Mortgage lending: the bastion of paper-intensive processing races to the Net

Have you purchased a home recently? Or perhaps you took advantage of lower interest rates during the '98 refinance boom? And did you go through your bank or did you join the millions of people who are increasingly turning to the Internet to shop for the most cost-effective loan?

Visit Yahoo and be linked to E-Loan (www.eloan.com), which in 1998 originated an estimated $1 billion in mortgage financing. At AOL you're linked to QuickenMortgage with 1998 volume of $600 million (partial year of operation). Even Bill is in the game with MSN HomeAdvisor, where you can investigate properties, community statistics, insurance costs and, of course, shop for the most attractive financing option. Each of those sites provides online applications and will guarantee and preapprove loans in seconds.

Contrast that to the traditional lender's sites. A recent Deutsche Bank Securities report reviewing online mortgages states that only five of the top 13 retail mortgage originators offer true online mortgages. While application information might be entered via an electronic form, behind the scenes data entry operators are transferring information into other systems for processing.

In 1998 less than 1% of mortgage originations took place via the Internet. That is projected to account for as much as 13% of the $1.6 trillion market by 2006.Why? Well there's the obvious, "Everything's moving to the 'Net." But more importantly, because most lenders originate at a financial loss, there are clear advantages to a different approach.It's a classic supply chain management challenge. Consider the parties involved: borrower, independent brokers, appraisers, title companies, mortgage insurance companies, inspectors, closing agents, attorneys and investors. Each generates paper--up to 100 pages by the closing--and each participates in a structured workflow process. But imagine building the business case to implement end-to-end processing before the Internet and thin-client deployments. Distributed scanners, printers, workstations, private high-capacity WANs ... tough, very tough ... especially when management wants an 18-month or better payback.

Granted, Yahoo (www.yahoo.com), AOL (www.aol.com) and Microsoft (www.microsoft.com) aren't banks; they're real estate portals, providing potential borrowers with a broader range of services than the traditional lender. However, their ability to generate traffic far exceeds that of most lenders, and that leaves the lenders in somewhat of a quandary. Do they invest in their own brand? Or is it better to focus on the right partnerships? The answer is "both."

To date, most of those mortgage portals manage refinance activity, a far simpler product than a conventional first mortgage. And while they allow you to prequalify for a loan, there is still a requirement to document claims made on the electronic application, and ultimately some organization will be responsible for underwriting the loan and approving the credit.

The organization that automates the end-to-end process stands to win. Will that be the traditional lender? The jury is still out, but it's a workflow opportunity extraordinare! The origination process demands high levels of integration. The broker completes an application. Ideally, data is automatically passed through a series of processes: credit report request, credit scoring, automated underwriting, appraisal request, title search, scheduling of closing agent, preparation of closing documents, etc. The more sophisticated lenders, thanks to massive customization, have automated those steps within their core production systems. However, the vast majority of lenders require manual or semi-automated transcription of data between multiple, disconnected systems. A recent trend among software and service vendors is to create strategic alliances or, more aggressively, to acquire complementary companies in an attempt to deliver straight-through processing. Alternatively the process can be outsourced to service bureaus, such as ARC Systems (www.arcsystems.com), which provide linkages that deliver decisions within 30 seconds rather than 30 days. Regardless of the approach, the message is clear: Make it simple, fast and reliable.

And what about mortgage loan servicing? Is there an Internet play?

Ask any document imaging vendor about their financial services customer base and mortgage loan servicing will typically be among the top two or three applications in production. While the origination process is highly fragmented, the servicing business continues to consolidate (the four largest mortgage firms service one-third of the total U.S. market). Those servicing organizations manage massive volumes of loans ... well over 2 million individual loan files at the largest firms. And while it's true that most customer service inquiries can be dealt with through access to data, getting to the documents isn't pretty.Within servicing, most of the image-enabled workflow processes center on refinancing and bankruptcy. The refinancing process is time-sensitive and requires release of lien and, therefore, access to documents. In 1998 the mortgage industry experienced an all-time peak in refinancing activity; many lenders sought ways to facilitate that process by allowing the borrower to initiate the process via the Internet. On a less positive note, 1998 also saw peaks in personal bankruptcy. When that involves a mortgage, there is an extraordinary level of document-intensive activity with multiple parties operating on strict time lines at risk of severe penalties levied by investors. Earlier this year, LOGS National Servicing Agency (www.lnsa.com) unveiled an electronic delivery system that links lenders and attorneys through secured online access.

There is no shortage of opportunity to link trade partners via secured intranet/extranet connections. Online investor reports, access by third-party insurance and tax services, and interaction with firms that assist with Real Estate Owned (REO) management represent an outstanding opportunity to improve service while lowering costs.

Perhaps more significant is the opportunity to allow borrowers to self-service via the Web. Lisa Fagan of Alltel (www.alltel.com) documented a 10% reduction in call center volume after interactive self-service features became available at the Web site.

Ed Berger, president of Midwest Loan Services (www.midwestloanservices.com), states that online billing, payment and statement services can shave 67% from the cost of providing coupons and 80% savings on statement production. Published case studies from Brightware (www.brightware.com), a company that helps automate inbound inquiries from the Web, discuss automation of 70% of inbound customer inquiries at Countrywide, where peak e-mail volumes reach 2,000 daily messages. At Mortgage.com, the Brightware solution helped enable a 400% increase in inquiries with a corresponding 50% staff reduction.

In a business where cost per loan serviced is the industry benchmark, online self-servicing options are mandatory and well designed call centers and Web sites are the delivery channel.