Magazine article Mortgage Banking

The LOS Market-The Battles Continues

Magazine article Mortgage Banking

The LOS Market-The Battles Continues

Article excerpt

It's been a long time since we've seen an article that goes through market share of the major loan origination system (LOS) firms in the third-party origination (TPO) space. This is a very sensitive subject and a great deal of controversy surrounds the topic. This column attempts to provide objective updated information and show general trends.

I'll start by saying this column reviews the market share numbers as determined by Wholesale Access, Columbia, Maryland. Wholesale Access provided its numbers to me exclusively for publication in Mortgage Banking. The surveys conducted by Wholesale Access took place every other year from 1998 to 2006.

The surveys primarily covered mortgage brokers and correspondents, defined as entities that either had no warehouse lines or used such for less than 50 percent of their loan volume. Using such a definition, many smaller "mortgage bankers" would fall into this category because it's common for firms closing even a small percentage of their loans in their own name to call themselves a mortgage banker.

Further, the market share numbers are based upon the total dollar amount of loans placed through each system. For the purpose of this column, I did not take into account the number of offices using each LOS--which can also be an important indicator of market share. While the differences are not dramatic, there would be some.

I noticed that in the past, an LOS such as Contour's The Loan Handler[R] (a product of Dublin, California-based Ellie Mae Inc.) would have a larger average customer, as counted by number of loans per year, than an LOS such as Byte (a product of Kirkland, Washington-based Byte Software) or Calyx Point[R] (a product of San Jose, California-based Calyx Software). Thus, some readers might feel market share by number of locations (which closely corresponds to number of user licenses) is more important than market share by number of loans. For many in the industry, including settlement-service providers, wholesalers and other third parties, it would likely be the dollar volume that would be most important.

The volume of loans through an LOS also helps to quantify how much of the industry is actually using a particular LOS. Often, origination firms might own several LOSes but primarily will only use one. Because of this fact, licensed users as claimed by the LOS vendors can be a less reliable number.

I view these numbers from Wholesale Access as accurate, and have relied on them going back to the early 1990s. I personally believe they are the best numbers currently available, and have used them extensively in my current consulting practices as well as when I was president of Contour Software and chief strategy officer for Ellie Mae.

Why is market share important? The key reason is that the more clients an LOS firm has, the more money it can funnel into research and development (R & D). In the software industry, market share can sort of feed on itself. Just witness the success of Microsoft[R] Corporation and how difficult it can be for other parties to produce comparable applications.

A second major issue is that the more customers an LOS has, the more third-party firms will build supporting applications. The leaders will have virtually every financial services firm building interfaces (for flood certificates, appraisals, title policies, credit reports and much more).

Today's world of eCommerce dictates that core applications such as an LOS require extensive support throughout any respective industry. This also becomes a tremendous barrier to entry for new LOS firms. Without a lot of users, third parties won't build connectivity--and users won't buy an LOS without a lot of connections already built (the proverbial Catch-22).

Figure 1 shows overall market share by product based on findings from the five separate Wholesale Access surveys from 1998 to 2006. We can see that Calyx has significantly increased its market share over this time period, and mostly at the expense of Byte, Contour, Genesis 2000[R] and others. …

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