Technology IS The Answer For Today\'s (and Tomorrow\'s) Mortgage Industry


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Some players in the mortgage industry are blaming technology for the industry\'s woes. Really?!

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Technology IS The Answer For Today\'s (and Tomorrow\'s) Mortgage Industry

  1. 1. The Summit Point Group Technology IS the Answer for Today’s (and Tomorrow’s) Mortgage Industry! So don’t be deceived by what you have heard or read . . .I can’t begin to tell you how many conversations I have had over the last few months where somereally smart people with significant positions in the mortgage industry have said roughly the samething – “technology got us into the trouble that we are in today!” To be a little more specific, thetechnology that they often point to is automated underwriting. Yes, the same technology thatdrastically reduced origination cycle times, drove new efficiencies, reduced costs, mitigated risks,and brought quality and consistency to decision-making is now to blame for the woes of the mortgageindustry. Really?!  At a roundtable discussion sponsored by Origination News during the Mortgage Bankers Association’s National Secondary Market Conference, participants talked about a “return to historically handwritten underwriting” and the inability of automation to assess or pick-up the “fourth ’C’ - character” of a borrower.  A recently published article by Ray Birch in National Mortgage News discussed banks and credit unions “turning off automated loan decision tools in favor of manual process” because they were no longer “trusting technology.”Today’s mortgage industry is moving quickly backwards in the evolutionary cycle for technology andprocess innovation . . . but why?Diving a little deeper into the thoughts and comments of industry managers and executives, thereasons for the escalating abandonment of automated underwriting and other decision-makingtechnology appear (at first) to have at least some merit. The reasons include: “The systems are justtoo easy to game; loan officers quickly figure out what data to enter to get an approval.” -and-“Automated underwriting systems ignore the subjective factors that every good lender once used toassess the reliability of a borrower.” -and- “The current automated decision systems don’t meet allof my needs.”Without arguing the value of the capabilities and judgment of an experienced underwriter, let’s takea look at the issues that now drive (and have driven) executives to abandon decision systems andother forms of automation in favor of a return to manual processing and underwriting. The systems are just too easy to game . . .The first issue often raised is the ability of loan officers to game the technology. If a lender dependssolely upon data manually entered into the technology for final lending decisions - then yes, theopportunity to game (or more accurately – LIE to) the system to gain the desired outcome is aproblem. Insert human processors and underwriters to verify all sources of documentation and dataused to render the lending decision and the risk of a lying loan officer is eliminated, or at leastmitigated.Copyright © 2011 The Summit Point Group
  2. 2. Page 2 Technology IS the Answer for Today’s (and Tomorrow’s) Mortgage IndustryNext, lenders depending solely upon technology decisions find that they are at a loss to explain how alending decision was made – to a consumer, to their investor, and to their regulator. Again, yes – if alender abandoned sound credit policy, compliance, process, and other procedures in favor ofaccepting “black box” recommendations, then they also likely lacked the process, data and controlsnecessary to provide the level of transparency requested or required by investors, regulators, andsecurities holders, possibly leading to repurchase requests and adverse regulatory findings. Inserthuman processors and underwriters and require full (and sometimes excessive) documentation ofloans, extensive checklists, strict underwriting standards and laborious procedures for all loans, and alender may move closer to being able to fulfill later audit requirements. Automated decision systems don’t meet all of my needs.Another issue often raised is the inability of the technology to meet current investor requirementsand/or internal requirements, or that the technology is out of step with new regulatory or processingrequirements. Insert paper overlays or full manual processing and underwriting, abandoningtechnology as a solution in favor of human-centric solutions and these issues may be solved.Now, let’s take a look at the “other side of the coin.” While lenders move towards manual processesand away from automation, what benefits are they giving up and what risks are they possiblyintroducing into their processes and their organizations?Customer service has likely been the first to suffer. As process requirements move back towardsmanual operations, borrowers are asked to meet more requirements, deliver more documentation,pay higher fees, risk rate changes, wait for weeks or months as a paper file moves through multiplehand-offs, and are more often being refused a loan due to strict underwriting standards or veryconservative eligibility terms. Without automated decision and business process technology,processing timeframes are expanded. Dependency on a human-centric processes limit scalability andresult in less flexibility and strictly conservative eligibility and underwriting rules. Customer service . . . the first to suffer.Lower levels of efficiency and accuracy and escalating costs also come with a higher dependence onhuman-centric manual procedures and processes. Without automated decision and business processtechnology, dependency on paper checklists, procedural manuals, and human assets take over. Thespeed and efficiency of the process are limited by the ability and availability of qualified staff. Theaccuracy and completeness of work is determined by the knowledge, skills and thoroughness of staff.The net results likely include lack of scalability, consistency, and completeness, and increased costs.Another potentially serious risk introduced in a move back to fully manual underwriting that is notassisted by decision-making technology is the inconsistent or inappropriate application ofunderwriting standards to lending decisions. Without automated business rules-driven technologies inuse, lending decisions are fully delegated to a human, leaving open opportunities to makeunknowingly bad decisions – both approvals and declinations.With the move to manual processing and underwriting, lenders have had to hire more people, providemore and more intensive training, and implement manual processes that could, and arguably should, Copyright © 2011 The Summit Point Group
