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IS E-MORTGAGE READY FOR TAKEOFF? Facilitated by information technology and large MBS consolidators, borrowers may end up with direct access to the secondary market. Under one vision of the future, it's conceivable the middleman could be removed from the lending process. Consider this futuristic scenario as provocative food for thought. Online consumer mortgage shopping, with direct access to pool commitments and delivery, could be on the horizon as the acceptance and sophistication of Internet commerce continues to grow. In fact, high-speed "e-mortgages"-loans available directly to borrowers from mortgage-backed security (MBS) consolidators via the World Wide Web-may soon be ready for takeoff. This approach becomes all the more compelling in a society where consumers are obsessed with bargain-hunting and cutting out the middleman. Although a bit more than merely pointing and clicking will be involved, e-mortgages could greatly streamline financing homes and other real property. Not only would the process be convenient, it should be lightning fast and virtually hassle-free. Steps that once took days and required the involvement of a mortgage banker or broker could be completed in minutes and without a middleman. I know this sounds somewhat farfetched, and the skeptics among you are already thinking about how the promise of technology has so often proven oversold. But for the space of this article I ask you to read on with as open a mind as you can muster. Under such a business scenario, the jobs of the mortgage banker or broker, at least as defined today, may cease to exist. These professional services might not be needed as consumers, on their own, shop more actively and efficiently for new loans. Meanwhile, existing mortgage holders would find it easy to browse for potential refinancing savings from their desktops when interest rates drop. Even if e-mortgages never roar onto the scene at full tilt, the ongoing evolution of information technology and access to information itself are making the mortgage marketplace more competitive and challenging. However, technology and practice-driven changes in the industry may be leveraged into sales and profitability gains by savvy companies with appropriate strategic plans. THE E-MORTGAGE EXPERIENCE In terms of available technology, the complete online e-mortgage should be attainable soon, even if business and logistical barriers might slow its arrival. Here's how shopping for and securing a computerized e-mortgage might work. EXPERIENCE: Say a consumer, Mrs. Smith, receives a letter from a mortgage-backed securities consolidator, Mack & May Company, that advises her of an opportunity to refinance her home mortgage. The letter informs Mrs. Smith that she could save hundreds of dollars per month, due to current low market interest rates, if her current mortgage rate is 7.5 percent or higher. As it turns out Mrs. Smith currently has a $200,000, 30-year mortgage fixed at 8 percent. Mrs. Smith, who is computer-literate and owns a computer, is intrigued. Although she has become used to her mortgage payments, she has been looking for ways to put more money into her savings and retirement accounts. To determine her real savings through refinancing, Mack & May's letter instructs Mrs. Smith to access www.eMortgage.com on the Internet; purchase a copy of the inexpensive program called E-Mortgage; or visit a mortgage preparer in her area for assistance in accessing the E-Mortgage system. Currently Mrs. Smith doesn't subscribe to an Internet service provider, but she does have a modem. She elects to buy the E-Mortgage software package and loads it into her computer from a CD-ROM. Mrs. Smith finds the E-Mortgage program easy to use; it dials directly into the Mack & May Company mortgage market and allows her to download a table of products and prices. The table tells her that a 30-year fixed mortgage is available at 6.875 percent, with no discount points. Accessing the system's mortgage comparison screen, Mrs. Smith learns that this rate would save her $230 per month. She's sold. Mrs. Smith selects an option that allows her to immediately complete an application for the mortgage online. When the application form pops up on the computer screen, she enters relevant personal information such as her Social Security number and Home Mortgage Disclosure Act (HMDA) information, employer and salary information, current mortgage holder information and the address of her home. The application also asks for information on her assets and liabilities. When she is ready to submit the application, the E-Mortgage program reminds Mrs. Smith that sending the information will authorize Mack & May Company and its assignees to check her credit, employment and current mortgage information. She consents to this and activates the application process by merely pushing the Enter key. The software dials into the main system, transmits Mrs. Smith's application and notifies he on-screen that the transmission has been successful. A prompt asks her to wait while a credit decision is made. Within eight minutes, E-Mortgage has reviewed Mrs. Smith's application, her credit bureau information and property valuation. It also verifies her current mortgage and income information electronically via government records. Mrs. Smith receives refinancing approval, subject to a drive-by property condition check. A loan commitment screen appears on Mrs. Smith's monitor listing all decision criteria, legal notifications and closing cost estimates (HUD1, Truth in Lending, Good Faith Estimate, etc.). E-Mortgage then asks her to accept the terms of the mortgage by hitting the Enter key. This also saves the decision criteria, legal notifications and closing cost estimate to either her computer's hard drive or a floppy disk. Next, the E-Mortgage program notifies Mrs. Smith that she must print out these forms, sign them, attach a check for $350 and hold the package for a messenger, who will be immediately dispatched by Mack & May to pick up the documents from her to take to a mortgage processing center. The software also explains to Mrs. Smith that Mack & May will notify her with the name of a title company to contact for setting up a loan closing