to the signing of e-mortgage notes online,” he says.

One example of paperless documentation that has been popular is an online form of truth in lending/good faith estimate document. Essentially, a lender is required to ask a borrower to review good faith and truth in lending requirements, but there isn’t actually a requirement that borrowers sign them or acknowledge receipt. As a result, these documents are often mailed out and fall into a black hole, with many borrowers not reviewing signed versions and lenders frequently not knowing whether the documents have been viewed.

When this information is disseminated through an online format, lenders can track electronically whether the documents have been received and viewed. In addition, lenders can give borrowers an easy button to click and e-sign that they have read and understood the forms, giving an extra layer of acknowledgment.

“At best they may have borrowers clicking that they have read the form, but at least they have the tracking mechanics to see who has viewed it, so it takes a lot of guesswork out of the process,” Jones says.

He also notes that in terms of protecting lenders, fraud protection is standard across the different types of mortgage products, with mechanisms in place for checking things like duplicate social security numbers, as well as integration with third party databases that allow lenders to drill down into more detail on certain items in credit reports. Fiserv Lending Solution’s loan origination products are divided into three areas, with DataTrac for small mortgage bankers, easyLender for regulated financial institutions for which mortgages are a subset of their services, and UniFi Pro for the large regional banks.

Metavante’s Brinn notes that perhaps most important for today’s market, the loan origination system’s decision engine allows lenders to change lending conditions quickly and universally throughout the organization’s touch points.

“This is absolutely the most dynamic market I’ve seen in the 22 years that I’ve been doing this. There is a significant amount of changing of rules and changing of pricing in this market,” Brinn says, noting that lenders are changing the FICO scores they accept (a score of a borrower’s credit worthiness named for Fair Isaac Corp. which originally developed it), changing their conditions on loan-to-value ratios, and substantially modifying or in some cases shutting down completely their NINA (no income no asset) loans. In addition, as many lenders sell their loans on the secondary market today the terms shift quickly as investor tolerances change.

Metavante’s loan origination system allows a loan origination underwriter product person to set up and maintain rules without having to be a programmer. When rules are changing almost daily, loan product people can directly change them in the system and they will be changed universally on the Web site and all systems that the brokers use. This makes rate changes much more current than the old system of faxing rate changes to brokers, and running the risk that the brokers may not have picked up a fax.

Similarly, at Fiserv a Web services architecture was implemented several years ago that allows all product setup guidelines from rules to pricing and rates to be maintained in one place and exposed to various changes from retail channels to broker channels and the Web. That said, firms have been taking more advantage in terms of fully implementing them, says Jones.

Back from the Brink of Default

Meanwhile, as foreclosures rise across the country, with newspapers routinely printing heat maps of geographic areas with the highest rates of foreclosure, technology for managing mortgage defaults is by necessity growing more sophisticated as well.

Kevin Schlumpf, managing director of the EarlyResolution practice within CSC’s Financial Services Sector, notes that loss mitigation is a complex workout through which mortgage lenders must show that they are fulfilling the fiduciary responsibility they have to investors. Whereas years ago, lenders primarily serviced their own loans along with possibly loans from an entity like Freddie Mac (the Federal Home Loan Mortgage Corporation), now mortgage providers routinely sell their mortgages on the secondary market. Thus, with many more investors, providers have a much more varied set of rules to adhere to, and the process of proving fiduciary responsibility to a wider investor base has increased in complexity.

The EarlyResolution mortgage default management system contains analytical tools, including net-present-value and loss severity calculations, that servicers can use to assess the financial impact of retention and liquidation and conduct loss mitigation evaluations across their collection and loss mitigation departments. The tools are configurable, enabling servicers to conduct financial analyses based on the needs of multiple investors with unique and varying portfolio servicing rules.

The system can be tailored to meet the needs of different types of mortgage loans. For example, Federal Housing Administration (FHA) loans may not allow particular claims, Freddie Mac may have rules in terms of the number of months a loan can be extended. The technology can also assess and review the configuration down to the state level.

In a new release, CSC has essentially added horsepower to the system in terms of liquidation and proving fiduciary responsibility when a loan reaches that point. The key component of the new release gives servicers the ability to perform financial analysis on loan modifications, short sales and deed-in-lieu-of-foreclosure solutions. That said, Schlumpf stresses that lenders have no interest in foreclosing, and aim to go the least cost route.

