Investments in technology are required to remain competitive in today\'s mortgage industry.

1. The
Summit Point
Group
Creating a Strategic Checklist for the “New” Mortgage Industry
The path to the future may have changed, but technology will still be critical.
Once upon a time, the “future” of the mortgage transaction seemed perfectly clear. A
consumer would contact a lender, providing some basic personal and transactional
information. Then, in a matter of days - or even hours - all processing would be complete.
The closing would then be scheduled, and the loan officer or advisor would provide the
customer with a wide array of loan program options tailored to the customer’s profile and
circumstances, enabling him or her to select the best possible loan program terms.
Making use of established standards and an extensive network connecting data sources and
service providers, everything that would be needed to process and close the mortgage would
be available. The borrower’s identity could be validated by SSN or driver’s license number
and qualified income established by a link to payroll, employment, or IRS databases. Credit
data from the repositories would be evaluated and scored and the subject property value
established via automated valuation model, with appraisals ordered for properties that could
not be valued with an appropriate level of certainty. Assets would be identified and valued
via direct links to financial institutions and title, taxes, liens, and other information
accessed via a networked “clearinghouse.”
In addition, advanced technologies using other data sources and models would further
evaluate the transaction, providing the loan officer or processor with additional information
and guidance. Business rules engines would evaluate and validate all data and terms,
flagging missing items or those needing additional attention. Risk engines would evaluate
risk attributes and score the transaction, with risk-based pricing attributes applied by pricing
engines. Loan programs would be dynamically constructed and priced by best-fit
technologies. Loan offers could be tailored to match the profile, needs, and desires of the
borrower, and priced according to transaction and risk attributes. Fraud risks would be
identified by intelligent systems that would access databases of detailed information about
the loan officer, lender, property, and the like. The overall approval would be provided by
automated underwriting engines, providing documentation and processing requirements
while flagging loans that might require further human review.
The advantages and benefits of this new world were unmistakable. Use of independent third
-party data to establish the loan transaction would avoid mistakes and practically remove
any chance of origination fraud. Business rules engines would replace many human activities
and provide significant efficiencies, while insuring consistency and accuracy and removing
any bias. Lenders could reserve their human resources for only those transactions that were
identified as requiring exceptional processing or a second look. Risk models used with rules
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2. Page 2 Creating a Strategic Checklist for the “New” Mortgage Industry
engines would accurately assign transaction risk attributes and enable flexible loan programs
that could be precisely priced according to terms and risks. The investment value of
securities with mortgages as collateral would increase due to the rich data model and
transparent value/risk-based pricing. And the consumer would “win,” with a mortgage
process that was quick, easy, flexible and fair. Borrowers that truly deserved and could
afford a mortgage could easily get one with terms that matched their profile and
circumstances.
That was the vision only a few years ago. Now, fast forward to today. The dream of an
efficient mortgage origination process and healthy secondary environment has been seriously
side-tracked. The number of major investors in the market for new originations has
dwindled to two – Fannie Mae and Freddie Mac. Other “investors” are chasing pools of non-
performing or troubled mortgages. Fully documented loan packages with manual processing
and underwriting have returned for all loans. Automated underwriting is now about whether
Fannie or Freddie will buy the mortgage. MERS is under attack by courts across the country,
as millions of loans enter foreclosure. Mortgage technology innovation seems to be stifled,
with resources instead focused on responding to the myriad of new legislative and regulatory
rule changes. Technology is even under attack, as commentators would have us believe that
technology enabled or even caused the current industry crisis. And consumers have seen
their borrowing options shrink significantly, with many blocked from getting new loans due
to hefty loan level price adjustments applied to new originations.
So the question; if we had reached the future-state vision before 2005, could we have
avoided the melt-down of the last few years? The answer: possibly . . . and possibly not.
 Use of third party employment, income, and asset data to establish the mortgage
transaction could have avoided fraudulent applications; NINA programs and paper
documentation, probably not . . .
 Affordability and risk models could have disqualified borrowers for loans that they clearly
could not or would not pay; manager overrides (approvals) and flawed models based
upon transaction loss rather than borrower payment performance, probably not . . .
 Property databases and rules engines could have identified multiple transactions for the
same property, quickly inflated prices, and owners of multiple properties; appraisal-only
(and sometimes duress-based) valuations, probably not . . .
