Computerized underwriting systems, which cut from weeks to days the time it takes to close a loan, are also opening up competition in the mortgage business. The systems are giving small lenders the tools that the giants of the mortgage business have long had access to, said Scott Cooley, founder of Contour Software Inc., one of the largest providers of software to mortgage originators.
Several of the largest private mortgage originators, such as Norwest Mortgage Inc. and Countrywide Home Loans Inc., have successfully used their own versions of automated underwriting for several years. But in the past two years Freddie Mac and Fannie Mae have launched versions that have had far-reaching impact throughout the rest of the industry, not least because between them Fannie and Freddie dominate the purchase of mortgages for resale as securities to investors.
The spread of automated underwriting is among a host of technological advances that many forecast will spur consolidation in the industry. "We'll see wholesale firms and securitization firms become one" to take advantage of economies of scale, Mr. Cooley predicted.
Freddie Mac says that its Loan Prospector system, introduced in November 1995, had 700 lenders using it as of July, and that it is being used to score more than 1,000 mortgages a week. The agency claims Loan Prospector cuts closing costs by $300 to $650 per loan.
Fannie Mae reports similar results with Desktop Underwriter. As of June more than 1,000 mortgage originators were using the system to process an average 10,000 transactions per month, it said.
Freddie Mac said its Loan Prospector uses statistical methods to forecast the creditworthiness of a prospective borrower with "consistency and accuracy no human underwriter can match." Mortgage bankers feed in financial information and the computer builds a prediction based on how similar loans have performed in the past.
"The majority of applications are classified as acceptable risk, making the loans eligible for immediate sale to Freddie Mac," the agency said, while the remainder get referred back to the originator for a closer review, along with guidelines for improvement.
The agency estimates that widespread adoption of automated underwriting will save borrowers $2 billion a year in closing costs and move some borrowers out of the subprime market and into conventional mortgages, saving them up to $100 million in annual interest payments. From originators' point of view, such systems helped them handle this year's giant refinancing wave without adding significant staff. Fannie Mae said that since automatic underwriting was introduced in 1995, it has resulted in a 14% increase in productivity, measured by total yearly origination volume divided by mortgage banking employment.
Roger Conley, Fannie Mae's vice president of technology marketing, said that "one-quarter to one-fifth of our new loans get verbal verification of employment," instead of via a pay stub or W-2, as was needed in every case under the old method.
"Now you can fill out an application and send it to Fannie or Freddie, and four minutes later it comes back" with an evaluation, said A.W. Pickel, president of Leader Mortgage Co. in Lenexa, Kan., who has served as chairman of the National Association of Mortgage Brokers technology committee.
The power of automated underwriting extends beyond just grading loans. Cameron King, executive vice president of the electronic commerce division of Countrywide Home Loans Inc., said his company's integrated system allows it to track and grade each loan from the first contact with the customer through the automated underwriter and into securitization.
Mr. King said that cuts the costs of protecting the pipeline of expected mortgage originations from changes in interest rates, "which can mean a lot of money."
