When IndyMac Bank began working with mortgage brokers in 1997, it was anxious to avoid being tagged as just another wholesaler using outdated rate sheets, which was the common practice at the time.
"Everybody used to originate loans on what was an average pricing business," said Gulshan Garg, chief technology officer at IndyMac Bank, Pasadena, Calif. "You originated a loan up-front based on some goofy rate sheet pricing, and then 60 days later you would find out the real value of the loan."
The solution was a homegrown system called e-MITS, or Electronic Mortgage Information and Transaction System. The heart of e-MITS is a pricing engine that uses valuation models from Standard & Poor's to compute loan rates consistent with marketplace demand.
"We provided an electronic mechanism for a broker to submit loan data to us. That was the easy piece," said Garg. "Once the data was with us, we managed it as if the loan had come to the door and we were ready to sell it."
Since then, IndyMac has taken e-MITS to other customer channels. The bank markets directly to consumers through the Internet, and has also forged strong relationships with small mortgage bankers, community financial institutions, real estate agents and homebuilders, all of which have direct access to the borrower.
"Unlike Countrywide, Bank of America and Wells Fargo, we don't really have retail brick-and-mortar branches," said Garg. "It's truly a click strategy, as opposed to click-and-brick."
Accordingly, over 90 percent of IndyMac's loan volume, which totaled $16.5 billion in 2001, is originated through the Internet. "In the business-to-business or business-to-consumer space, our customers are able to get approval on a plethora of products from us, literally in seconds," said Garg. "Sight unseen. No telephone, no nothing."
But homebuyers can still get handholding and personal service when they need it, from experts with the incentives to help. Although mortgage brokers still generate the bulk of IndyMac's mortgages, real estate professionals can now use e-MITS to grab a piece of the transaction.
"RESPA restrictions prohibit real estate professionals from earning compensation just for referring the transactions to yet another real estate professional," said Garg. "Using our technology, we are helping realtors to offer loan products and to be a consultant to their customer."
IndyMac has also targeted subdivision developers even as it curtails lending to that market. Late last year, it announced it would scale back construction lending from 31 states to a core group of eight western states. The remaining borrowers are now encouraged to offer IndyMac loans using the Electronic Mortgage Information and Transaction System.
"We will employ more stringent underwriting guidelines and pricing on the construction financing," wrote IndyMac in its 2001 annual report. "However, our homebuilders will see enhanced earnings opportunities through their ability to act as mortgage lenders to their customers, creating a win-win situation for IndyMac and its homebuilder customers."
Although IndyMac Bank holds some of the loans it originates, most loans are pooled and sold into the secondary market in the form of mortgage-backed securities (MBS). Interest and principal payments are transformed, via financial engineering, from a pool of mortgages into segments that appeal to investors with varying tolerances for risk. The least-risky, AAA-rated MBS loans are functionally equivalent to U.S. Treasury bonds, and are priced and marketed accordingly.
But risks don't disappear; they instead undergo transformation. For example, riskier MBS loans-which tend to lose value when interest rates fall as homeowners refinance or pay off their mortgages-are the hardest to price and sell. That's where success in interest rate and prepayment modeling can provide an advantage.
"Through the very sophisticated models, we try to gauge the propensity of prepayment of these loans right at the point-of-sale," said Garg. "Using that estimate, we minimize the amount of premium that we are willing to pay to the customer."
IndyMac Bank estimates the sale price for a loan using several scenarios.
"We look at loans going into mortgage-backed securities, loans going into our portfolio, and loans going into the Fannie Mae and Freddie Mac systems," said Garg. "Rather than just evaluating the loan from one execution, we look at the loan for multiple executions.
Gulshan Garg, chief technology officer
A BANK PROFILE:
IndyMac Bank is a technology-based mortgage banker whose proprietary systems facilitate automated underwriting and risk-based pricing. Distribution channels include mortgage brokers, mortgage bankers and community financial institutions, as well as selling directly to consumers and through realtors and home builders.
HQ: Pasadena, Calif.