With technology playing an increasing role in mortgage lending, Fannie Mae and Freddie Mac are marketing their technological products and services with increased vigor.

Wall Street analysts keep close watch on the government-sponsored enterprises' use of technology as a window into their long-term outlook. And analysts see credit scoring and risk-based pricing as the tools of the future, providing more precise measurements of loans.

But the interdependence between Fannie and Freddie and the small and large lenders they do business with stands to change as the giants' systems gain more-widespread use.

A recent report by Moody's Investors Service notes that Fannie's and Freddie's "overwhelming influence over the mortgage banking industry is likely to intensify as their automated underwriting systems and related technologies become the standard."

The report raises concerns about automated underwriting, including "the potential over-reliance on automated systems," and the possibility of having "poor overall risk assessment" because of the difficulty of monitoring the quality of input.

Moody's noted that the "relative cost structure of mortgage origination could shift substantially, affecting in turn the relative power and position of the larger originators vis-a-vis smaller ones, as well as the terms of trade among the GSEs, originators, and servicers."

Standardization of borrower credit profiles, increased use of credit scoring, and more-widespread knowledge of loan portfolio characteristics may also result in more-efficient servicing management, according to the report.

While some larger lenders have openly voiced concerns about the agencies' gaining too much power through the dissemination of their automated underwriting technologies, smaller lenders also have concerns.

Fannie and Freddie are making their products directly available to their seller-servicers, but many smaller lenders are concerned that they must be sponsored by a seller-servicer, which makes them somewhat committed to that sponsor, said Richard Beidl, senior analyst with the Tower Group in Newton, Mass. This makes small lenders feel that they have less flexibility, he added.

Thomas O'Donnell, a senior analyst at Salomon Smith Barney, said automated underwriting would create a more level playing field that will allow the "mom and pop players" to compete with larger ones in originations.

Some analysts also note that the two agencies have been filling a leadership vacuum when it comes to technology initiatives.

"The mortgage industry itself has a well-deserved reputation for being somewhat behind the financial industry in the effective use and adoption of technology," said Mr. Beidl. "Freddie and Fannie have led the charge from the investor side to changing the standards to allow for streamlined and automated type processes that we're now starting to see broadly across the industry."

As the two major investors in mortgages, Fannie and Freddie "have not only the position to lead the industry, but to some degree the responsibility," Mr. Beidl said. "It's in their interests, lender's interests, and consumer's interests."

The main technology focus of Fannie and Freddie is on automated underwriting, technology developed in the last few years, Mr. Beidl said. Lenders stand to benefit by evaluating up to 60% of their loans on automated systems, he added.

Underwriting used to be the last step before closing a loan, but Fannie and Freddie have moved it to the front of the process, Mr. Beidl said. With more than half of loans falling into the "vanilla" category-having almost no idiosyncrasies in their profile-the loans can be processed in an automated fashion with limited documentation, he said.

The automated underwriting process "relieves a lot of stress from the borrower who sits on pins and needles not knowing what happens in the background," Mr. Beidl said.

Fannie and Freddie have a similar agenda: a focus on underwriting and on what the secondary market wants, Mr. Beidl said. But each company has set out on different paths to develop tools they believe their customers want and need, he added.

Fannie Mae has its Desktop Underwriter and Desktop Originator-which provide the company with "a more thorough set of tools," said Mr. Beidl. But Fannie has not expanded to the extent that Freddie has in having a wide range of loans in their mix, he said.

While Freddie does not have a point of sale application program, Freddie's Loan Prospector is a "robust program" that has expanded to include FHA loans and jumbo loans. Freddie is also pursuing lenders doing B&C loans, he said. "They're really trying to provide a single solution with automated underwriting."

Risk-based pricing is being pursued by Freddie Mac in a pilot program with a handful of lenders, a spokeswoman for the company said. Some lenders are also exploring risk-based pricing on their own, she added.

Risk-based pricing enables Freddie and lenders "to recognize that not every single loan is the same and (that) classes of loans carry different risks," Mr. Beidl said. This type of pricing would allow Freddie Mac and lenders to stratify price levels, he added. This kind of pricing would also be attractive to investors as it helps "to determine what level of investment risk they want to assume, and be compensated accordingly," he said.

While Fannie Mae said there would be enhancements to its automated underwriting system later this year, it has not embraced the philosophy behind risk-based pricing.

Fannie is focused on how to get more people with "challenging credit" into the A market without their being penalized by a pricing premium, said Michael J. Williams, senior vice president for customer technology services at Fannie Mae.

"This has been a year of explosive growth in the use of technology," said Mr. Williams.

Refinancings have had a "big impact" on lenders' use of automated underwriting technology, because lenders had to deal with the increased volume by either hiring people or taking advantage of technology, he said.

Fannie has more than 700 lenders using Desktop Underwriter and its customers are processing more than 20,000 underwriting requests a day, he said. Fannie hopes to receive more than a million loans in 1998 through its automated underwriting system, Mr. Williams said.

Freddie Mac's Loan Prospector has been running about 40,000 loans a week, said Griff Straw, director of products and new business at Freddie Mac.

Fannie's Desktop Originator has almost 1,500 brokers on line through relationships with almost 40 lenders, Mr. Williams said. This point of sale system is responsible for 20,000 loans a month, he added.

Taking underwriting to the point of sale for retail, wholesale, and correspondent lines of business is "changing the whole way the workflow occurs," said Mr. Williams. The heavy documentation that underwriters used to examine have been replaced by a data set that leads to borrowers' being approved in minutes instead of weeks and months, he added.

Both Fannie and Freddie are also using secured network links with web- based technology to create connections with lenders and brokers to foster electronic commerce.

Freddie Mac has almost 1,200 lenders and nearly 200 service providers on its GoldWorks electronic network, the company said.

Service providers offer mortgage insurance, electronic appraisals, credit reports, title insurance, title searches, and other support, said Griff Straw, director of products and new business at Freddie Mac.

In the last 18 months, Freddie has done 200,000 electronic appraisals complete with digital photos or maps. That number is expected to double if not triple next year, he said.

Fannie Mae's electronic network, MortgageLinks, has about 500 and almost 100 industry partners who provide services, said Mr. Williams. Services are now available from appraisers, credit providers, conduits, and rating agencies, he said.

The Web is "going to be a powerful platform for business to business transactions," Mr. Williams said. For it to be viable, a secure transaction capability has to be available, he said. Fannie is now testing this capability, he added. Fannie and Freddie use Web sites primarily to provide information to consumers and lenders.

Fannie and Freddie say they pursue feedback from lenders. Mortgage technology products and services can then be refined to suit market demand.

Fannie has consulting services and integration services that include helping lenders to integrate Fannie's technology into a lender's origination system. Fannie also has published its integration guide on the World Wide Web, he said.

Freddie went on the road for three weeks when it was developing its network link and met with lenders in focus groups. "We continually talk to lenders," said Mr. Straw. In addition, Freddie has a marketing team, an implementation team, and a technology strategy group, he said.

"One of the initial myths of technology is that technology will cut your costs and that's not necessarily true," said Mr. Straw.

Despite the lure of technology, "not everybody is ready to start doing business electronically," he said, adding that some lenders are still using yellow legal pads and fax machines.

"The whole marketplace doesn't move at one time," Mr. Straw said. But even if it moves gradually, Fannie and Freddie will be waiting with open arms as more and more lenders put aside their pads and pick up their keyboards.

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