As trouble in the nation's foreclosure process leaked out-from robo-signing to lost documents to backdated notarizations-the hunt was on for a culprit. A convenient target was the Mortgage Electronic Registration System, or MERS-a technology platform that tracks more than 64 million mortgages and is owned by the industry's biggest players, including Fannie Mae, Freddie Mac and several large lenders. But analysts and consultants say that blaming MERS and technology in general is a mistake. Servicers are mostly responsible for not investing enough in technology and not setting correct policies and procedures.
"MERS was built to prevent problems like this, but it only keeps track of ownership, not actual documents-that's what the servicers are supposed to do. I don't see MERS as a source of the problem," says Craig Focardi, a senior research director at TowerGroup. "The failure was due to process and policy by the servicers, not technology."
Terry Wakefield, CEO of Wakefield Co., a consulting firm in Grafton, WI, says that, "You need to be careful not to broad-brush technology with negative connotations. Technology is a good thing. But in the mortgage industry technology is woefully archaic."
For decades, Wakefield says, the industry has refused to invest in mortgage technology because in the battle for budgetary dollars mortgage departments lost out to areas with higher potential returns on equity. "There's a cost/benefit analysis and capital is allocated to the area of highest returns. The result is that now the industry's technology infrastructure is 20 or 30 years behind other process-centric businesses."
He points out that in October JPMorgan Chase set aside $1.5 billion dollars to cover legal expenses associated with foreclosure. "If they had taken one-tenth of that and invested in a loan production and serving program they wouldn't have the problem." And JPMorgan is actually a technology leader in an industry where underinvestment is chronic.
Ironically, says TowerGroup's Focardi, the industry was actually making some strides toward greater automation in the years leading up to the financial crisis. The e-Signature Act was passed back in 2000 and the industry was slowly working through the legal and process issues to incorporate e-documents. "They had largely perfected what the industry needed to do to get e-mortgage processes up and running and then priorities changed when the subprime crisis hit," Focardi says.
Executives at technology vendors see the recent foreclosure problems as an opportunity to demonstrate their value. Dain Ehring, CEO of Dorado, describes the company's "dynamic workflow" solution. The technology gathers, validates and stores data and highlights which loans' documents are in order and can be signed automatically (or robo signed), and which loans need human intervention.
Meanwhile, FICO offers another solution. Joanne Gaskin, product management director at FICO, says that FICO's mortgage portfolio optimizer helps banks determine the best loan remediation option-this is valuable information for overwhelmed front-line employees confronted by hundreds of distraught consumers. Banks can set policy, she says, "but is policy being executed?" That's proving a real stumbling block for banks trying to operate in today hectic mortgage environment.
And then there's LPS, a provider of mortgage processing services. Today, more than 50 percent of all the nation's foreclosures are managed through the company's desktop technology. CTO James Iredale says that LPS' workflow and communication tool can help alleviate the foreclosure issues facing the industry. It's a many-to-many model that allows someone to upload a document and share it easily.
But, as others in the industry noted, Iredale says technology is only as good as the policies and procedures a mortgage servicer puts around it. "The technology has no knowledge of the document itself," Iredale says. Ultimately, if someone wanted to upload a blank document there's little a document control system can do."
In the future, Focardi says that mortgage systems could be built with more quality control steps and logic so inexperienced people can navigate the system with less chance of making mistakes.
The rub is that getting the most out of new technology takes a commitment on the part of servicers to optimize their current processes-something they haven't been willing to do, Wakefield says.
Until that happens, any technology will be limited by today's inefficient processes. "Vendors who sell loan modification systems are forced to sell products that mirror inefficient processes in the mortgage system because the mortgage companies are unwilling to do the incredibly hard work to understand current processes down to the step level-to the fraction of a minute and the penny-and optimize the processes," he says. "The industry needs to get serious about admitting the infrastructure is deficient, and until then God knows what might happen next. It's a sad state of affairs."