Magazine article Mortgage Banking

Business Is off, but the Level of Effort Is Up

Magazine article Mortgage Banking

Business Is off, but the Level of Effort Is Up

Article excerpt

We are in a recession. This recession may be deeper, longer and more painful than we have experienced in decades. The freezing of the capital markets worldwide has made it difficult for businesses to raise funds for large, capital-intensive projects. In times such as these, companies cancel projects and renegotiate contracts to squeeze out costs wherever they are able. Information technology (IT) infrastructure generally is accounted for as a capital budget. Such investment will decline as a proportion of corporate spending.

Is IT strategic, tactical or simply an operational tool? In a down market, lenders will cast most infrastructural investments in a cautious light. Less will be categorized as strategic. And all IT investments can be delayed, postponed or cancelled.

I was recently quoted in the October 2008 issue of ABA Banking Journal as saying. "All the 'levers' that drove high loan volumes and the need for technology 'got turned off.'" In MORTECH 2007, we had predicted that 10 percent of core technology spending in the mortgage sector disappeared. As quoted in the article, I said the sudden loss of the subprime sector left "more vendors of interesting technology that [there are] takers of it.'"

We at MORTECH LLC are projecting still another decline in technology spending by mortgage bankers. Another 10 percent decline in 2009 would bring all mortgage industry technology spending down to $3.2 billion. Lenders' spending on IT in 2009 could come in 17 percent lower than during the peak year of 2006.

In the ABA Banking Journal article, I concluded there would be some who will need to update their systems. In every market there will be some investment and some spending to integrate consolidating noted, "but that's all 'backfill,'" as I noted in the article.

Rethinking technology

The credit crisis has shocked lenders and their near-in relations--the Wall Street money managers--into rethinking the role of technology. We inexorably are moving into a more abstract way of managing the mortgage business. Automated decision-making has taken over where human judgment once prevailed.

George Colony, chairman of the board and chief executive officer of Forrester Research Inc., Cambridge, Massachusetts, wrote in his Oct. 3 blog (, "We have stepped over the line into a world where, without the check of human common sense and understanding, they [computers] can do great harm."

Colony points to the use of complex algorithms to value prime mortgages, to create their derivatives and to fund mortgages through private-label securities as the germ that multiplied and created the pandemic credit crisis from which we now suffer.

"Goldman [Sachs & Co.], Lehman [Brothers] and others created securities that blended mortgages of divergent risk. These securities were supposedly safe, backed by another exotic instrument--credit default swaps," Colony states. He concludes, "The trust and information of the old days [of personalized banking were] replaced by "computer models and arcane mathematics. The evil great-great-computer-grandchildren of HAL [the command and control computer in the Stanley Kubrick science-fiction film classic, 2001: A Space Odyssey) were in charge."

These notions hearken to a technology-centered vision of industry and its future. At times, there is a sense of the inevitable being carried on the wings of technology change. Before the credit crisis, it seemed that as technology spontaneously and unrelentingly advanced, bankers needed only to read the trends and position themselves to profit from the tsunami of good fortune. When talking with mortgage technology leaders about specific kinds of technology applications, one had the feeling that the inevitable had transformed into economic predetermination.

Where lenders are spending on IT

While the mortgage industry has been decimated and re-formed by the credit crisis, lenders are spending money on technology that will help them identify, measure and manage their exposure to delinquency and default. …

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