appointment. This information will be sent via an e-mail feature built into the program. To access the e-mail message and closing instructions, Mrs. Smith is asked to dial back into the system after three days. The messenger picks up Mrs. Smith's signed documents and check within a few hours. Three days later, she uses E-Mortgage to access her e-mail message, which directs her to contact Local Loan and Title Company to schedule an insured closing appointment. Mrs. Smith phones Local Loan and Title to schedule the closing for three days later. At closing, the title company asks her to sign the note, the mortgage, the final closing cost statement and a few more disclosures (forms that had been e-mailed to the title company earlier). Mrs. Smith also receives an introduction letter from National Mortgage Servicing Company, explaining that the firm has been selected by Mack & May to service her mortgage for as long as the servicing firm meets the needs of Mack & May, Mrs. Smith and mortgage pool investors. The letter also includes a coupon for her first payment and an envelope in which to mail it. After the closing, the signed documents are copied and provided to Mack & May's mortgage processing unit, National Mortgage Servicing and Mrs. Smith. She walks out of the title company's office with her new, money-saving mortgage in hand and in place. Mack & May Company receives the executed note, mortgage and disclosures. It then matches the final numbers on the documents to its system and to the payment that had been wired to the title company to pay off Mrs. Smith's old mortgage. Once it has been confirmed that the closing went as planned, a collateral loan file is established and sent to a custodian for safekeeping. Mack & May then confirms via the E-Mortgage system that Mrs. Smith's loan has been received into the MBS pool to which she had originally committed only eight days earlier. (See Figure 1 for an illustration of how this new e-mortgage process might work.) THE FALLOUT: WHO WILL BE LEFT IN E-MORTGAGE'S DUST? If this scenario were to become reality (granted that today it appears quite the long shot), what would it mean for the mortgage industry? Investors would continue to invest in pools of individual mortgages to manage risk. However, consumers would have direct access to the secondary market and be able to sell their individual mortgage products directly into these investment pools. Market consolidators-potentially the government-sponsored enterprises (GSEs), private consolidators such as Prudential and GMAC-RFC, or some new player like Microsoft-will offer this direct access by defining the pools, attracting investors and coordinating consumer participation. Meanwhile, vendors such as title companies and mortgage service suppliers will assist in the initial sale and post-contract servicing of the individual mortgages. The evolution of network computing and the resulting improvement in real-time information access will make the consumer mortgage market more efficient. Mortgage bankers will need to adjust to a new way of doing business as a result. Consider: Currently when a consumer needs a mortgage, he or she goes to the marketplace with an agent who, typically, is a mortgage banker or mortgage broker representative. The borrower must turn to an agent because the agent has access to such information as the types of mortgage products available, product prices, product requirements and, of course, market access. Conversely, without a banker or broker, the mortgage marketplace has no way to gather vital information about the consumer, such as income, employment, assets, liabilities, credit history, collateral value and collateral title. At present, the mortgage originator collects this information, often manually, from the applicant and supplies it to investors via market consolidators. Only when this information has been shared and verified can the mortgage selection process occur. Thus, mortgage originators such as mortgage bankers and brokers play a vital role as dealmaker and controller of information quality and accuracy. (See Figure 2 for a chart of how the current mortgage process works.) Once the loan is closed, funded, boarded (set up on the accounts receivable system after it is funded), recorded and set up, the post-contract servicing process begins. Consumers need a place to send their payments to and someone to maintain the status of their accounts. Investors must collect those interest and principal payments and make sure the consumers' accounts are properly maintained and serviced. Mortgage servicing companies carry out these transaction management and information-processing assignments for a servicing fee. HOW CLOSE ARE WE? Although the total e-mortgage package has yet to be assembled, information technology advances are already changing the mortgage business and slowly eroding the importance of the mortgage originator. Consider the following elements that already exist or could easily be created:
The e-mortgage product would offer the same time and money-savings appeal. By initiating the mortgage origination process directly with the consolidator, the consumer would trim steps and save on loan origination fees and above-market discount points. Would borrowers be comfortable assembling and closing their own mortgage application packages for submittal to Freddie Mac or Fannie Mae? Quite possibly. Many individuals could gather the correct backup information, print out the appropriate documents and assemble the files in the correct order, especially if it meant a lower mortgage origination fee. For those who could not, or would not, there would be a market for "mortgage preparers" who would do the work for the borrowers for a fixed fee (like H&R Block or Jackson-Hewitt do for income taxes). OTHER MARKET FORCES AT WORK In addition to technology, other forces are steering the mortgage marketplace toward simplified or self-service processing. First, competition for borrowers has driven down margins in the mortgage origination and servicing businesses. Another place to trim expenses is from the sales force making money on origination commissions. The best way to reduce origination fees is to offer the consumer the option of doing more work in exchange for lower pricing.
