Electronic Mortgage Bottlenecks, Part 3 – Operational Processes and Risks (A manager’s view on the adoption implications of straight-through mortgage processing) -- May 22, 2007 (Also appearing in the MBA Tech NewsLink)
Lost within the grim assessment of the mortgage industry, there is a groundswell of interest and activity surrounding electronic straight-through processing of mortgages (or eMortgages in this context). Driven by the need for improved efficiencies, a reduction in errors, and an improvement in operating margins, executives and their initiative teams are quietly unlocking their own futures.
When projecting the future process and operational integration requirements, the principal focus of the typical enterprise appears to be concentrated on securing incremental but sustainable gains. Perhaps contrary to consultants and industry pundits, enterprises are keenly aware of the risks (e.g., systemic, operational, customer, and financial) associated with early or late adoption of any solution set. Coupled with a perception that standards and interoperability were still evolving, many corporate budgets and agendas lacked meaningful investment in eMortgages (especially during times of significant positive volumes).
Anthony House, MBA ResTech Committee Member states, “The future of electronic mortgage adoption resides collectively with individual organizational ability to remove the artificial barriers introduced as part of SOP legacy procedures. Information availability underpinned by well understood data ‘sources and uses’ must be made available throughout the corporate hierarchy especially to field level personnel who continually interact with the customer base.”
Nonetheless, the shift from a paper-driven, manual process to a streamlined electronic “mortgage highway” is on-going and evident. Yet with the specialization and compartmentalization of processes and operational procedures, what eMortgage solutions should be relegated to specialized providers as compared to internal staff? What risks are being implicitly accepted when choosing solutions, providers, or vendors?
Enter the “Mortgage Highway”
It is apparent for those who have begun implementing and adopting electronic mortgage processes that success is not based solely on a single application or vendor. The nuances and complexities range from data integration, security, privacy, workflows, rules-based techniques, multiple party deliveries, regulatory compliance, and of course automated and manual checks-and-balances. Experiential lessons have proven that the aforementioned categories just scratch the surface of the complexities and organizational disciplines which must be identified and internalized to ensure eMortgage rigor.
Cary Burch, President and CEO of LSSI states, “Service providers that embrace and master the eMortgage enabled process will have the upper hand when it comes to proving a transition platform for mortgage lenders. Generally, the cultural hindrances of today may not be broken and seeking out a specialized outsourcing partner that has proven the eMortgage model may be the only means to make the leap to eMortgage lending.”
Tim M. Anderson, Vice President of eMortgage Services at Stewart put forth, “Once people understand the process there actually is less risk involved in the intelligent electronic world as compared to the paper process world which can be easily forged. The great thing about a full paperless eMortgage process is that you can authenticate and validate all parties in the process, (because they go online to do their business) and record each and every event. A full eMortgage process provides total transparency and online auditing to the process. Something you cannot do in the paper world with many events happening offline, scratched, and initialed on paper documents.”
“Electronic mortgage processing is more than a back-office effort,” according to Anthony House, MBA ResTech Committee Member. “It defines the interaction from information ‘cradle to grave’ involving all parties supporting the diverse transaction types – retail, correspondent, and wholesale. Acceptance, streamlining, and adoption must be cross-division or the implementing organization’s risk perpetuating silos of inefficiencies and improper behaviors.”
In an analogous situation to the equity markets, the industry is recognizing not just a need for existing and future standards, but a demand for a ubiquitous highway of interchange what allows both large and small to openly participate. Key to gaining and sustaining access to this emerging highway is eight macro-foundational categories.
- Business Growth: What are the operating constraints and measurements that support electronic mortgage adoption? What are the success factors?
- Trading Partners: Who will be interacting with the organization (e.g., GSE’s, county recorders, MERS, Wall Street firms)? What are their access points and how does this impact internal process?
- Quality and Certification: What operating disciplines are being implemented to improve SLA’s and OLA’s? What steps must be promoted and internalized to guarantee delivery while adhering to required operating parameters demanded by “trading partner” enterprises? How will this reduce errors and improve cycle time?
