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Lending's Winding Road

Loan institutions are finding innovative ways to cope with a seismic shift in their business.

The idea is to create a "factory" where loans can be stamped out in assembly-line fashion for smaller banks that can't afford or don't want to build their own, says Kevin Shannon, president of consumer real estate at Bank of America. The set-up frees those banks to concentrate on processes that create "sustainable advantage," such as sales and marketing, Shannon says.

These lenders aren't alone in their efforts to use technology to revise their businesses. Total spending on new mortgage technology will hit $94 million in two years, up from $34 million this year, according to Celent. The percentage of the top 100 mortgage lenders investing in technology will climb from 11 percent this year to 20 percent next year.

By all measures, the number of new and refinanced mortgages is falling. Mortgage volumes will drop by half next year, Shannon says, and industry profits will drop by two-thirds. The Mortgage Bankers Association's refinance index, a measure of refinancing activity, stood at 1,776 on Dec. 5, down from a peak of 9,978 in May.



Bank of America set up a "factory" for loans to be written assembly-line style, Shannon says.

To cope with this massive change, Countrywide Home Loans, the nation's third-largest mortgage company, which handles more than 100,000 new loans a month, is expanding its automation effort. ArtEnterprise, Mindbox LLC's rules-based engine for automating loan decisions, is the core of Countrywide's proprietary underwriting system, called Clues. The Clues system lets Countrywide instantly update its loan products, rates, and policies, and to underwrite a loan in 15 seconds. It also lets customers apply for loans and receive approvals online, on the telephone, or in a branch office.

The complexity of these processes have stymied Countrywide's and other lenders' attempts to automate loan processes. Each loan applicant must be evaluated on a number of risk categories such as income, employment, credit history, assets and liabilities, the appraised value of the home, and market conditions. Parts of the process, such as pulling credit reports, were automated and integrated into loan systems years ago, and many existing systems provide rudimentary workflow-automation tools. But the bulk of these systems are homegrown, stitched together over many years, and banks are quite ready to scrap them for newer offerings. "A lot of lenders are looking at more-advanced features from their loan-system providers," says David Flaxman, chief eSolutions technology officer at Fannie Mae.

At the same time, borrowers are pressing for better pricing and services, such as instant approvals, rate locks, and faster closing. For banks, this means automating documents and tasks associated with closings, many of them involving lawyers, appraisers, title companies, flood-certification providers, and other third parties. Banks are exploring the use of Web-based technologies and are developing standards to gather and process these documents electronically, enabling closings to take place in weeks instead of months.

Online lenders are a small but growing sector that's out ahead on automating processes. Home Loan Center Inc. uses Microsoft's .NET to create Web services that link customers with loan products based on factors such as credit score and desired monthly payment. Home Loan customers can fill out the loan application and get rate locks online; the company can close home-equity lines of credit in as little as seven days, a spokesman says.

Home Loan and other online lenders such as Quicken and E-Loan account for about 6 percent of new mortgages, according to Celent. That portion is expected to rise to 10 percent in two years. Fannie Mae is working with lenders to simplify the "fundamental business processes to close and fund a loan," Flaxman says. Electronic mortgages will begin to appear next year, he says. One step in this effort: Fannie Mae and Freddie Mac have enhanced automated underwriting software they license to banks to help them determine whether a loan application conforms to their risk standards.

Technology helps mortgage companies tap into segments of the population that have been left out of the housing market. For example, Freddie Mac has fine-tuned its automated underwriting software, Loan Originator, to reach out to minorities who've shied away because of distrust of financial intermediaries or misconceptions that they'll get turned down because of poor credit histories. Freddie Mac was able to hike approval rates to 85 percent, up from 50 percent in the mid-1990s, letting banks offer more loans to people who would have been turned down in the past.

"Mortgage products need to be more creative," says Freddie Mac VP Patricia McClung. "Electronic mortgages are the wave of the future, but it's not going to happen overnight."

One problem: Digital-signature laws have been enacted, making electronic documents the legal equivalent of paper, but they haven't been tested in court yet with respect to mortgages. That's just one of many obstacles potentially in the way of using technology to simplify the business processes of an industry built on complexity. One thing is clear, though: If lenders can succeed in just some of what they're planning, they'll have come a long way from where they are now.

Article originally appeared in InformationWeek, Dec. 15, 2003

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