“If you go delinquent EarlyResolution can be used to work with you on a plan for longer-term repayment, a plan for finding what is the highest likelihood of you carrying forward with the loan,” Schlumpf says. “The goal is to get a retention plan, a promise to pay, or a repayment plan that may modify the loan or refinance. When the liquidation option arises services have to be able to demonstrate that they have looked at loss severity and net present value and at all the solutions before foreclosure.”

Reading the Tea Leaves

Moving forward, the way these technologies are being used may provide clues as to what the mortgage industry may look like once it emerges from the debacle.

An obvious side effect of the mortgage industry’s woes is that firms are looking to do more with less, notes Metavante’s Brinn.

“With the pressure they are under, lenders are looking to lower their costs, and through automation they certainly can do the same amount of work with less people and lower their costs of business,” he says.

This bodes well for vendors in the near future as the drive toward lower costs could push lenders to further streamline and automate their systems in an attempt to pare down their operations. Meanwhile, Brinn says, the current crisis may also see the rise in prominence of a new tier of players in the mortgage industry. While firms for whom mortgage lending was the primary business are now suffering, other financial institutions, for whom mortgages were only a subset of their service, are stepping up to the plate.

“As some of the leaders in the space are not in a position of strength, we are seeing community banks, money center banks and regional banks that have lagged a bit in the mortgage lending space seize the opportunity,” he says. “Banks that make money and interest margins on deposits have a great opportunity to capture market share back from independent mortgage lenders. They are saying, ‘This is our chance to really put the kind of infrastructure in place to enable us to be very efficient and very effective.’ They want to put their feet on the street so that when the industry does come back, independent mortgage lenders will have a tougher time to compete.”

Fiserv’s Jones takes a similar view.

“There are two parts to this, and one is that as there is a downturn in the industry lenders are looking at their technology platform and they are in a position to upgrade and add capabilities into their environment, where a few years ago they had so much volume they may have been saying ‘I don’t have time to think about doing anything with technology because I’m so busy producing loans,’” Jones says. “The other side is that with the sub-prime crisis and some players having exited the mortgage business, when borrowers come back they may go to more regulated financial institutions that they know and they can trust.”

He adds, “I’ve seen discussions of this in the industry though I haven’t seen any solid studies but from our own experience there seems to be good solid activity within our customer base.”

CSC’s Schlumpf notes that he has increasingly seen providers reach out to get data from a wider array of sources. They then use this wider array of data to reach out to a borrower who may be in danger of default as soon as possible.

“We are seeing more strategic outreach to the borrower. If a borrower has a possible drop in a FICO score – if the borrower is located in a geographic area where prices have dropped and foreclosures have risen; if a borrower has two new lines of credit or a broker promise – these are all signs that the borrower may have a cash flow problem.

In cases like these, mortgage providers in some cases even have their customer service departments make proactive calls to the borrower to see if they can get them on a new plan early. In other cases, providers have added tools and calculators to Web sites that borrowers can use to evaluate different and more preferable options if they are having trouble making payments.

“They might be able to reach them at a point where the customer can be retained from a customer service perspective; this might mean customer services may call you or reach out through the Web site,” he says.

Finally, Schlumpf says he is seeing more default management later in the foreclosure process as well.

“There is the legal aspect – if a loan goes into foreclosure, sometimes the borrower can pay, but the loan has already been handed to lawyers who are not equipped with the mechanisms to put the borrower back on a payment plan,” he says.

Increasingly, legal firms are beginning to enter the default management game, and add the capabilities to transition borrowers back into the system if it seems that they may have entered foreclosure in error, or their financial situations have changed.

That trend is evidenced by the recent announcement that LOGS Network, a national group of commonly owned and centrally managed law firms and trustee companies providing real-estate-related legal and title services, had launched a home retention assistance business called HEART (Homeowners Equity Assisted Retention Team) Financial. HEART Financial chose CSC’s EarlyResolution mortgage default software-as-a-service solution and will use it to recommend customized workout programs for residential borrowers whose delinquent loans have been referred for foreclosure or bankruptcy legal representation.

While this may seem simple and logical enough, in an earlier time this type of outreach would have been akin to reaching out to borrowers from beyond the mortgage grave.


www.metavante.com

www.fiserv.com

www.csc.com