A Business Transformed by Technology.

Position:Mortgage banks

The mortgage business has come a long way in implementing new technology. But many changes yet to come will transform the mortgage process even more.

SAYING TECHNOLOGY HAS CHANGED THE WAY THE MORTGAGE INDUSTRY DOES BUSINESS IS AN UNDERSTATEMENT. The proper use of technology has changed the mortgage process and made it possible for companies to fatten their bottom line.

"Clearly, over the last two years, we've seen exponential growth in the use of technology," says Paul Reid, executive vice president of the Mortgage Bankers Association of America (MBA) in Washington, D.C. "People are really embracing [technology], and we're seeing it in every facet of the business. We're starting to see everyone try to grab the technology brass ring."

Many changes and technological enhancements to mortgage-related companies have been done voluntarily. Two of the largest technological developments that have changed the way the mortgage industry has evolved are the use of automated underwriting (AU) and the Internet.

"Technology is not a luxury anymore; it's a necessity," Reid says. "Everybody wants the process done cheaper and faster."

The use of AU systems has been a catalyst for the development of other technologies that have changed the way the mortgage industry does business. With AU systems, lenders have a firmer understanding of what loan features government-sponsored enterprises (GSEs) will accept and what loan criteria will prevent a loan from defaulting. These systems forced lenders to look at their entire business and consider how automation could improve other areas of mortgage origination, both at the point of sale and in the back office. In turn, lenders developed sophisticated systems to capture more detail about the applicant and to support AU systems.

Next came access to AU systems through loan origination systems. This put loan decisions, not just prequalifications, at the front end of the process so consumers could get rapid decisions on their loans.

"Automated underwriting systems have had a profound effect on the industry and caused a ripple effect in the entire process," says Pete Maselli, senior vice president of business development at Freddie Mac. "The use of technology in the mortgage industry has created a compelling need for more technology and for engineering a better business process. This raises the bar for making all of the process more efficient."

With the unveiling of its [pmiAURA.sup.SM] system, which was used by both mortgage insurance (MI) companies and mortgage companies such as NationsBanc Mortgage, HomeSide Lending (then called BancBoston Mortgage) and Shelter Mortgage as early as spring 1996, PMI Mortgage Insurance Co., San Francisco, was one of the earliest to introduce an automated underwriting system.

Freddie Mac and Fannie Mae furthered the widespread adoption of AU systems when they introduced their automating underwriting systems--Freddie Mac's Loan Prospector(r) (LP) and Fannie Mae's Desktop Underwriter(r) (DU)--to give lenders a tool with which to project more accurately how loans would perform. But in the minds of many, Fannie Mae and Freddie Mac's move--because they both could require approval by their AU systems for loans they would buy--expedited the use of technology and pushed the industry to develop new technology. Fannie and Freddie offered the added inducement to lenders of waiving reps and warranties on loans approved through their proprietary AU systems. This meant no buyback worries for lenders if a loan sold to the GSEs went into default.

Along with letting lenders pass on cost savings to their customers, GSEs made it possible for lenders to develop a more efficient loan origination process. Although GSEs have never made the use of their AU systems mandatory, the benefits of using the systems are clear. GSEs have provided incentives that are not available using manual methods. Officials at Fannie Mae and Freddie Mac said they offer these incentives because by using their AU systems on loans it helps to mitigate the default risk of those loans.

When the GSEs introduced their systems to the industry in the mid-1990s, few lenders used technology in the way they did business. In fact, at that time, laptops had limited capabilities and were used by a small number of...

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