On the servicing side of the mortgage business, servicing companies record their fees as assets on their balance sheets. The reason: Fees are considered to be acquired revenue streams. The income continues until the servicing asset is sold or ends with the retirement of the mortgage.
However, the balance sheet value of the servicing is loaded with assumptions, and the actual value of the revenue flow may be unknown. If mortgage loans are originated directly through consolidators, the consolidators could retain ownership of the servicing rights. In turn, servicing would be outsourced for an established fee to contracted vendors. This would eliminate the write-off risks that now haunt many mortgage servicers. Additionally, there's industry sentiment to cut through red tape and simply modify each borrower's existing loan when they determine it suits them. In a sense, that's happening today with refinancing, but the process is long, laborious and sometimes cost-prohibitive for borrowers. If the GSEs and other mortgage consolidators originated and maintained servicing rights for all loans, they would have more flexibility and motivation to create simplified refinance plans. The consolidators also could swap loans in and out of pools to mitigate early prepayment of the pools, as well as find ways to ensure that consumers and investors are satisfied. THE NEW MORTGAGE MARKETPLACE In my view, the mortgage origination and servicing arenas are gravitating toward three players: mortgage consumers, market consolidators and mortgage-backed securities investors. Consumers and consolidators would both play by modified rules in the e-mortgage environment. For instance, consolidators would:
MORTGAGE ORIGINATORS GSEs could not tackle an e-mortgage product offering under their current legislative charters. The first company to create an e-mortgage business model most likely will have to come from outside the industry. In fact, the size and risk of creating an integrated electronic mortgage marketplace may be too large for any single company to take on, at least for the near future. Still, e-mortgage is a legitimate long-term vision, and mortgage industry firms should consider preparing for it. The way I read the trends are the value of mortgage originators will drop as consumers, empowered with greater information access, see less reason to pay a 1 percent origination fee and above-market discount points for a new or refinanced loan. In my view, the solution for mortgage originators is to develop a fixed-fee practice that matches price with value-added. A sales channel with fixed-fee mortgage origination has several benefits.
First, it prepares the originator for the advent of the e-mortgage market. Second, it also would assist in bidding for
business from consolidators once e-mortgage arrives, by establishing unit pricing history. In the interim, a fixed-fee approach as a unique pricing option would have
appeal in the current market. Sophisticated refinance consumers already seriously try to bid down and contain costs, so
a fixed cost approach would meet their needs. A similar approach has worked well in the securities trading
industry.How low might the fees go? With effective process control, successful companies may be able to offer $500 origination fees. As e-mortgage evolves, the price may drop to the $200 range. Mortgage originators will be able to afford to do this if they focus on:
MORTGAGE SERVICERS Companies with strong core competencies in loan servicing for borrowers and investors will want to refine and exploit this expertise to further their competitive advantage. In fact, in lieu of originating mortgages, it might make business sense for some firms to specialize in mortgage servicing only. This specialization would require companies to rely on sources other than their internal mortgage origination counterparts for business. As a result, these mortgage servicers would have to develop specific servicing business sales channels to reach their customers consolidators and not merely purchase servicing rights. For mortgage servicers, the key to winning and retaining business from consolidators will be providing quality, in the form of superior service, to the consolidators, investors and consumers. As a contracted service provider, mortgage servicers will need to focus on quality achievement, in line with ISO 9002 (International Standards Organization guidelines for doing business on a world-class level) or Malcolm Baldridge Award standards. The keys to success for mortgage servicers are:
VENDORS OR MORTGAGE SERVICE PROVIDERS Currently, the outsourcing of specialized tasks is expanding in the mortgage industry. As the business moves closer to the e-mortgage model, there will be expanded vendor sales opportunities for traditional services such as appraisals, title insurance, credit bureau checks and closings. Outsourcing demand also will rise for document processing, underwriting, income verification and collateral custodians. Opportunities will be especially strong for vendors who combine mortgage services and offer them to customers on a one-stop, turnkey basis. After all, vendor consolidation is a sweeping trend in all U.S. business sectors. The basis for this trend is customer intimacy. Thus, companies hoping to become major players in serving the mortgage industry, as I see it, should expand their service offerings and geographic presence. Expanding and updating in formation technology systems and platforms will be especially critical, since this is central to e-mortgage, which will rely on electronic data interchange (EDI), specific system linkages, specific service requirements and close coordination of protocols. How can vendors achieve these goals? Mortgage service providers should:
Founded in 1981, LoBue Associates, Inc., provides a range of consulting services to leading banks and financial institutions. The firm has conducted more than 300 consulting projects in 38 countries, providing business design, on-site project management and execution, and training and development services. In banking, LoBue has expertise in the retail, consumer finance, private, mortgage, corporate and international, and technology lines of business. Reprinted with permission of Mortgage Bankers Association of America (Mortgage
Banking magazine, December 1999).return |
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