So far, so good. That's the view of executives working on making the mortgage industry Y2K-compliant.

But during the preparation for the millennium, fears have been intense. On the one hand, protecting consumers-and their credit ratings-is considered crucial. No less important, however: ensuring the integrity of trading in mortgage-backed and other securities.

"What's the worst-case scenario?" asks Sadu Thinakal, president of the mortgage division at Fiserv Mortgage Products, which makes servicing software. "Where consumers are making payments and they're not applied properly so they're recorded as delinquent. In this case the payments would be recorded as being made in 1900 rather than 2000.

"The second worst-case scenario involves Wall Street and the whole international financial system," he says. "Investors in the secondary market are guaranteed timely payment, you want to make sure that there's no problem in the processing system and the trading back and forth of information. Any problems could create a crisis of confidence."

With these concerns in mind, the mortgage industry has been pursuing a two-pronged approach to ensuring Y2K readiness. The first prong involves assisting individual financial institutions in their efforts. Early on, Federal regulations required them to be Y2K-compliant by the end of last year; they have allowed systems testing to continue through the second quarter.

Freddie Mac is requiring all customers who service 1,000 or more loans to test two different transactions: investor reporting and default reporting. Testing started in early March and should be completed by May.

Similarly, Fannie Mae is requiring its lenders to perform three tests involving security balance reporting (for those dealing with mortgage- backed securities); investor reporting; and delinquency reporting. Testing must be completed by the end of this month.

"We're certainly pleased with level of commitment from lenders and other industry participants," says Carol Teafley, vice president for Year-2000. "There has been an extremely high level of attention to detail. It's nice to see this plan come together and all the pieces walking in tandem." Meanwhile, both regulators and the mortgage industry's trade group, the Mortgage Bankers Association of America, Washington, have been focusing on the second prong-the vendor community. Some consider vendors-tax services, credit bureaus, mortgage insurance companies, coupon vendors-to be potentially the "weak link" in readiness efforts.

"These companies are not under regulatory fiat but their clients are," notes Lauren Meadows, vice president of application development at Alltel Information Services Inc., a mortgage service bureau in Jacksonville, Fla. "If a financial institution is doing good due diligence, in addition to putting together a project plan that identifies all the things it needs to do internally, it's also looking outside. It needs to say to companies such as service bureaus, 'Are you ready? We rely on you.' These parties may not be regulated, but they have an incentive to be Y2K compliant because financial institutions will take their business elsewhere if they're not."

Last year the Federal Financial Institutions Examinations Council issued guidelines making trading-partner testing mandatory by June. In addition, since October 1997 the MBA has been developing a "Year 2000 Inter-Industry Test." Notes an MBA white paper: "Thousands of lenders need to test their systems with hundreds of vendors, federal agencies, and the government- sponsored entities. Coordinating this effort on an ad-hoc basis will be chaos at best."

The MBA's goal: To create a central clearing house to "bring order to the confusion and consequently contribute to the mortgage industry's safe transition into the next millennium," the MBA paper says. "Our objective is to remove real and perceived barriers to broad mortgage industry participation in an industrywide readiness test (and) ... to ensure that the greatest number of industry participants have a chance to validate the interoperability of their systems before the Year-2000."

James Horn, the MBA's director of technology initiatives, says that the association's efforts are on track. "Right now we're just shy of 1,000 participants, who handle about 90% of the companies originating mortgages or doing the servicing on them. This enables them to test all of their electronic trading partners following guidelines established by the FFIEC."

MBA's test includes 16 origination, secondary market, and servicing transactions. "We've been doing formal testing since Feb. 10," says Mr. Horn. "There's no way of knowing which of the 16 transactions people are testing because they can pick and choose, and we're not recording specific successes or failures, but the process is well under way."

The MBA stresses that its testing program is not meant to be a substitute for efforts that vendors need to make individually; the major vendors, appear to have been at least as aggressive in their own efforts to be compliant. "To make sure that Alltel's ready internally, I've been working on our hardware and software since 1994," says Mr. Meadows. "We've had 8,000 lines of computer code to look at. I'm not complaining, but I'm tired."

Fiserv started working on Y2K issues toward the end of 1997. "We completed all of our software work in the middle of 1998 and our users started testing in October 1998, so we've been pushing ahead steadily," says Mr. Thinakal.

Steve Gozdan, senior vice president and chief operating officer at Cenlar Federal Savings Bank, a wholesale bank engaged in mortgage servicing in Ewing, N.J., calls its Y2K efforts "the largest effort we've undertaken in the last year-and-a half. We had very little code to rewrite, but the people time involved has been extraordinary nonetheless."

In the middle of last year, "we broke our Y2K efforts down into 16 different work packages," says Mr. Gozdan. "Each package really involved a set of different systems that had some sort of commonality to them. So, for example, we had our LAN-related applications in one package, our Alltel system in another, and each package had its own manager. We've completed the in-house testing and now we're looking to schedule and finalize testing with other vendors, such as EDS, which handles our payroll."

Given the intensity of their efforts, executives expect the industry will run into some glitches on Jan. 1-but chaos will be avoided. On a cautionary note, Jeff Noe, a spokesman for Freddie Mac, says, "It's really kind of early to tell how the testing is going."

Says Alltel's Mr. Meadows: "What will happen depends on whether you're an optimist or pessimist, but I feel that we're in decent shape, that there won't be any major blips. No one will be put out of business and no one's stock price will be affected negatively."

Others agree. "The securities and mortgage industry has been at the forefront of efforts to be ready, so I don't think there's any possibility of a large-scale failure," says Cenlar's Mr. Gozdan. "On the other hand, there are some vendors we can't test such as the utilities, the Postal Service and the phone companies, and that may be our single biggest concern. To the extent that we can, though, we're building in redundancies and focusing on contingency planning. We're going to be O.K."

For those still working on their systems, Mr. Meadows offers a tip. "One thing we had to deal with early on was the issue of whether 2000 is a leap year. "Generally people know that every fourth year is a leap year unless it's divisible by 100, in which case it isn't. So many people assumed that 2000 wasn't a leap year.

"But there's a further rule, which is that if the year is divisible by 400, it is a leap year," she says. "Fortunately, we caught on to this fairly early on."

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