Consumer Finance International Retail Banking Wealth Management LoBue Technology				Mortgage Banking... ONLINE ORIGINATIONS, THE FUTURE OF LENDING Prepare yourself for the first Internet-driven consolidation in history. While a number of businesses are still trying to determine whether or not they should have a Web site, the mortgage industry is finding more business than it can handle coming through its modems. As reported in the August 1998 issue of Mortgage Banking, almost $265 million in online mortgage loans were originated in 1997 and industry experts predict that electronic loan originations will reach $725 million by the end of this year. Loan originators who haven't already built their Web sites may not be too late, but without a presence on the Web, they may find themselves putting the competition's name on the door. Buying a home is probably the largest investment most people make during their lifetimes. In the past, first-time homebuyers typically learned about the loan approval process while buying their home. They relied on either their bank or a recommendation from their real estate agent to find a loan, and rarely shopped around for a better deal. Those days are over. Borrowers now log on to the Internet to educate themselves about the lending industry and to shop for the best rates. These people are excellent target clients for loan originators. They are often dual-income, college educated couples with upper middle-class earnings and a strong financial future. With very little free time, a computer at home and the desire to investigate the lending industry at odd hours, they want precise information and will quickly sign off from any site that doesn't meet their criteria. Attracting their attention doesn't have to be a monumental financial investment. A number of companies offer software specifically designed to establish an Internet mortgage origination site. Genesis 2000 recently released its WebBuilder system, an easy-to-use, template-based program that takes only minutes to install, is easy to customize, and can be updated 24 hours a day, seven days a week. Other software companies that offer similar mortgage industry packages include Mortgage Software Source at www.4-mss.com or HomeSide Lending at www.homeloan.com, an Internet-based company with links to other providers. There are three basic types of online mortgage web sites: Brochure-Style - which primarily provides information on the products the lender offers and how to contact them. These storefront-only sites offer just a glimpse of the company, and require the homebuyer to visit their offices to begin the loan application process. Brochures with Interactive Tools - are a small step up. They contain tools such as an online calculator, updated interest rates, pre-qualification forms and answers to frequently asked questions. Full-Service - where prospects can actually apply for a loan and receive legally binding pre-approval commitments. Sophisticated extras include automatic email notices to inform clients when their loan is available or pager number rental for extremely time-crunched customers. It is also possible to get an automatic loan interest rate lock-in agreement, along with a host of other products normally available only at an office. Even though this type of site can cost as much as $2 million or more, companies like Countrywide Home Loans, Inc. believe it pays for itself because it attracts borrowers looking for higher-than-average loans. Another key point to consider is the cost-per-loan application savings, since borrowers enter in all the information, do their own calculations, and research available loans without tying up a loan officer. Fannie Mae and Freddie Mac are also on the Internet, creating another reason for loan originators to establish a presence online. Mortgage brokers and bankers can send completed applications to these agencies and receive instant approval for the resale of the loan. Through MORNETPlus, subscribers have access to Desktop Originator, which is used by Fannie Mae, or Desktop Underwriter, which Freddie Mac uses. To subscribe, originators must be sponsored by a lender. Members can check project/rate information, submit loan applications and lock in loans electronically. The system automatically approves rate-lock requests that meet the program-eligibility, price-availability and rate-lock parameters. These electronic systems require far less paperwork to process an application because it can be sent directly to Fannie Mae or Freddie Mac for approval. Originators receive loan approval or a referral to a human underwriter based on as little information as a credit report, a FICO score and a subset of the uniform residential loan application. Fannie Mae reports that Desktop Underwriter is processing an average of 10,000 transactions per month. The system's use of selling guide rules and compensating factors results in maximum flexibility for borrowers, allowing lenders to tailor a loan based on an individual borrower's risk profile. Other benefits include: An increase in the number of clients originators can serve. The elimination of phone tag between clients, originators and underwriters. Streamlined appraisal and property inspection report forms. Obtaining rate information electronically. A reduction in staff because case files sent electronically do not have to be re-keyed. Mortgage companies like Finet Holdings Company of Walnut Creek, California takes full advantage of the Internet. Finet created a fully integrated electronic mortgage approval system by tying together the required forms on its Web site with Fannie Mae's Desktop Underwriter software. Finet asks borrowers to fill out an application on a secure, electronic form, check the data against electronic credit reports and then automatically sends it to Fannie Mae for approval. The borrower learns of the outcome through email. The bank can then issue a check within 48 hours of approval. This example points out two important security factors that lenders need to address when building a Web site - transaction protection and data protection. Transaction protection provides a secure system, which allows customers to send personal information, such as credit card numbers, over the Internet. Data protection ensures that the information cannot be accessed by outside sources once it arrives. These computerized underwriting systems, which cut from weeks to days the time it takes to close a loan, are opening up competition in the mortgage business. These systems give small lenders the tools the giants of the mortgage business use to dominate the industry. Also consider that online loan originations are less expensive than traditional ones. An internet application requires fewer middlemen and costs about $25 to process, compared to the $250 a traditional lead costs to generate through direct mail. This ability to deal directly with Fannie Mae and Freddie Mac will greatly increase business in the lending industry. These agencies estimate that widespread adoption of automated underwriting will save borrowers $2 billion a year in closing costs and move some borrowers out of the sub-prime market and into conventional mortgages, saving them up to $100 million in annual interest payments. From the originators' point of view, such systems helped them handle this year's giant refinancing wave without adding significant staff. Since automatic underwriting was introduced in 1995, Fannie Mae reports a 14% increase in productivity, measured by total yearly origination volume divided by mortgage banking employment. Automated lending doesn't stop there. For loans that are in default, Altel has developed software designed to save lenders time and money when dealing with severely delinquent loans. These loans are automatically transferred to a special computer service after 60 or 90 days of delinquency. Instead of manually entering in the data, the information can be electronically sent. This eliminates delays and delivers greater resolution of delinquent loans. The mortgage industry definitely belongs on the Internet. The National Association of Realtors reported in the November 12, 1998 issue of American Banker that online mortgage origination saves $21 billion a year nationally - $7 billion by eliminating the middlemen and $14 billion by automating the paper trail. Understanding, reacting and profiting from this change is critical to the survival of lenders both big and small. Like it or not, service is now secondary, because the key to attracting borrowers is online access to information. Whether your site is a simple brochure, or offers the capacity to apply for a loan directly, understanding the demands of your client base and positioning yourself to offer flexibility and respond quickly are critical. Those lenders remaining after the next round of consolidations will be the ones who have the ability to originate and close loan applications electronically. return
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