Collection agent. Loan modifier. Property manager.
Such businesses do not jump to mind when one thinks of International Business Machines Corp.
Over the past three years, IBM has bought a series of companies with the goal of automating every aspect of mortgage lending, from underwriting to processing to closing a loan.
And since March, IBM has been offering behind-the-scenes help with modifications of troubled loans.
It also has been showcasing new loan-modification software at servicing conferences.
But it was its deal last month to buy Wilshire Credit Corp of Beaverton, Ore., that would move IBM to a new side of the mortgage equation: servicing shaky loans.
Some industry experts said IBM has its sights on servicing assignments from the government-sponsored enterprises Fannie Mae and Freddie Mac.
After all, IBM already provides mainframe computers to Fannie and the Treasury Department.
The Armonk, N.Y., technology giant first saw the potential of the mortgage market around the time origination volume hit a high of $4 trillion in 2003, according to Linda Simmons, general manager of mortgage finance at Overture Technologies Inc. in Bethesda, Md., who spent five years in IBM's consulting division.
But mortgage servicing is where the action — and government money — has gravitated. "When you start using numbers like 9 million to 10 million loans going into default, it's a critical mass that gets IBM's attention," Simmons said.
Moreover, servicing is notable for its dearth of software, an issue that became widely apparent when servicers struggled this year to adopt the Obama administration's Home Affordable Modification Program. Currently 14.4% of all mortgages are either in foreclosure or at least one payment past due, according to the Mortgage Bankers Association.
Brian Fitzpatrick, the chief executive of Aklero Process Solutions Inc., a Radnor, Pa., company that has automated the pre-closing and post-closing analysis of loan documentation, said many of the large banks are so overwhelmed with their servicing operations that they might offload assets to IBM, which could then make a pitch to sell its back-office services, such as underwriting and document preparation.
"This is a hedge to their origination fulfillment strategy," Fitzpatrick said. "It puts them on both sides of the see-saw."
Both areas play into IBM's larger strategy of generating half its profits from business-process outsourcing and consulting rather than from hardware or software, analysts said.
Eric Ray, the general manager of financial services for IBM's global technology services, was unavailable to comment.
Jordan Brown, the CEO of MarketWise Advisors LLC, a Ponte Vedra Beach, Fla., investment bank and consulting firm, said that, because of the government's efforts to stem the wave of foreclosures, outsourcers see an opportunity in servicing.
"Today there is a pressure cooker in terms of the ability to provide people and capital to fix the loss-mitigation problem, so that's the first pressure point that provides an opportunity to realize revenue and profits," Brown said. "There's a very tight marriage coming together of both the outsourcing and management of servicing assets."
Moreover, because IBM is not originating mortgages and also does not maintain mortgage servicing rights, it isn't seen as a direct competitor to lenders, he said. Its clients in the origination business include Coastal Federal Credit Union of Raleigh and Tree.com Inc.'s LendingTree Loans.
One question competitors have raised is whether IBM complies with Federal Housing Administration guidelines that require underwriters to work for a mortgage lender and make the final decision of whether to approve a borrower. An IBM spokesman said that clients have the ability to log into IBM's system and perform the one specific underwriting task, while IBM does 90% of the pre- and post-closing work on FHA loans.
(IBM agreed to buy Wilshire Credit from Bank of America Corp., and B of A kept the servicing rights to roughly 127,000 loans in Wilshire's portfolio, with balances totaling about $18 billion. B of A inherited Wilshire Credit in its Jan. 1 purchase of Merrill Lynch & Co.)
Some observers caution that nothing is a slam dunk, even for a company with pockets as deep as IBM's.
Mary Kladde, the founder and CEO of Titan Lenders Corp., a Denver back-office fulfillment provider that competes against IBM, said many mortgage executives have tried — and failed — to automate all the steps in the mortgage process.
"This really isn't their forte, but they see an opportunity because there's so much fallout and weakness on the software side," said Kladde. "I find it fascinating that IBM thinks they can solve all the ills of the industry when there are so many people who are in it and can't figure it out."
Still, fresh memories of last year's liquidity crisis may give IBM an advantage in dealing with large bank customers. Mark Loughridge, IBM's senior vice president and chief financial officer, said on a third-quarter earnings conference call that IBM held $11.5 billion in cash.
"They've got the capital that many other lending IT vendors don't have today," said Craig Focardi, the senior research director for the consumer lending service at TowerGroup Inc., a research firm.
IBM moved into mortgage outsourcing in 2006 with the purchases of Palisades Technology Partners, an Englewood Cliffs, N.J., mortgage technology provider, and FileNet Corp., a Costa Mesa, Calif., content management company. Since then it has bought two other software companies with applications in mortgages: Cognos, a portfolio risk management software provider based in Ottawa, and iLogs, a business rule management software company in Paris.
IBM is likely to broaden its servicing platform and may pique the interest of new entrants that are not hobbled by legacy technology systems, Focardi said.
"While we've seen the concentration of loan servicing assets among the Big Four" — B of A, Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. — "if those four institutions gain significant economies of scale, others are going to need to find a way to compete, and an outsourced solution is one way to do that," he said. "Collections and distressed-asset management will be here for some time."