It would probably be an overstatement to say refi-hungry mortgage borrowers are stampeding Macon Bank in Franklin, North Carolina.

But after the Federal Reserve lowered interest rates late last year to uncharted levels that begged for someone...or anyone...to lend or borrow, homeowners seeking lower monthly mortgage payments resulting from a 30-year rate approaching 5 percent have suddenly rediscovered their mortgage lenders' bookmarked Websites.

"Right after the rates came down, we got as many people in one day as we had gotten in the previous month looking to refinance. And we're still getting them," says Kristy Daigle, mortgage processing supervisor for Macon Bank, which has about $1 billion in assets and a pipeline of about $25 million.

Macon isn't alone. As the Mortgage Bankers Association's refinancing index spiked upward around the holidays- it was up 63 percent in one week to 6758.6 on December 24 and hit 7414.1 on Jan. 14 - short-staffed banks began to lean more heavily on automated origination platforms to handle an unexpected windfall of refi volume amid an otherwise moribund period of foreclosures, devaluation and layoffs.

The heavy use of automated origination and underwriting platforms is partly blamed for the downturn. But today's more sober underwriting environment and skittish capital markets that have rediscovered risk should prevent a rash of bad Web-enabled loans this time around - one hopes.

Richard Beidl, an independent mortgage consultant in San Diego, says tougher underwriting guidelines from Freddie Mac and Fannie Mae will make it harder for borrowers with questionable credit profiles to get speedy approvals based on little more than a recommendation from an automated underwriting platform. "And the limited number of major players that are left in the industry, the Bank of Americas and the Citigroups, are playing very much by the rules. If anything, they are playing by an over-interpretation of the rules," Beidl says.

Lenders not on the sidelines have little choice but count on the automated platforms that are now their only hope of handling the new volume.

"The movement in rates has been so dramatic it may have caught people by surprise. It's very possible that lenders could end up with a volume that they can't handle," says Mike Sklarz, president of New City Technology, a Honolulu-based real estate data and analytics firm. "Firms have been hacking away at staff like crazy to get expenses in line with revenues, so they very likely are overshooting." Most mortgage lenders have smaller staffs than two years ago as tens of thousands of loan officers, underwriters and processors have been fired.

"Without the ability to do online applications, there's no way we could have kept up with all of the people who have been coming in," says Daigle.

Macon uses Mortgagebot, an online origination product, and Ratewatch to give customers and realtors an early heads-up on changes in the market. The lender, which says about 90 percent of its current mortgage volume is refinancing applications, currently offers a $200 closing credit for online applications and a $200 refund for decisions that take longer than 15 days.

Daigle wouldn't disclose new refi volume or specific application numbers, but says the volume of online applications increased 59 percent in 2008, with a 64 percent pull-through rate (though she said the recent spike in refi applications would likely cause the pull-through percentage to decline in the short-term). The bank has a staff of 14 loan officers, two processors, two funders and two underwriters. That's down from the 18 loan officers, four processors, and three underwriters that the bank was able to deploy two years ago.

The use of automated origination will help understaffed lenders keep up with higher volume resulting from lower rates, and it will also allow lenders to keep staffing costs under control. But lenders say the technology can only be effective if the volume-at-all-costs attitude of the past remains in the past.

"Anytime you stress an origination system with a large volume of business, you risk people cutting corners," says Gregg Formigoni, vp of mortgage lending, Illini Bank, Springfield, Ill., a $250 million institution with a dozen branches in central Illinois. "And some of the mentality is that 'We don't need underwriters because we're using automated underwriting.'"

But Formigoni, who joined Illini in 2005 to help build a mortgage lending operation at the community bank, also says his institution - which has been using branch managers to act as loan officers - wouldn't have been able to handle the recent uptick in volume without automated applications and underwriting. "I logged into our system on a recent Sunday night, and saw that we had 13 applications submitted, even though we aren't open on Sunday," he says, adding the online application also provides disclosures electronically and pulls the applicant's credit file and submits that information to Desktop Underwriter (Fannie Mae's automated underwriting system) for a preliminary review. "So on Monday morning, we're doing fact checking and verifying the information on the application."

Formigoni says that since the overall mortgage market is now less dominated by "fringe" products designed mainly to goose volume numbers at lenders, there will be less opportunity for automated lending platforms to be used to cut corners in credit risk management in the name of volume. "And we didn't do much of that stuff anyway," he says.

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