Most mortgage lenders still lose money on loan originations. That explains why the industry is in a frantic scramble to reduce its origination costs through automation.

Software vendors, meanwhile, are in their own mad scramble to provide the technology that gets the lending job done. The business is especially competitive; no single vendor dominates the market, and more than a dozen companies large and small are vying for market share.

To be sure, lenders have been slow in making their choices. The industry has yet to rally around a single vendor. And most of the vendors agree that they haven't made much of a dent in the number of institutions considering replacement of their originations systems.

According to the prestigious Mortech survey, a bit more than a third of mortgage companies are shopping for an originations system, and the percentage hasn't changed much in recent years. Software vendors put the figure even higher, more like 50%.

"You have to understand that many of the systems being offered are brand new, and vendors are going through a significant learning curve also," said James D. Jones, who heads Massachusetts-based Wellesley Consulting Group. "Very few installations are using these systems in production. The buyer has to approach a decision differently than if a lot of installations were up and running."

Though the choice may be difficult, a sense of urgency has been building, and the quest for profit is not the only factor. Lenders also face the problem of fixing the Year 2000 glitch in their legacy computer systems, and some are pondering whether replacing their originations setup with a snazzier new-and glitch-free-version might not be less costly.

Another factor driving technology ambitions is the growing complexity of loan originations. Telemarketing has expanded dramatically; controlled business arrangements have become commonplace; and affinity lending has become a lucrative specialty. All these approaches to lending require their own specialized technological support.

And lenders are increasingly demanding powerful data bases that permit them to engage in sophisticated cross-selling.

Right now, it's hard to speak of an industry leader, but some of the competitors for that title are Interlinq Software Corp., Alltel Information Services, Fiserv Inc., Fitech Systems, and Gallagher Financial Systems Inc.

Interlinq appears to be ahead of the rest of the pack as its software is used by about 20% of the mortgage industry's lenders, according to its chief executive, Jiri Nechleba.

Mr. Nechleba says he fears that many companies are committing to systems that will be out of date in three or four years because the ability to capture data that will drive the systems is still emerging.

"We want to offer systems that companies need and can grow with," he said. "Lenders won't have to rebuy because we're upgrading all the time."

Mr. Jones, the consultant, also believes some companies may be forced to purchase different systems in a few years. "If there is going to be remorse, it's because a company was unable to identify its long-term business objectives," he said.

Alltel, meanwhile, has its sights set on becoming the market leader in originations technology, as it is now in software for servicing loans, with a market share of about 40%. That's an ambitious target, as Alltel's originations systems now have perhaps 10% of the markets it serves. It does not offer systems to brokers, a big market.

One of Alltel's key selling points is that electronic data interchange (EDI) is already integrated into its InterAct system. "We have a value- added network that already has 140 vendors on it," said John Wolf, executive vice president of Alltel's mortgage division. With competing systems, the EDI would be a customization, he said.

A second selling point, Mr. Wolf said, is a work flow engine that is linked to the EDI capability. Third, he said, is that the system is readily scalable.

While each competing system has significant differences that serve the special needs of particular lenders, they also have much in common, running in Windows and using networks of terminals, or clients, linked to a larger central computer, or server.

The Windows environment makes it possible for the system to use documents with a wide variety of formats. And the client-server technology can be a big cost-saver because it permits the use of less-powerful computers, known as thin clients, for the terminals.

Mr. Nechleba of Interlinq is particularly enthusiastic about the thin- client capability, which Interlinq recently introduced for its MortgageWare system. "It lets a lender strike a balance between a centralized and a decentralized system," he said.

The only knock on client-server systems is that they may not have the capacity to handle the volume of the biggest originators. Mr. Wolf of Alltel acknowledged that capacity may be a problem for some vendors but added that Alltel was offering advanced scalability features.

In the battle for market share, various vendors have had small successes recently. Gallagher, for example, has sold its Millenium system to United Companies Financial. United is using Millenium, a Windows NT-based system, to replace its own DOS-based software. Millenium will be used in conjunction with United's own back-end data base from Microsoft, which uses standard query language. And Fleet Mortgage Corp. has committed to Loansoft's Works system to supplement its in-house Compass software, which it says is functional but slow.

Meanwhile, other vendors have been enthusiastically churning out data services that can be provided directly to the new systems. A number of companies are offering one-stop shopping for mortgage-related services, including appraisals, title insurance, credit reports, and the like. They include First American Financial Corp., Chicago Title Insurance Co., Stewart Title Guaranty Corp., and Lender Services Inc.

But Jeff Lebowitz, a co-author of the Mortech study, says lenders have not shown much enthusiasm for the one-stop idea, preferring to shop around piecemeal for the services they need. "The one-stop services should shorten the closing cycle and reduce costs. But our data says lenders would rather do business with specific firms," he said.

Whether the lenders choose single or multiple sources of data, however, the software system companies will be ready. Most offer the choice of single or multiple data input.

Indeed, some lenders are offering their own closing services in a bid to prop up sagging profits on originations.An open question for originations software is how loan underwriting gets done. It seems pointless to use slow and time-consuming manual underwriting with a state-of-the-art originations system. Originators have their choice of using automated underwriting models from Fannie Mae, Freddie Mac, mortgage insurers, and various other vendors.

Many experts think a shift to risk-based pricing of loans is inevitable and in fact is likely to have made significant inroads in the next few years. If they prove correct, the underwriting model will be a key element in originations systems of the future.

One of the supporters of risk-based pricing, Leland C. Brendsel, chairman of Freddie Mac, put it this way:

"The widespread use of objective risk measures will reduce the fear of rejection that keeps many consumers from applying for a mortgage service in the first place." He believes technology will boost application rates and "get more people on the path to homeownership."

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