It has become broadly accepted that automation is essential to a well-run mortgage operation. Despite the persuasiveness of the idea and the distinctly positive media coverage given to technology, some mortgage lenders have yet to automate even the most basic functions. There remain large gaps between general perceptions and industry actions.
For all intents and purposes, every servicer has access to automation. According to our Mortech 96 survey, 98% of servicers have automated the basic servicing functions. Given that service bureaus began offering technology services more than 20 years ago and that servicing lends itself well to automation, we would expect universal automation among servicers.
Front-end process automation is another matter altogether. In 1996, 82.7% of mortgage companies reported having automated loan production. Just 49.6%, however, have automated their secondary marketing operations.
The average annual growth rate in the number of companies having automated originations has declined from 6.5% (1988-96) to 1.95% (1994-96) - but that's normal as the technology and the industry mature. If the growth of origination-system use continues at the 1994-96 rate, however, the penetration rate of origination automation will not equal that of servicing automation until 2004.
A more unexpected result is the decline in the proportion of lenders that have automated secondary marketing. Since 1994, that percentage has declined by an average of 2.2% annually. Less than half of the industry is automated, and the growth rate of secondary marketing technology has turned negative. These have occurred while more than 90% of lenders sell new production into the secondary market. If everyone believes that technology is essential, why the decline in automation levels of a core business function?
In researching industry trends, we long ago learned to be wary of generalizations and to be cautious about relying too heavily on personal experience.
Only a relatively small minority of lenders (22.8%) see technology as strategic to their businesses, according to Mortech 96. The great majority (71.1%) consider technology merely to complement day-to-day operations.
If seven of 10 mortgage lenders are not convinced that technology is determinant of their position in the marketplace, it is likely that technology is not part of their plans for allocating financial and human resources. This, in part, may explain the decline in the proportion of lenders investing in marketing decision support technology.
Another explanation may be that lenders have found an alternative source of information for managing their pipelines and inventory of loans to be sold - the automated underwriting system.
By some measures, such systems have taken the industry by storm. One-fourth of Mortech 96 respondents indicate that they have implemented an automated system. Another 27.4% are either budgeted for or planning to implement one. That means more firms will be using automated underwriting technology than will use conventional secondary marketing systems.
This is a remarkable change in lenders' operational methods. Given that Freddie Mac's Loan Prospector made its commercial debut in February 1995, the adoption rate of automated underwriting systems has been nothing short of fantastic.
More than 70% of such systems are from Freddie Mac and Fannie Mae. These are not intended to be secondary marketing systems but ultimately will incorporate most of the logic of determining which loans are acceptable to the secondary market and for which investor's purchase commitment.
Although Mortech 96 did not pose the question directly to respondents, it is conceivable that use of GSE automated underwriting systems has obviated many lenders' perceived need to invest in secondary marketing technology.
Displacing secondary marketing systems is likely to be an unintended effect of GSE technology. But for lenders originating predominantly conforming product and selling most of their current production, closer logical and operational ties to the agencies is natural.
A key question is: What do lenders expect from their investment in technology? Mortech 96 surveyed lenders' technology objectives for the next two years - with some surprising results.
The primary technology objective for the greatest proportion of lenders (34.5%) was to standardize their technology. Nearly 50% of lenders use core systems from multiple systems vendors. Using multiple vendors lets lenders pick the best technology for each business area. Buying systems this way, however, creates operational complexity resulting from differing user interfaces, dissimilar data definitions, and often different operating systems.
Operational complexity, in turn, creates additional expenses for user training, added documentation, and increased staff and time for data and systems maintenance. The large segment of lenders that want to standardize technology are, in a sense, consolidating rather than increasing their use of technology.
There are clear signs of a slowdown in technology expansion. The industry simply may be in an interim period of consolidation, but the data point in this direction. This trend may be reversed if industry profitability improves and technology suppliers introduce a new generation of core mortgage banking systems to displace the old.