The Dawn of the Wall Street Influence on the Mortgage Industry -- November 29, 2006 (Also appearing in the MBA NewsLink)

It was early in 2005 when a MBA article brought up the prospects of potential “Giants in the Canyons” discussing new industry entrants, their impact on back-office operations, and a fresh perspective for the digital integration of a fragmented origination and servicing industry.  As the 2006 enters its twilight, it appears that indeed those non-traditional market influencers and partners have now come to be competitors. 

Fueled by an increasing demand for high quality MBS’s (mortgage backed securities), the Wall Street firms using their private label products now account for nearly 30% of all outstanding MBS’s (per the FDIC, securitization in 2005 comprised 68% of all residential mortgages).  Investor demands for increased yield MBS’s has materially contributed to a number of highly visible mortgage M&A events in 2006 -- contributing to a record worldwide global M&A activity that exceeds $3.3 trillion for all industries.

Recognizing the returns and efficiencies that can be gained by increasing vertical channel capabilities, Wall Street is broadening their impact on market makers and delivery organizations with an accelerated embracing of e-mortgage processing.  Analogous to the STP (straight-through processing) and T+3 / T+1 (trade plus settlement days), investment and international banking operations recognize the bottom line returns that can be achieved using best-of-breed processes, highly automated exchanges, globalized workforces, and information standards. 

Armed with lessons learned, M&A integration models, and aggressive performance targets, these recently purchased mortgage operating environments may represent the “catalyst for innovation” necessary to break the old paper-based and document scanned back-office operations.  After all, Wall Street is no stranger to change, risk, controversy, and adaptation.

Whereas these new challengers’ present unknown risks for established mortgage firms, opportunities exist for those willing to quickly assimilate their transformational and experiential lessons learned.  Even though the mortgage industry has been dominated by stove-piped internal operations and serialized processes, the entry of these formidable competitors provides the industry with some discrete actions:

1. Innovation of the Back-End Value Chain to radically reduce the time-consuming serialized processes, information reentry, and integrated information systems.
2. Reducing Settlement Time using e-mortgage standards to accelerate post-closing to days from the current weeks and months thereby improving MBS availability and reducing outstanding lines of credit.
3. Incorporating Regulatory Compliance and Reporting into a by-product of the delivery chain from origination through MBS avoiding “one-off” efforts that add time, inefficiencies, and increase risks (e.g., error processing, exception handling, and inaccuracies).
4. Use of Industry Standards from the lessons of the bond and equity markets, increased implementation of MISMO, PRIA, and ALTA standards to promote system interoperability, securitization, and cost reduction.
5. Custom Tailored Customer Service will be the norm expanding farther down into the middle market customer base and well beyond just the “affluent” borrower.  It will not just be about automated call centers and VoIP implementations, but a truly customizable experience that “locks-in” customer continuance for an industry that is now viewed a commodity.
6. Technology Must be Part of a Holistic Solution able to bring about compartmentalized changes to facilitate organizational change, continuous improvements, and incremental gains.

The market is set for a radical disintermediation.  As the current acquisitions by the Wall Street firms have been concentrated primarily around the non-prime niche, one should expect major announcements in 2007 and 2008 in the prime segment as these pioneer players expand their product line and seek new investment opportunities.  After all, while the M&A activity within the mortgage industry has been limited and buyers seek improved deals, the projected Wall Street acquirers have built highly efficient and profitable organizations on finding, leveraging, and integrating diverse financial products into a comprehensive customer portfolio.  It’s just a question of who is the next acquisition and how the mortgage industry will respond to the changes?

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