Magazine article Mortgage Banking

Data Standardization: Streamlining Access to the Secondary Market

Magazine article Mortgage Banking

Data Standardization: Streamlining Access to the Secondary Market

Article excerpt

Responding to the complexity of the current loan delivery and investor reporting processes, the secondary market agencies (Fannie Mae, Freddie Mac and GNMA) have joined forces in an ambitious data standardization effort involving electronic data interchange (EDI). If all goes as planned, the agencies will start to implement EDI in 1994 transmission for the loan delivery and investor reporting functions.

This EDI initiative has been the cornerstone of a strategy by the MBA's InterAgency Technology Task Force (IAT) to reduce processing costs in loan origination, secondary marketing and servicing. EDI is the computer-to-computer transmission of business data in a standardized format. The EDI standards being developed by the IAT will enable mortgage bankers to transmit loan delivery and investor reporting data to all three agencies and private investors using one standard format.

In designing the standard formats, the IAT held meetings, focus groups and round-table forums throughout 1993 with the appropriate industry players such as lenders, service bureaus, software providers, private investors and conduits. These outreach activities were complemented by an industrywide cost-benefit study conducted by an independent consultant. The purpose of the study was to assess the potential impact on the agencies and the mortgage industry of implementing loan delivery and investor reporting data standards.

The key findings of the study (available from the Mortgage Bankers Association of America |MBA~) validated the IAT's projections of significant savings to the industry (especially if the standards are implemented during a period of relatively high volume). Lower costs were identified through reduced data error rates, simplified training requirements and overall higher productivity due to streamlined processing.

As part of the cost-benefit analysis, surveys were distributed to 800 MBA members. Lenders concluded that the benefits of enhanced customer service, economies of scale and error reduction were most important. However, lenders also stressed that they could reduce their loan delivery cycle by 3.2 days through implementing EDI standards in the delivery process. By including more loans in a pool with an earlier settlement date, lenders can potentially receive more favorable pricing for those loans.

The projected savings are substantially higher with the industrywide adoption of a mortgage product data model. The model would create standard definitions of loan characteristics used to define mortgage products instead of relying on plan numbers or product codes. This method of identifying the product by its characteristics (loan term, amortization method, interest rate calculation, etc.) would eliminate rekeying of data as the loan is transferred between players in the mortgage industry and reduce the accompanying errors made in classifying mortgage loans into product types.

Benefits to the industry from implementing the investor reporting and loan delivery standards have been estimated at close to half a billion dollars (NPV |net purchase value~ over five years). An additional reduction of 2.9 days in the investor delivery cycle could be realized by implementing the product data model, yielding even more benefit to the industry (detailed calculations provided upon request).

Survey results and case study data indicate that the cost of implementing loan delivery (borrower and property data) and investor reporting standards could average slightly more than $200,000 for a typical lender that sells $1 billion in mortgages into the secondary market. …

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