Association, Fannie Mae. This article is adapted from a talk at a technology awards program sponsored by American Management Systems Inc. in Washington. Let me discuss an important trend that significantly affects our nation - one that is a challenge to Fannie Mae and other companies dealing with strategic technological advancements. One of our nation's most pressing problems during the past two decades has been the lag in the growth of productivity. The failure to improve our productivity rates has led to slower growth in real output and stagnating wages for most workers. A recent BusinessWeek article finds hope in the increased levels of investment by U.S. companies and declares that investment to be the most important economic event of the decade. Fannie Mae is one of the companies cited in the article. We have made a series of investments to totally reengineer the transaction through which lenders sell loans to us for cash. When I arrived at Fannie Mae, a lender obtained a commitment to sell us a loan for cash by calling one of our six offices. Everyone received the same price, and the average call took 10 to 15 minutes. When market prices moved, we needed 20 minutes to change our prices. Our inability to offer real-time pricing was very costly. It was obvious we could do better. We began by developing our live pricing system, a client/server system, that gives us the ability to price loans for mortgage lenders and price all the loans they want to sell us at current market prices - prices that change every minute. We then leveraged our live pricing system into Desktop Trader, a Windows application that makes it very easy for customers to commit to sell loans to Fannie Mae. We have also revamped the delivery side of the transaction by creating a central document delivery facility in suburban Washington. Lenders electronically transmit delivery information to the facility. Loan documents are delivered overnight and scanned into an image work flow system. Analysts compare the delivery data with the actual documents right there on their monitors. Payments to lenders are now made in two days rather than five. Documents are maintained in image and physical form, but we're working now with county registrars to explore eliminating the use of physical documents altogether. When that change is made, we'll be able to purchase billions of dollars of loans entirely on-line. Because of our central position in the housing finance system, our redesign will have an impact throughout the economy that will dwarf the benefit to Fannie Mae. This is an example of what I mean by "return to society" as a measurement that motivates us at Fannie Mae. Properly conceived, information systems can and should have a return to society. There are many ways in which new technologies can provide society with a return otherwise unavailable. Let me give you an example that relates to the current state of affairs here in Washington. The budget proposals on Capitol Hill would cut the funding of the Department of Housing and Urban Development by one-third. This will inevitably have a major impact throughout the nation on those programs designed to help renters or promote home ownership. As the federal government reduces its investment, it will be necessary for those of us in the housing industry to find new ways to achieve our goals. Fannie Mae is leading the way in this arena. In the spring of 1994, we announced an initiative called "Showing America a New Way Home." As part of this initiative, we have committed to finance $1 trillion of mortgages for low- and moderate-income households, first-time home buyers, and others by the end of the decade. An integral part of this initiative is our promise to use technology to reduce the barriers to homeownership. We also recognize the opportunity to reduce the high cost of originating a mortgage. The housing finance industry spends approximately $19 billion a year to originate $700 billion of mortgages - a staggering number. Even more striking is that the industry routinely loses money on each mortgage originated and must subsidize its originations with profits from servicing mortgages. Fannie Mae has made a public commitment to reduce the cost of originating a mortgage by $1,000, or 40%. Such a reduction would be the equivalent of a $7 billion annual down payment assistance program for home buyers. Reengineering the entire loan origination process is at the heart of our effort. As I mentioned earlier, independent lenders originate loans that they may then sell to Fannie Mae. At one time, Fannie Mae re-underwrote every loan before agreeing to buy it. Only recently has the authority to approve loans been delegated to lenders. We've automated this process. Earlier this year we introduced a loan decision system called Desktop Underwriter. This Windows application automated the underwriting decision by using artificial intelligence to apply the rules in our guidebooks to the facts of a particular borrower. In August, we took a step away from the approach in the guide by substituting credit scoring for the traditional rules governing credit reports. By yearend, we will completely reengineer and streamline the process in the guidebook. Using our next version of Desktop Underwriter, lenders will be able to give borrowers a loan decision at the point of sale while they wait. Documentation for all loans originated with the system will be reduced, and this new process will also cut the cost and the detail of appraisals. By next spring, the system will automatically underwrite Federal Housing Administration and Veterans Administration loans as well. In just one year, we have introduced the applications necessary to revolutionize the process of originating a mortgage. The system will not just be different. It will make better credit judgments, and it will do so more consistently, faster, with less paperwork and at lower cost for the lender and the borrower. Desktop Underwriter and other products we've announced will get us halfway toward cutting origination costs by $1,000. The return to society in this case can be measured not only in the money saved, but in the number of people who will now qualify to buy a home. Now, worrying about returns to society may come easier to us at Fannie Mae because we are a private company with a public mission. Understanding the technology and becoming adept in its use is, of course, vitally important. We must also understand the promise it holds to create changes that benefit people and society.
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