- Productivity Optimized: With the adoption of incremental or broad based electronic interchanges, what will the measurable impact be on employee productivity? What will be required for sustainability?
- Customer: First and foremost, how will the adoption of electronic process improvements change the interaction with the existing and potential customer base? What should be done to secure market advantage from the changes while reducing “piggyback” competitive responses?
- Compliance and Auditing: Is the organization prepared for the discipline of electronic processing and automation of mortgage workflow which mandates adherence to rigorous processes? Who will be responsible for the review and improvement of audit and compliance reporting needs? What improvement and monitoring processes will be utilized?
- Transparency and Recovery: To meet trading partner (both upstream and downstream) accessibility to transaction content, how will transparency be achieved while meeting privacy, security, and competitive safeguards? How will this information be tracked, stored, and archived?
- Content Management: Utilizing standards and regulatory requirements as guidance, how will the enterprise deal with widespread information interchanges? Where will this information be kept including formats, encryptions, replications, archiving, vaulting, and imaging? What will it cost and should it be mined?
“Competing business divisions and operational segments that fail to recognize and share information, internal systems, and databases will fall short in the successful application of electronic mortgage processing,” professes Anthony House. “Without a common set of business drivers linked to customer delivery channels and enterprise processes, the electronic mortgage technology selection and deployment will disappoint corporate leaders.”
Collaboration and Exploitation
The challenges of adopting process changes have been made easier over the years using tools and analytical disciplines such as Six Sigma, Kaizen, and others. The baselining, improvements, and control over process and risk changes for electronic mortgage processing would superiorly benefit from their inclusion as a facilitator for successful implementation. For organizations contemplating or struggling with process initiatives, advice and experience is readily available, and may provide the change agents needed for implementation and enterprise justification.
Irrespective of the challenges, they are being overcome with the exploitation of a collaborative set of standards and information interchanges which facilitates the unfettered exchange of documents and products. While numerous research studies are discussing the need for education, training, and success stories as a catalyst for adoption, it appears that the industry downturn may be the watershed event that secures process changes and risk mitigation for acceptance of electronic mortgages.
So what are the success factors and implications to ensure incremental and sustained electronic mortgage results?
- Scope: A clear delineation of the operating parameters and organizational commitment must be defined to ensure success and incremental achievements. Each electronic mortgage project should be part of a larger program of change that is carefully integrated and planned. Not all components can be implemented (nor should they) at a single time, thus requiring pervasive collaborations among trading partners, technologists, customers, and vendors.
- Clear Benefits: While process change initiatives speak of “swim lanes,” process models, cycle times, and “as-is” and “to-be” states, they are no substitute for business valuation and organization benefits. Additionally, there must be a clear assessment of organizational readiness, resistance, and on-going support requirements.
- Repeatability: Regardless of the disciplines and changes sought, they must be repeatable and optimized for risk mitigation. To ensure transparency, auditability, and manageability of the multiple programs and vendors, there must be consistency and rigor. Additionally, stakeholders must be actively involved throughout the transformation cycle to promote adherence to plans, achievement of the benefits, and for unexpected “mid-course” business corrections or changes.
Cy Brinn, President of Metavante Lending Solutions, clearly states the opportunity for the markets, “In the short run eMortgages will cost more than paper based mortgages, so there is some financial risk. Overtime, as the technology and processes are refined the cost of eMortgages will be far lower than the cost of paper-based mortgages. Those lenders that achieve substantial cost savings will use their lower cost basis to reduce their pricing to borrowers. This will in turn increase their competitive position. Lenders that don’t achieve the same level of cost effectiveness will ultimately find that they are unable to compete and will fail to survive.”
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Indeed the complexities of process change and risk management for electronic mortgage processing are material. Nevertheless, change is underway and the benefits are beginning to become apparent not just for the early adopters, but for the industry in general. While some lament the industry shakeout that is already one year old, others believe this time of reflection and adjustment brings forth a new and sustainable call for widespread implementation. After all, one executive said, “…we’re not paving a cow path here, where creating the foundation for an electronic mortgage highway.”
Appearing next in the five part series – “Electronic Mortgage Bottlenecks, Part 4 – Industry Adoption and Justification”
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