Electronic Mortgage Bottlenecks, Part 4 – Industry Adoption and Justification (A manager’s view on the adoption implications of straight-through mortgage processing) -- May 29, 2007 (Also appearing in the MBA Tech NewsLink)
It was just a short year ago that as an industry we were locked in a standards debate with sides being drawn and articles being written. Today, that particular debate has faded and it is being replaced with the question of “how can we implement the standards and move the industry towards widespread adoption?”
Don Iannitti, founder and CEO of Document Systems Inc., “We’re definitely ready to deliver fully electronic mortgages. Our technology is mature and tested, but we see no signs that the industry is ready for sustainable adoption at this point. While investors are now aware of the benefits, the industry drivers are too far removed from the closing table. There must be a clear incentive for wholesale lenders and mortgage brokers to change their operations. We’re not seeing that yet. We’ve been able to deliver closing documents electronically for years. We have the largest client base in the industry and we’re not getting the requests.”
While the intrinsic merits of electronic mortgages are readily apparent, it is the rationale and implications for corporate adoption that appears to vary widely and be contingent upon the organizational culture. Is it simply a matter of justifying the holistic merits or is it something more sorted, dealing with competitive positioning, internal politics, and even personal gains? It runs the gambit with each organizational rationale and timeframes, tuned to the perceived value and return associated with sustainable adoption.
According to James Hennessy, Managing Director, Capsilon FSG, Inc., “To survive, lenders and others along the value chain have to find ways to control the costs associated with manufacturing loans and bringing them to the capital markets. Dealing with electrons over paper is a highly meaningful way to start, and can result in immediate lift of 30% or more in efficiency.”
Anthony House, MBA ResTech Committee Member echoes, “There are roughly 1000 discrete informational elements within the mortgage life-cycle that must be managed, optimized, and automated. For electronic mortgages, the sources and uses of this information has the potential for disintermediation of the traditional operational and delivery channels. However, the challenges remain within the enterprises to recognize and execute on the stated benefits with realistic and pragmatic plans of attack.”
No Longer in the Hands of Technologists…
There is a general awaking among managers and organizational executives, that the electronic mortgage standards and commitment are no longer just about technology. The debate has matured into one surrounding profitability, operational excellence, and a reduction of risks (i.e., systemic, operational, and customer). Whereas many pundits argue that the foundational elements needed for adoption have existed for some time, it is the applicability, and dare we say, the increasing choices available which are prompting C-level interest.
Tim M. Anderson, Vice President of eMortgage Services at Stewart, was asked what is the biggest compelling event or set of events that has or will promote industry including Wall Street firms’ acceptance and implementation? “MERS eNote Registry and Investor eDelivery were critical, but getting the major investors that are buying loans today to begin buying eNotes will be the single most important factor to rate of adoption and success.” Cy Brinn, President of Metavante Lending Solutions, interjected that successful adoption will be spurred by “GSE’s and other major secondary market investors making adoption mandatory or offering meaningful pricing advantages. The secondary market could play a major role in accelerating adoption.”
“While the GSE’s are making a major push for eMortgages, there are no definitive reasons that will force mortgage lenders to make a comprehensive transformation to eMortgages,” continues Cy Brinn. “That being the case, it will take at least several more years for the transformation to reach ‘terminal velocity’ and several years after that for the majority of the industry to make the investment needed to participate.”
Does the secondary market and reduction in errors / buy-backs have any material impact on speed of adoption? Tim Anderson states that “Yes, and a very big case to substantiate on the value of SMARTDocs. Additionally, the ability to create self validating docs, where you can put business intelligence right at the doc level, will be a huge factor once this is understood. At point of data entry on the document you can allow (soft edits) or stop, (hard compliance edits) right there in processing without having to go to another system, (and time) to validate the data on the document. The logic is contained within the document rather then having to take the separate step and cost of running it through a separate validation engine.”
“Information must be managed holistically within the enterprise databases,” says Anthony House. “Often times, management of data and the decisions made take place in far-flung locations resulting in elongated decision making, erroneous conclusions, and an inability to realize faster cycle times. Mortgage organizations who fail to grasp the totality of the standards proposed will incur a greater costs basis and marginalized operating results.”
- Beyond the Committees: To date, there is a perception that the loin’s share of work and media coverage has been concentrated around the standards and committees. To spur acceptance, there needs to be a material shift in coverage and promotion to that of implementation, education, and communication. There are many parallels that can be drawn from “sister” industry segments (e.g., equities, currency exchange), but for mortgage executives and team leaders, there needs to be a realization that it’s more than just standards and committee involvement.
- Risk Mitigation: Organizational leadership is now accepting the reality that the deployment of electronic mortgage processes and solutions can provide a potential reduction of operational rework and risk. This has caused an exploration into the use of established electronic methods and techniques to lessen not just exceptions and rejections, but also an effort to stem buybacks and lesser quality portfolio holdings. These efforts are still evolving, albeit promising, as an implication of the discrete rationale surrounding electronic mortgage adoption.
