The same factors that permeate the banking industry as a whole - consolidation, the inertia of heavy capital investment in last-generation technology, the daunting complexity of conversions, and the enormous risk associated with failure - are well represented in mortgage banking.

As with core systems, mortgage servicing is primarily controlled by a few key players. They, like their brethren in other sectors of the industry, are cautious about adopting emerging technologies.

In fact, even more obstacles prevent mortgage banking from moving toward new technology - obstacles related in part to the complexity of the business and to changes in the economic climate, which have dramatically altered the product offerings.

Mortgage banking is extremely complex. By the time the average loan has lumbered toward closing, the file has bulked up to hundreds of pieces of paper. Much of this bulk is due to a pronounced regulatory burden and to variation among the states in real estate lending laws.

Changes in the business climate during the 1980s further complicated the business.

The rise of mortgage securitization and secondary markets altered fundamental assumptions. In addition, mortgage banks dramatically increased their share of the market, and banks increased their focus on this business, in search of lower-risk assets.

Not all core system providers could adapt to these changes and remain competitive in servicing. Therefore servicing, like trust, has become the domain of a few niche providers.

The real question is: Are the remaining providers the last of a dying breed - or have they begun evolving into something new?

Alltel Information Services Inc. clearly dominates the servicing niche, owning more than half the market.

The mortgage division, formerly known as CPI, was acquired in early 1992. It has gained strength and depth because of its relationship with its corporate sibling, Systematics.

Alltel Mortgage has started a careful migration of its mainframe applications to PC workstations and is targeting its first new application at post-payoff processing. This is the most logical - and simplest - of the complex mortgage processes to convert to a new system.

The company has no plans to migrate all services from the mainframe platform. Instead, it will begin offering more value-added services and focus on applications that surround the mainframe processor.

To its credit, Alltel Mortgage initiated a major corporate initiative in 1993, dubbed Renaissance, that marks the company's initial movement toward client/server architectures. Reflecting its new relationships with both a bank outsourcing sibling and a telecommunications parent, this new software will include a communications network, dubbed CPI Interchange, that would link lenders, investors, and service providers on an industry "information superhighway."

Alltel Mortgage has three main strategic advantages:

*Its current market dominance and Alltel affiliation should guarantee funding for long-term, large-scale research and development.

*It has clearly demonstrated strong vision and coordinated corporate initiative in developing the Renaissance initiative and CPI Interchange product.

*Its current financial strength and market share will make it extremely difficult for competitors to steal the market.

There are three key issues that Alltel Mortgage must address:

*Products like the Renaissance workstation applications and CPI Interchange represent a real technological push, and the announcements for these products have been far ahead of delivered product. Is the company stretching itself too thin?

*How effectively can Alltel Mortgage compete as a complete utility against Fannie Mae and Freddie MAC?

*Will Alltel Mortgage become complacent with its huge market share or become so preoccupied with its new development initiatives that it falters in providing quality service to existing customers?

Data Link established itself as a robust, high-quality mortgage banking servicer in the early 1980s, but hit a bumpy period midway through the decade. It was acquired in late 1993 by Fiserv Inc. as part of the Mellon Information Services deal and now appears to be on the rebound. Fiserv has increased its investment in the product line and plans to strategically grow Data Link as a key component of its overall product mix.

Like the other players in this market, Data Link's transition to client/server technology will be evolutionary. Strategically, Data Link is bucking the trend in purposely keeping workstations out of the high-volume processing functions to minimize potential productivity impacts. A pilot client/server application is currently under way for customer service functions.

Unlike Alltel Mortgage, Data Link has no plans to enter the information superhighway business. Data Link believes that it will be difficult to compete with Fannie Mae, Freddie Mac, and the major telecommunication companies. The company plans to embrace an open-systems architecture that will connect to any of these gateways.

Data Link offers four key strategic advantages:

*Fiserv ownership adds much-needed organizational stability and financial investment to the company.

*Mortgage professionals throughout the market believe Data Link has made significant improvements in its product line over the past two years.

*Fiserv is bundling Data Link as a partner application with its various core system offerings, and this could be an attractive option for bank and thrift clients.

*Data Link has taken a pragmatic approach to product development and is focusing on making tangible income and productivity improvements to the existing product base. It has not oversold or over-promised sexy new technology solutions.

Data Link faces significant technological and marketing challenges:

*Will it be able to position itself for future growth and differentiate itself in the market enough to garner greater share from Alltel Mortgage?

*Will it be able to effectively penetrate the thousands of existing Fiserv bank and thrift clients who are now handling mortgage servicing in other ways?

*It plans to shift to a platform independent product. Can this strategy be pulled off within a reasonable time and cost?

Lomas Information Systems, like Data Link, was hard hit by the climatic changes of the 1980s. After a few years of near hibernation, Lomas was recently purchased by Prudential Insurance through its Clayton, Mo., subsidiary, Residential Services Corporation of America. Lomas was subsequently renamed Residential Information Services.

With this new financial backing, Residential Information Services was once again ready to compete as a long-term player in the industry. However, uncertainty about the future has again arisen since the announcement by Prudential that it is selling its entire mortgage operation, including Residential Information Services.

Residential Information Services may be still positioned for a resurgence. Key advantages include:

*Synergies are possible with other companies within Residential Services Corp. of America.

*The company has made a strong commitment to workstation migration, and has developed both claims tracking and point of sale applications using state of the art Power Builder and SQL Server tools.

Residential Information Services is confronted by three major challenges:

*Has the past hibernation period created too great a functionality gap between what it now offers and what its competitors are offering?

*Will the company's focus on providing a flexible, event-driven design and complementary workstation applications be enough to attract new customers?

*What will the future of Residential Information Services be after sale to an acquirer?

* * *

Don't expect revolutionary new systems in mortgage banking for two reasons: There are no potential competitors with any stated intention of developing a new mortgage servicing system, and the complexity of the business may make it cost-prohibitive to build a system from the ground up. Overall, you can expect to see the following trends persist through the 1990s:

*PC and client/server development will initially be focused on mortgage origination systems. The first Windows versions of these applications are scheduled for beta testing during 1995.

*Innovative mortgage banking leaders, such as Countrywide, may try to compete with the handful of established outsourcing players. With its current technology leadership, an organization like Countrywide could be a major threat as a new entrant.

*The bulk of productivity improvements in servicing will come from incorporating work flow applications like Lotus Notes into existing systems. Currently, no providers offer a seamless, plug-and-play version of this type of groupware.

*The battle for building the mortgage information superhighway will be heated for some time. Expect no clear winner for at least three years.

The mortgage servicing industry consolidation will continue, and the bulk of loans will still be serviced by the major, big-iron providers for at least the remainder of this decade.

Ms. Seymann is president and chief executive of M One Inc., a Phoenix- based consulting firm specializing in bank management and technology. Mr. Williams and Mr. Faulkner are managing directors.

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