A changed mortgage lending industry will emerge from the crucible of the current credit crisis. New ways of thinking will be required about every thing from products to risk management and regulatory compliance. Innovations will be sought in organizational structures, loan products, processes and technology. As the mortgage industry looks for ways to improve both service and profitability while protecting its bottom line, ideas and technologies known as Web 2.0 can provide a useful framework for imagining what lending might look like in the not-too-distant future. Call it Mortgage 2.0--the new industry will be a complete re-do of how products, technology and processes are designed and integrated in order to originate, service and sell off a mortgage loan. Like its Web 2.0 cousin, Mortgage 2.0 aims to facilitate greater creativity, information-sharing and--most notably--collaboration among users. It is made possible because it is being built on a foundation of technologies designed with just such goals in mind.
Reverse engineering the origination process
Mortgage lending technology has come a long way over the last few years. The static, cumbersome loan origination systems (LOSes) that lenders historically deployed are being replaced with more dynamic and agile solutions such as service-oriented architecture (SOA), and with a new delivery model called software as a service (SaaS) (see "Networked Origination" in the December 2007 issue of Mortgage Banking). The speed, improved functionality and on-demand access to information provided by SOA and SaaS together will prove to be crucial going forward, as the industry adapts to the dramatic regulatory and market changes it now confronts.
Consider the Troubled Asset Relief Program (TARP), included as part of the Emergency Economic Stabilization Act of 2008 passed by the U.S. Congress in early October. Provisions in TARP require the Treasury secretary to maximize assistance for residential homeowners having difficulty making loan payments. This includes encouraging servicers to make loan modifications thought likely to help head off foreclosures. More recently, a few major banks agreed to consider supporting a rewrite of U.S. bankruptcy law to allow judges to make mortgage modifications as part of an individual's bankruptcy filing, although most in the industry oppose this measure. According to Burlingame, California-based Lundquist Consulting Inc.'s National Bankruptcy Research Center, there were more than 1 million personal bankruptcy filings in 2008, many of which contained at least some mortgage debt.
Of course, many of the mortgage loans likely to be affected were long ago bundled and sold off in the mortgage-backed securities (MBS) market. Loan modification will require essentially reverse engineering the origination process, taking the securitized structures apart to track mortgage performance back to the level of the individual homeowner.
Until very recently, this would hardly have been possible. The mortgage servicer would have had access to only a small fraction of the original loan application data. More might have been available from the lender, but would have been difficult to access.
Consider just one of the documents that make up the loan package--the original appraisal. In any refinance or modification effort, this appraisal would likely be an important starting point in establishing a floor for the value of a mortgage. In a legacy LOS, something like five data elements of that appraisal would have been stored electronically, while five pages of information would have been committed to paper and stored in a file.
Revisiting tens of thousands of closed mortgage files would have meant sending a veritable legion of clerks and accountants down into the archives and out into the warehouses to retrieve and sort through millions of documents by hand. The man-hours and resources spent on such a project would have been astronomical, and the mortgage crisis would have been long past before most of these files saw the light of day. …