- It’s about “Building Blocks:” Unlike the turnkey solutions of the past for point based applications, there is a growing acknowledgement that to reach a sustainable electronic mortgage steady state, many components must be properly aligned and flawlessly delivered. As a result, it has become imperative that a “pragmatic best-of-breed” approach must be selected and integrated using standardized exchanges, interfaces, and workflows. For many implementing firms, vendor and product due diligence and survivability will become more important than prior evaluations.
- Personnel and Advisors: From all indications, we are shifting from a prototyping mindset surrounding electronic mortgages to a more mainstream and production sustainable delivery environment. Consequently, as the implementation needs shift, so will the required skills of personnel and advisors involved in establishing strategic and tactical directions. As we change from a conceptual architecture and delivery approach, specialized and pragmatic skills will be required. Additionally, emphasis will naturally be shifting to performance metrics, benchmarking, SLA’s, and operating costs as the electronic mortgage processes and technologies are integrated into the corporate budgets and dashboards.
James Hennessy continues, “However, before the industry can be sufficiently mature for eMortgages, it needs to get paperless by adopting “nearly eMortgages -- that is paperless during origination and delivery to investors, but carrying blue ink closings and conventional recordings. Far from being all or nothing, eMortgages would be viewed best as an evolutionary development. Borrowers, lenders and investors all can benefit by making the process as paperless as possible, even if some aspects remain traditional.”
Crossing the threshold into the Production Mindset
As we know, during the last eight years, many people and organizations have discussed and debated the merits of electronic mortgage end-to-end processing. Historically, organizations have “stuck their toes in the water” by forming internal committees, attending conferences, and even piloting this with customers and trading partners. However, the critical mass of volume and acceptance was not reached.
“The industry is already experiencing one important challenge that has to be mitigated for the success of electronic mortgages and that is the preponderance of origination by mortgage brokers - somewhere around 65% of the transactions. This means that in order to get real adoption, brokers have to be included in the process. Transactions created directly by lenders are more readily controlled and new paradigms are implemented at the will of management. Wholesale is a different story, as brokers tend to do what is familiar and comfortable, and that makes radical change difficult to mandate,” adds James Hennessy.
Even though some have declared the past electronic mortgage efforts a “non-starter,” what we are indeed experiencing is a maturity of thought, collaboration demands, and implementation pragmatism. The level of visibility and discussion has now reached into the executive offices and board rooms in meaningful ways as they ask and expect answers to these universal questions:
- How can electronic mortgages increase operating margins and boost profitability?
- What technologies will be needed, can it be supported, and what will it cost (initial and on-going)?
- What do our customers need and how can this serve them better, while promoting cross-selling, improving retention, and being easy-to-use?
- Who will be impacted and what are the operational processes that must be changed?
- How long will it take? Do we have the experience to define and realize the goals and objectives? Can it be done incrementally? What are the dependencies?
- When can we expect financial, productivity, or quality benefits to be realized? What confidence level is associated with these projections? What if it fails?
- What contingency plans must be adopted? What risks will be assumed or mitigated during this adoption process? Who has accountability and responsibility?
Interviewees were asked what due diligence should be performed to safeguard against improper actions (i.e., adoption of partners, technologies, processes, education, etc.)? Tim Anderson replied, “Pick one of the few real players that have been involved for sometime in the process and already have made the financial commitment and investment to develop lasting solutions. Make sure they have good, documented process flows and the legal backing and expertise to not only rep and warrant the current process, but the ability to keep it updated as this catches on. This is a technology that is going to be updated by every attorney general and governed by multiple legal compliance regulations. Therefore, you are going to need a long term partner that not only keeps the software updated, but is probably one of the biggest internal users / own customer of the solution (such as title organizations).”
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“Loan buy-backs have become a significant threat that all lenders are taking very seriously,” says Don Iannitti. “While taking the paper out of the process allows us to significantly reduce errors due to re-keying, lenders do not seem to be seeing the eMortgage as a risk mitigation solution to this problem. Financial incentives from the secondary market could push the industry into adoption, but we’ve seen no evidence that the market is willing to provide those incentives. Therefore, the primary driver will be the consumer. Eventually, borrowers will demand that the loan needed to build the addition onto their home should be as easy to get as the lumber is to buy from Home Depot. When that happens, lenders will move forward with eClosing and eSigning and the paper will go away.”
To date, industry adoption is often associated with “motherhood and apple pie.” It’s not. It’s about business and how the adoption of repeatable and structured processes can be utilized to tangibly realize financial performance. This business reality is finally setting in and the results are encouraging, spurred by reviews of prior initiatives and success stories. In 2009, when we look back and assess what the turning points were that accelerated electronic mortgage adoption, industry professionals may just conclude that in 2007 we injected business value and operational excellence into a good technical framework.
Appearing next in the five part series – “Electronic Mortgage Bottlenecks, Part 5 – Consumer, Security, and Regulatory Consequences”
For 2008 MBA entries, click here