  3. 3. Technology IS the Answer for Today’s (and Tomorrow’s) Mortgage Industry Page 3be automated. They have given up the ability to centralize and enforce sound decision-making thatcan be replicated quickly, efficiently and consistently with technology. Scarce expert resources areeither wasted on repetitive tasks, or stretched thin, supporting inexperienced staff. The quality,efficiency and speed of a technology-assisted lending process are lost to a process that is costly, slow,restrictive, and inconsistent. New industry leaders are beginning to emerge . . .So what is the right answer?While many lenders have “solved” their issues with technology through development andimplementation of manual, human-centric processes, new industry leaders are beginning to emergethat are embracing technology and applying new know-how to avoid or otherwise mitigate pastproblems, while further expanding the use of technology to the benefit of their customers and theircompanies. Through the use of business rules management systems and business process managementsystems they are centralizing and controlling decision-making logic, customizing and streamliningbusiness processes, gaining access to data and services to mitigate risks and validate transactionalattributes, while gaining visibility and transparency that allows them to better execute theirstrategies and manage their business. They are retraining staff to leverage technology, gaining newefficiencies, mitigating risks, and enhancing customer service.So what does this look like?Through development of enterprise-level approaches to business rules management, companies havebeen able to institutionalize their business rules for use across their entire value chain. They havedeployed automated underwriting services designed to evaluate all of their business according to theirguidelines and methods, dropping dependency on “black-box” solutions. Eligibility, underwriting,pricing, and other rules-driven decision services are centrally maintained, ensuring consistency inapplication and enabling rapid deployment of new policies and guidelines. These same rules are alsoused by their servicing operations for monitoring and quick evaluation of potential refinances,modifications and workouts. This enterprise-level approach also enables companies to “marry”business rules with business process, facilitating the efficient use of scarce human resources whileenabling scalability. New know-how and methods help to avoid the pitfalls of past implementationswhile allowing nimble responses to changes in rules, regulations and market conditions. New know-how and methods . . . nimble responses . . .Integrated access to data and service providers enables these same companies to reduce theirdependency on information provided by borrowers or entered by loan officers, while also furthereliminating paper, and reducing risk. Electronic access to tax returns, employment and asset data,fraud tools, and other data population and verification sources and services eliminates redundant anderror-prone manual processes while enhancing quality and service and shortening cycle times.Central data stores provide immediate access to all data associated with a transaction. Further,business rules-based services are used to rapidly compare, assess and otherwise evaluate the termsand attributes of all information associated with a transaction or file to flag potential issues or itemsrequiring further investigation. Copyright © 2011 The Summit Point Group
  4. 4. Page 4 Technology IS the Answer for Today’s (and Tomorrow’s) Mortgage IndustryIntelligent business process management approaches and systems have been deployed to facilitateprocessing of transactions. Reflecting business processes, business process management systems usingbusiness rules automatically route work to appropriate groups, persons, and systems based upon theterms and attributes of the file or transaction. Exceptions can be quickly flagged and routed forexception processing. Management has complete visibility at any time into their entire business.Additionally, business process analysts and managers have the ability to monitor and analyze work andflow patterns, using this information to assess effectiveness and propose changes in businessprocesses that will result in greater quality, reduced risk, and gained efficiencies. Complete visibility, greater quality, reduced risk, and gained efficienciesIntegrated web-based user interfaces provide access to all information and data associated with a fileor transaction, the status and state of the transaction, and other information related to the file.Graphic and detailed views enable management to assess how their business is running and quicklyaccess files, regardless of where the transaction is currently being processed or worked. Somecompanies have also provided their customers/borrowers with online access to in-process files,providing customer visibility into the process and an enhanced customer experience, while reducingthe costs associated with customer management.Today’s mortgage industry is truly experiencing a period of transition.Those companies that believe technology has been the source and cause of the industry’s woes (andtheir pain), thus abandoning automated rules-based decision technology in favor of manual paper-based processes, will likely find that technology-embracing competitors will soon surpass them.Through deployment of business rules-based decision and business process management systems thesecompetitors will quickly show that they can deliver better quality, more options, reduced risk, andhigher customer service, all while mitigating the risks of the past and reducing the cost of doingbusiness. Further, they will be able to meet the coming requirements of transparency and visibilitythat will be demanded by investors, regulators, and others in the industry.During this period of transition lenders will be best served by quickly adopting business strategies thatare based upon new know-how, efficient use of human resources, and advanced technologies thatinclude business rules and business process management systems. About the author: David Coleman is Managing Director of The Summit Point Group, a strategic management and technology consulting firm with extensive experience in all aspects of the mortgage business and unique expertise with business process and rules management technologies. He is a financial services and mortgage banking specialist with over 25 years experience as a Senior IT Executive and Management Consultant. Prior to founding The Summit Point Group, David served as Vice President of Technology at Fannie Mae, where he led strategic business and technology initiatives. His accomplishments while at Fannie Mae included the development and roll-out of Desktop Underwriter. Copyright © 2011 The Summit Point Group