There is a bold technology transformation underway in the mortgage lending industry that some sources contend will reduce costs of mortgage origination. This is good news for bankers, who are always interested in new ways to increase shrinking profit margins and step up market share.
Regardless of their size, banks today face increased bottom line pressures due to rapid industry consolidation, a glut of mortgage lenders, and a growing number of sophisticated, rate-shopping customers. These bank lenders, faced with the harsh reality of limited capital and personnel, are confronted with tough choices when deciding how to invest their technology dollars-and what technology providers to work with to achieve the right system.
Given the current market conditions, bankers who invest wisely in leading-edge mortgage origination technology could stem losses associated with the business. Nationwide, continued consolidation has resulted in 40 percent of loans originated in 1996 being done so by the top 25 originators, according to recent statistics. Meanwhile, mortgage loans continue to be originated at a big loss. The average firm, according to the Mortgage Bankers Association of America's 1995 Cost Study, sustained a loss of $1,030 per loan, due to production expenses of $1,773. Contrast that loss to a 1995 warehouse and marketing profit of $667 and a $99 servicing profit per loan.
how tech can up profit margins
Help may be on the way for the mortgage production function, with its historically high costs, manual inefficiencies and frustratingly long cycle times. This assistance comes in the form of a new generation of loan origination technology. A growing number of technology vendors, including Alltel; FIS, Inc.; Fiserv; FiTECH Systems; Gallagher Financial Systems, Inc., and MortgageFlex Systems, Inc., have-or are currently-entering the marketplace with new loan origination systems (LOS) that claim to target four key issues critical to lender success: higher loan volumes, lower costs, more productivity, and faster cycle times.
Functionally, most of these systems cover the entire origination process, from point-of-sale through post-closing, including secondary marketing. Technically, these vendor offerings don't look at all like their predecessors, incorporating many new, advanced features such as Microsoft Windows-based graphical user interfaces, client/server design, automated workflow and task queuing, open architecture, relational databases, customization tools and fast links to the most popular automated underwriting systems. Clearly, that's a lot of whiz-bang technology, but how will bankers' businesses profit from these new LOS systems?
According to John Wolf, executive vice president, Alltel Information Services, Jacksonville, FL, the industry has begun to diversify its origination channels; leaders are creating controlled business arrangements, telemarketing, and affinity channels because these channels are more cost effective than the traditional loan originator channel.Consequently, Wolf believes these new channels are too complex for older, simpler systems.
To address this, Alltel has developed InterAct, a mortgage origination product that Wolf contends has three benefits for bankers: controls-oriented EDI integration, automated workflows, and strong support for newer, less expensive, origination channels.
But every banker fears that with new technology comes the threat of greater training requirements for users. Not so, says E. Lester Dominick, president of MortgageFlex Systems, Inc., based in Jacksonville, FL. "There's the perception that Windows-based products are easy to use. Bankers can reduce their training expenses while putting more power in the hands of users," he says. Further, bankers should be emphasizing data- mining and cross-selling capabilities. Dominick, whose company developed a new product called LoanQuest, argues that data must be very easy to get at, hence LoanQuest. The system enables bankers to store information in relational databases; in turn, this easy-to-access data means bankers can use the information collected about customers for bank-wide, targeted cross-selling opportunities.
Even so, asking branch tellers and loan managers to sell multiple products necessitates technology that is truly user friendly. One of the greatest benefits in a bank branch is ease of use, says John F. Saelens, senior vice president of Fiserv Mortgage Products Division in South Bend, IN. Fiserv's UniFi Loan Origination System has point-of-sale features that are easy to use, so tellers are not intimidated by the new technology. This allows banks to bring in more mortgage and consumer loan business from walk-in traffic. Another benefit, he claims, is the opportunity for back- office reengineering. Saelens says that bankers have the opportunity to use the new software flexibly to conform with the reengineering vision of a bank CEO, allowing the organization to "think outside the box."
Lenders are slowly beginning to sign on the dotted line for these new systems. Why? A number of business reasons. When asked what benefits the company hopes to achieve, Fred C. Johnson, president of Plymouth Mortgage Company, a subsidiary of Plymouth Savings Bank in Middleborough, MA, says, "First, to increase the origination volume per mortgage officer; second, to give us a tool to attract experienced loan officers; and third, to achieve a new standard of three-day loan approvals, not just as the exception, but as the rule." He sees the three-day approval achievable not solely from a systems perspective (the mortgage company recently purchased Alltel's InterAct), but in conjunction with electronic links to automated underwriting and credit bureau systems.
the mandate is to reduce costs
Another requirement for bank mortgage lenders, according to Johnson, is to further reduce costs. "Lenders still work off of a standard of one point in revenue per loan. One point has to be set as the bar to get under for your production expenses. With a new system, increased volume will help, but automation and automated underwriting will mean fewer loans will get sent to underwriting, and the loans can be handled by less costly individuals," he says.
The migration to a new generation of loan origination systems, however, is definitely not without risk. Technology providers will be sternly challenged to deliver and support more sophisticated technology to their new customers while migrating their current customers from older platforms. Bankers will be confronted with learning new skills required to manage the client/server, network computing and Internet environments. Saelens believes there are two big risks for bankers: undersupporting the installation process and deploying inadequate hardware. "The installation process has to begin from the top. The installation requires a full-time dedication of resources; one or two business types and one or two technical people, for three to four months in order to implement the CEO's vision successfully," he says. But perhaps the biggest risk to bankers is a lack of controls. "The business has become very complex with product definitions, underwriting, and fair lending. The days of simple origination systems are past. It will take a bigger commitment by lenders to operate new systems and it will require more controls," says Wolf.
Despite unrelenting financial and competitive pressures, it appears likely that the lending industry is rapidly moving toward highly automated and electronically expedited loan approval.
James D. Jones is president of First Wellesley Consulting Group, a Massachussetts-based firm that assists mortgage lenders with technology, strategic planning and operational improvements.
