Two technology giants are suddenly training their sights on the home mortgage industry.
Electronic Data Systems Corp. says it will soon show residential lenders that it can cut their cost of servicing loans by as much 50%.
And International Business Machines Corp. is "making massive strides" toward developing systems support for mortgage servicers, says David Partridge, a managing principal for IBM's retail banking industry group.
The moves come as mortgage lenders across the company are facing increasingly tight profit margins, with too many companies chasing too few loans.
"The mortgage industry has its back against the wall in terms of lowering costs," said Larry Walker, executive director for EDS' real estate and mortgage industry division.
Plano, Tex.-based EDS, which announced last week that it was buying Wendover Funding Inc., which collects and processes monthly loan payments on behalf of other servicers. EDS plans to use the company, known as a subservicer, to demonstrate its cost-cutting clout to the industry.
IBM's push could mark a significant change of heart for the company. "IBM has looked at the business a number of times but had not made a significant commitment," said Jeff Lebowitz, principal of SSP Associates, a Chevy Chase, Md.-based research firm.
Other technology companies are said to be looking at subservicing. First American Real Estate Information Services is in talks to develop an entity that could subservice between $250 billion and $300 billion of loans through its Excelis servicing system.
And the industry leader in servicing software, Alltel Corp., could conceivably make a push into subservicing. Alltel's CPI loan servicing system dominates the servicing market with a share estimated at 50%
"I can't imagine Alltel sitting on the sideline," said Edward Elanjian, managing director of Cohane Rafferty Securities, a Harrison, N.Y.-based investment banking firm and servicing broker.
Mr. Lebowitz said given Alltel's background in facilities management and outsourcing, it would make sense for Alltel to consider competing in the subservicing market.
Mr. Elanjian said that only the larger servicers are able to develop their own technology in-house, so smaller servicers might look to farm out the servicing to a technology provider if it can significantly lower the costs.
Wendover, based in Greensboro, N.C., subservices $9.3 billion in loans. Mr. Walker said EDS will combine Wendover's servicing expertise with its technology to cut servicing costs. Industry analysts estimate that the average cost to service a loan is between $90 and $100. But the range is wide, and some smaller servicers spend $200 or more.
One issue technology companies will have to address is making sure they aren't competing with the companies they provide services for, Mr. Partridge said.
To that end, Mr. Walker said, Wendover will only subservice loans. Once the transaction is completed, EDS will sell the small percentage of servicing that Wendover owns.
EDS' mortgage division has also received a high-profile boost from the launch of Mortgage Electronic Registration Systems, or Mers. EDS won a bid to develop the technology for the system, which tracks the ownership of servicing rights.
"Strategically they were committed to making a larger presence in the mortgage industry," said Paul Mullings, chief executive officer of Mers.
EDS also is in charge of maintaining the system, Mr. Mullings said. Mers went on-line on Monday, and more than 130 mortgage companies have signed on to use the system.
Mr. Walker said EDS' next big mortgage venture will be a paperless loan- closing service that will allow borrowers to virtually sign their mortgage agreements. This service will be available by the fourth quarter, Mr. Walker said.
Despite EDS' increased presence in the mortgage market, Mr. Walker concedes that its mortgage-related business is "a rounding error" for a company that last year had in excess of $14 billion of revenues.
Still, EDS is showing a commitment to expanding its mortgage-related operations. Mr. Walker said he had no problem persuading EDS to ante up for Wendover, even though it is undergoing turbulent times.
Last Friday EDS reported a rare quarterly decline in earnings; its stock fell 23%.