Credit technology for streamlining mortgage originations is here, and further improvements will come rapidly.
Institutions that don't act now will be left on the fringes of the industry or, worse, forced out. Those that make the necessary investments will be positioned to dominate their chosen markets.
Most of the technology focus so far has been on cost reduction and service improvement. These are certainly major competitive issues, but this focus ignores other fundamental issues and opportunities that technology will create for both large and small players.
The most fundamental change will be the transformation of loan originations into a commodity.
Credit systems will eventually eliminate much of the value lenders have been able to add to the origination process.
Further accelerating the process are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., which are making the necessary technology available to all lenders. Eventually, perhaps two-thirds of all volume will be processed in a commodity fashion.
Turning loan originations into commodities will force two major changes.
First, consolidation, already occurring because of major cost differences that have emerged among participants, will increase.
With much of the origination process commoditized, differences among players in servicing and funding will be emphasized. This will hasten consolidation by reinforcing pricing advantages for players with access to low-cost funds and efficient servicing shops.
This is an interesting outcome, since so much has been made of the role of Fannie Mae and Freddie Mac in leveling the playing field with their technology. The fact is that it will take much more than technology to level the playing field.
Second, a massive number of new players will enter the market. As the need for expertise to originate mortgages is reduced, more companies within the broader financial services industry will offer mortgages.
Charles Schwab & Co., the discount stock brokerage house, is an example, with its customer list and significant capabilities in marketing and distribution. It would be fairly simple for the company to align with a player such as Countrywide Home Loans to outsource the remaining functions.
To compete, companies must refocus and invest in new capabilities. The emphasis will be narrowed to servicing, funding, and sales and marketing.
Efficient servicers must continue to invest to reduce costs and risks. Efforts would include workflow technology, imaging, predictive models for functions such as staffing and collections, and hedging strategies.
For sales and marketing, players will need to drive down costs and develop more sophisticated ways of building volume to differentiate themselves. Investments must be focused on alternative delivery, third- party sourcing, and segmentation and data mining.
Developing a wide variety of alternative delivery channels such as telephone, direct banking, and the Internet is one way of driving down sourcing costs.
The introduction of technologies will reopen the fight to establish third-party relationships.
Consumer segmentation and data mining can perhaps lead to the lowest- cost sourcing method if the capabilities can be developed to predict consumer behavior and needs.
Initially, players can leverage knowledge of existing customers to develop customer-retention models. However, companies will have distinct competitive advantages if they understand consumer segment needs, develop innovative products, and target new customers effectively.
Market participants must completely reconceive their business models. This includes: rethinking the sales force and marketing-advertising efforts; upgrading market information to improve consumer targeting; and creating streamlined alternative delivery processes for retail and wholesale channels that are extremely low cost.
Mr. Bucca is a principal and Mr. Jewett a senior vice president of Booz- Allen & Hamilton, New York.