 Full transparency into transaction data and various value/risk attributes could have
helped analysts more accurately value collateral and thus the securities. Of course,
even the best valuations would not have stood in the way of excessively aggressive
practices.
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3. Creating a Strategic Checklist for the “New” Mortgage Industry Page 3
The next question is “where are we going from here?” Unfortunately, the future is far from
being predictable. With so many variables at play, even a best guess could be far from the
ultimate reality. The only reasonable approach (which is at best, cloudy) is to study what is
happening today. The continued existence of Fannie Mae and Freddie Mac is likely limited.
While often controversial in their reach, Fannie and Freddie helped to set standards in risk
assessment, processing requirements, documentation, forms, data, and transactional
standards. They were active (financial) sponsors of MISMO and MERS, and were highly
responsible for the adoption of technologies by the mortgage industry – automated
underwriting as an example. They spent hundreds of millions of dollars in these areas and
their exit will surely leave a gap. The Consumer Financial Protection Bureau is still under
development, but with substantial powers, it will clearly impact how the mortgage industry
does business. Already within its future purview are long-discussed consumer disclosure
changes and the definition of the Qualified Residential Mortgage (QRM). The roles of FHFA,
HUD, FDIC, and other governmental entities in policy development and enforcement remain
in place, pending future legislation and administration actions. FHFA has driven HVCC
adoption and FDIC continues with policies that effectively block covered bond issuance.
Congress continues to debate legislation that will determine the future of the GSEs and
mortgage industry methods and practices.
While the above list is not anywhere close to being exhaustive, these topics alone
demonstrate that the future will be one of transformation. Unfortunately, due to the chaos
of the last few years, innovations in mortgage industry methods and technology have stalled.
While the GSEs recently re-engaged on data standards, adopting and sponsoring MISMO
transactions for delivery and appraisal, other areas of their domain seem to have taken a
step backward; Desktop Underwriter and Loan Prospector are no longer industry utilities, but
simply tools of delivery for Fannie Mae and Freddie Mac – thus the move to broad-based
manual underwriting. Broad sponsorship of data standards by mortgage lenders is non-
existent. A quick scan of the MISMO subscriber list identified less than 15 lender subscribers.
The secondary/securities market for non-conforming mortgages is almost non-existent.
There have been only two issuances of jumbo securities in the last two years by the same
issuer; and Fannie Mae/Freddie Mac delivery eligibility is due to contract later this year.
Looking at the current environment, a few conclusions may be reached. The pace of change
will accelerate before the industry reaches any level of stability. Changes in origination
methods and loan programs that provide the flexibilities that borrowers need will not be
abundant. The industry standards, methods, and technologies that could reduce risk, bring
efficiencies, and improve lending overall for the consumer and the lender will not evolve as
broad-based offerings in the near future. The mortgage industry that was envisioned only a
few years ago will not emerge for years to come. As a result, intelligent use of technology
will once again emerge as a differentiator for industry participants.
Assuming that the above conclusions are anywhere close to being correct, this writer
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4. Page 4 Creating a Strategic Checklist for the “New” Mortgage Industry
believes that there are technology priorities that mortgage lenders should be looking at
today.
1. Ensure that loan origination and processing systems have the ability to capture
and store all data related to the mortgage transaction, including credit trade
lines and all appraisal data fields; the direction is for more data, not less, as
reporting requirements expand.
2. Buy or build enterprise-level business rules capabilities; BRMS solutions will
expand capabilities, support rapid change, and offer new efficiencies required to
meet changing markets, new rules and regulations.
3. Evaluate using best-in-class providers of mortgage related services for flexibility,
quality and value.
Investments in new methods and technologies are required to maintain flexibilities that will
be demanded to remain competitive in an industry that is poised for a period of rapid
change; put them at the top of your “strategic checklist.”
About the author: David Coleman is Managing Director of The Summit Point Group, a strategic management
and technology consulting firm. He is an accomplished mortgage industry executive with more than 20 years
of demonstrated success developing and executing strategies for major business and technology initiatives,
turn-around transitions, and operational start-ups. Prior to founding The Summit Point Group, David served
as Vice President of Technology at Fannie Mae, where he led strategic business and technology planning. His
accomplishments while at Fannie Mae included the development and roll-out of Desktop Underwriter.
davidcoleman@thesummitpointgroup.com
Copyright © 2011 The Summit Point Group www.TheSummitPointGroup.com