Where Banks Lie on the Mortgage Technology Curve
Lebowitz, Jeff, Bechoeffer, Ina, O'Sullivan, Orla, ABA Banking Journal
If the core mortgage lending functions, loan servicing has been automated the most. Mortgage servicing systems have been available since the mid 1970s, either through in-house implementation or by service bureau contract. As figure 1 shows, essentially all (97.3%) loan servicers have automated their operations (90.5% of commercial banks respondents service mortgages and 98.1% of these are automated.) There has been widespread automation of servicing since 1992.
Loan origination and secondary marketing systems, however, are not so common. Approximately one in five mortgage firms operates without a loan production system today, down from one in two, in 1988. Since then, the proportion of first-time users of origination systems has grown, on average per year.
Conversely, secondary marketing automation has declined since 1994. This may reflect sellers increased use of investors' automated underwriting systems, which also automate secondary marketing.
Only 50% of all originators, and 40% of commercial banks have automated secondary marketing. This indicates that loan sales decisions are quite often being made without formal decision support.
This is somewhat surprising given that 91% of all originators (93.7% of which are commercial banks) sell loans on the secondary market. Of these, 16% of the group (and 15% of commercial banks) sell their entire portfolio to one or another of the government-sponsored housing finance agencies. These companies, essentially correspondents of the agencies, do not require systems support to analyze best execution for loan sales. Among the other 84% of sellers, 51.2% lack an automated secondary marketing system. They are selling to competing investors without the benefit of a system for comparing pricing and sales execution.
The relative lack of decision support technology underlies our conclusion that the industry is broadening its use of technology, but not necessarily using it to the greatest advantage.
If the mortgage industry is falling short in its employment of technology the explanation might partly be found in lenders' attitudes toward technology. Since the first MORTECH survey was fielded in 1988, there have been clear signals that lenders have come to regard technology as more important to their businesses than they used to. The reevaluation, however, is far from complete.
Figure two (on the next page) shows that, today, slightly more than 20% of mortgage players characterize their technology use as strategic. Even this smallish proportion represents a doubling (since 1988) of those who invest in technology to improve their business position. The problem is that the balance of the industry remains consumed by day-to-day pressures and takes an operational view of technology. They report funding technology on an asneeded basis. (MORTECH asked respondents to describe their technology attitude as "strategic", "tactical," or "operational," correlating, in MORTECH's view, with a long-term, mid-term, or short-term focus, respectively. However, surveyors left the terms open to respondents' own definitions.)
While technology is becoming more widely recognized as critical to business success, its implementation severely lags its perceived importance. We find that only 5.0% of lenders perceive themselves as being at the leading edge in applying technology. This suggests lenders must (1) update their technology and (2) use their existing technology more effectively.
Asked what their major technology objective is, a third of lenders said standardizing what they have while another quarter said modernizing it.
Throughout the decade, demand for new core banking systems has been high. Every two years since 1988, an average of 28.2% of MORTECH respondents said they were shopping for a new origination system (typically 71.3% of these were replacing an existing system). Today, the level of those seeking a new origination system has risen to exceed 33. …