As we approach the millennium, mortgage banking is revving up for the information superhighway. Automated underwriting, credit scoring, artificial intelligence, interactive on-line services, and other new technology will help the industry work smarter, cut costs, and serve borrowers better.
However, to remain competitive as it prepares for this wired world, the mortgage banking industry should engineer new electronic systems and strategies so players can adapt quickly to a changing market.
New technology, such as the automated mortgage underwriting systems implemented by Fannie Mae and Freddie Mac, and other electronic innovations that are sure to follow among large lenders, will work best for the "plain- vanilla" borrower. Loan applications that fit the usual criteria, easily scored and approved, will remain the most profitable for mortgage bankers.
Whether automation incorporates rulemaking or involves credit scoring, the real industry challenge will be to develop systems that can handle the borrower who defies traditional underwriting.
Mortgage bankers should take into account the fact that economic and social trends are altering borrower profiles.
Conventional underwriting rewards the consumer for employment longevity, earned income, savings, home equity, a low debt ratio, and a solid credit history. Yet, the economic and cultural factors that shape our life today - corporate restructuring, entrepreneurship, two-income families, one-parent households, ethnic and cultural diversity - have changed these traditional borrower demographics profoundly.
Corporate layoffs continue as companies seek to strengthen balance sheets and boost stock prices. The number of temporary workers at American companies has ballooned from 500,000 in 1983 to nearly two million last year.
In a September 1994 survey, Link Resources Inc., a New York research and consulting firm, reported that more than 43 million Americans, or roughly one-third of the work force, were working at least part of the time from a home office. Of that number, more than 12 million people were primarily self-employed, the survey said,
Nearly half of all marriages in 1992 were dual-income partnerships, compared with one in four unions in 1963, according to a recent study by the University of Wisconsin and the University of Michigan. Wives contributed an average of 36% of the income in dual-earner families and were the prime breadwinner in 43% of these families, the study said.
In addition, with affluent baby boomers now spending money on children of their own, consumer debt continues to mount as a percentage of income.
Job interruption, self-employment which may skew income levels and cause a credit glitch, dual-income families reduced to one wage-earner, high debt load - all of these characteristics may fit today's consumer at some point. These trends will only accelerate, as global competition and individuals' concerns for quality of life make a decades-long career at one company a relic of the more secure past.
Future lending patterns, and the technology that supports them, will need to address this shifting profile of tomorrow's consumer.
The industry also will need innovative strategies for community lending, another area which does not easily fit high-tech procedures and fast credit approvals.
Different ethnic groups and new immigrants, those who don't save in traditional ways and have no demonstrable credit histories, may be creditworthy but are woefully underserved. Mortgage banking must find the skill and knowledge to reach out to different cultures with growing economic clout, or bankers will miss an important market.
At the same time, the challenge will be to avoid erring to the other extreme. When assessing creditworthiness, mortgage bankers should continue to distinguish between underserved and undeserving. The focus should still be on making good loans, even as the industry pioneers technological frontiers and seeks to build volume in today's difficult business climate.
Overall, new industry technology must embrace a changing marketplace. The competitive solution may be to examine the underwriting operation to allow the exception rather than reinforce the norm. Certainly, mortgage bankers will need smart, well-trained underwriting staffs who can work with customers and realize the potential in a conventionally risky profile.
These same challenges also must be met by firms that provide services to lenders. Those of us in the mortgage insurance industry, for example, should be as knowledgeable about new technology and innovative practices as our clients. We also will need to monitor and assess industry changes, to assist mortgage bankers in meeting strategic goals.
In terms of future growth, the application of new technology will not be completely effective if mortgage bankers base their systems on old assumptions. Pure automation is not a panacea. Planning for rapid change in an unpredictable business climate involves something that predates cyberspace: smart business thinking.
Mr. Brafman is president and chief operating officer of Amerin Guaranty Corp., Chicago, and a former regional director of the Office of Thrift Supervision.