Though still in its early stages, automated underwriting is expected to transform the home-loan transaction and the industry with it.
Loans will be cheaper and quicker to get, particularly for borrowers with sterling payment records. Many of these consumers will access lenders via computer.
Competition among lenders will become even more cutthroat, experts predict. The biggest lenders are expected to snag the low-risk customers with bargain-basement pricing, making loans even more like commodities than they now are.
Meanwhile, small and mid-sized lenders, in particular, will likely target riskier customers, whose loans will remain more labor-intensive and thus profitable.
"By some time in the near future, all you are going to do is enter a Social Security number and that will be it," said Brian Chappelle, staff vice president at the Mortgage Bankers Association.
"You will be able to access IRS data, you'll do electronic verification of jobs, of deposits," Mr. Chappelle said, and for borrowers with good credit histories, loans will follow quickly.
But before they get there, lenders will face a number of thorny decisions, experts say.
The first is deciding what kind of system to get. Fannie Mae, Freddie Mac, and several mortgage insurers are competing to sell their underwriting systems to lenders. The systems use a combination of automated rules and statistical models to gauge the creditworthiness of a prospective borrower.
With the agency systems, go marketing incentives. Fannie and Freddie will buy without recourse loans approved by their systems, and many lenders are torn between the two systems.
Second, and perhaps more challenging, lenders must figure out how to leverage the new technology, that is, use it to gain a competitive edge by changing the way they make loans.
"The technology presents opportunities," said Kevin Cademartori, vice president for strategic technologies at the Mortgage Guaranty Insurance Corp., Milwaukee. "You've got to figure out in your own organization how you are going to exploit the opportunity of mortgage scoring, for example. It's not obvious, it doesn't come with the software."
One obvious tack, Mr. Cademartori said, is to require different levels of documentation for borrowers with different risk. Thus borrowers, who are identified as low-risk by the new technology, would get a speedy approval with fewer documents to back up their financial situation.
While automated underwriting will surely pare the ranks of mortgage underwriters, Mr. Cademartori and others say human underwriters will always be needed for a substantial group of loans, which machines by themselves will be unable to analyze with precision.
Ultimately, automated underwriting could open up new markets to the secondary market agencies, which now dominate the market for A-grade loans up to the statutory limit, now $207,000.
Already, Freddie Mac has developed an underwriting model for subprime and jumbo loans in cooperation with the credit-rating agency Standard & Poor's.