The aftermath of the mortgage meltdown has forced lenders to scrutinize the capabilities of their technology to keep pace with regulatory and compliance changes. Technology providers must incorporate new forms, documentation and calculations in order to ensure that their systems aren't obsolete.
But the impacts of regulatory and compliance changes go further than just updating documents or calculations. Investors and regulators, such as the recently developed Consumer Finance Protection Bureau (CFPB), are demanding greater transparency of a lender's process, requiring more-detailed and better-quality data. As a result, data that was sufficient in the past is being taken to task, especially for lenders that rely on integrations between more than one system to run their operations.
Multiple databases and incomplete transfers of data make it difficult for lenders to locate information that is accurate and that can be relied upon for critical business decisions. The potential impact can be catastrophic for a lender given the increased scrutiny and penalties that can be levied on lenders by agencies such as the CFPB.
According to the Mortgage Bankers Association (MBA), secondary marketing profit margins have declined in the past two quarters, and this had a substantial impact on lender profitability. Between the third and fourth quarters of 2011, average secondary marketing profits dropped 15 basis points (bps) and average net production profit fell to 58 bps, reducing lender profitability by 25%. Therefore, lenders are looking for new platforms to help them lower their cost per loan and improve profitability to mitigate the impact of falling secondary marketing gains.
Since 2006, more than 80,000 mortgage brokers have exited the business as loan volume dropped from a peak of $3 trillion in 2005 to an expected volume of less than $1 trillion in 2012. As the overall industry struggled, so did mortgage technology vendors.
According to industry experts, the mortgage technology vendor market shrank from approximately 600 vendors in 2005 to just 300 today. And the contraction continues as merger and acquisition activity heats up. This consolidation activity is causing lenders to question the long-term viability for continued vendor support of their platforms, especially if the vendor has recently been involved in a merger or acquisition.
As a result, lenders are taking pre-emptive actions to search for a technology vendor that provides a greater degree of comfort related to a long-term commitment to support and enhance their platforms.
In spite of the industry's struggles, mortgage technology continues to innovate with the rest of the business world. The Internet, cloud computing and mobile technology are just three examples of newer technologies that are beginning to establish themselves as key drivers of growth.
The emergence of cloud computing is by far one of the biggest advances that is changing mortgage technology, especially in the loan origination system (LOS) space. Lenders are able to reduce their total cost of software ownership (TCO) by as much as 70% using a cloud-based or -hosted solution, and they now have the ability to scale software more efficiently – these factors are swaying lenders to change their technology.
Although mobile technology is still relatively immature, lenders are also taking a serious look at the technology as a way to drive more efficiency and to attract volume-producing talent to their organization. While completing a 1003 application on a smartphone is still a ways off (at least practically speaking), the ability to link originators to information in their LOS and real-time pricing tools are already here. The direction that mobile technology will go is unknown, but many predict that it's only a matter of time before lenders are expected to have some form of mobility built into their technology strategy.
It's been a long time coming, but the Internet has finally become a legitimate business channel for lenders. Although the concept of using the Internet to market home loans is as old as the Internet itself, actual usage by consumers was scant until recently.
LendingTree.com, one of the pioneers of Internet mortgage lending, reports that 21% of consumers now use the Internet to shop for a home loan. With the concurrent growth of online mortgage marketplaces like LendingTree and Zillow, mortgage lenders of any size can look to the Internet as a legitimate source of loan volume.
When we face a problem, our natural instinct is to solve it. When we see an opportunity, the instinct is to go after it. So in the fast-paced world of mortgage lending, it's only natural for lenders to have a reactionary response to problems and opportunities.
However, this type of reactionary behavior can be counterproductive and ultimately lead to poor decision-making. Moving quickly to quash a problem or take advantage of a new opportunity can turn into a game of whack-a-mole: as one problem or opportunity is solved, another one appears. Since not every problem can be solved nor can every opportunity turn into The Next Big Thing, a reservoir of frustration builds into a crisis, at which point the executive staff calls for a technology makeover.
This reactive model of decision-making creates a list-driven process of technology evaluation. Lenders gather all of their identified problems and opportunities into a wish list and embark on a search for a provider that can meet these needs. The provider that is best suited to satisfy their wish list at the lowest cost is the one that is selected. In response, technology providers market and sell their products using ‘feature lists’ to make it easier for lenders to identify their value.
Why, then, do so many lenders end up having buyer's remorse? Although data is scant, one study showed that only 60% of lenders were happy with their LOS technology investment. Many were disappointed with rollout times, cost overruns and customer service.
But more telling is that one out of four lenders in this study felt that their provider over-promised on functionality and ended up delivering vaporware. In fact, almost half of all lenders believed that vaporware is a common occurrence in the mortgage technology industry.
But what would vendors have to gain by not delivering a solution that they promised? And why would lenders continue working with a company that they felt did not follow through on their promises? We believe that the real cause of dissatisfaction with technology outcomes is not dishonesty, but a lack of understanding – a lack of understanding between lenders and vendors, as well as a lack of understanding that lenders have about themselves.
When lenders go through their wish list of desired functionality and say they need a document imaging system, for instance, they don't communicate the reason why they need it or the actual problem they're trying to solve. Is it because the cost of handling paper is too high? Is it because their staff has a hard time finding documents because they're in different locations? There are several reasons behind a request for a feature or tool.
Therefore, it's easy to see how a lender's needs can easily become lost in translation, and how that can result in dissatisfaction with technology choices. Vendors aren't necessarily guilty of delivering vaporware; they're simply making wrong assumptions about lender expectations.
Linn Cook is director of marketing and Binh Dang is president of Costa Mesa, Calif.-based LendingQB. They can be reached at (888) 285-3912. This article is adapted and edited from their new white paper, ‘Making Better Technology Decisions.’