REQUIRED READING: The late Steve Jobs once remarked, ‘I have a great respect for incremental improvement, and I've done that sort of thing in my life, but I've always been attracted to the more revolutionary changes.’ Jobs, of course, never focused his talents on mortgage banking pricing engines, but could his message of revolutionary change find resonance in regard to this niche product?
Robert Wolf, vice president of capital markets at St. Louis-based Lenders One Mortgage Cooperative, believes a little revolutionary change would benefit today's pricing engine technology, especially in view of today's mortgage banking market.
‘Pricing is more complex over the last several years,’ says Wolf. ‘All different types of risks come into play today, which makes it difficult to quote off a rate sheet. And mortgage bankers do not want to be dinged on the back end by the government-sponsored enterprises (GSEs) for something they've missed.’
‘The number of investors and lenders in the market today is larger than it was five or six years ago,’ adds Mark Coupland, vice president of business development at Appleton, Wis.-based LoanSifter. ‘Today, it is not just the major banks that are purchasing all of the loans, but there are smaller institutions, too. Originators selling to multiple sources need to understand all of the nuances between all of these entities.’
‘The days of the original pricing engine, where we just did quotes and it was all online and we didn't really offer any other pieces that help the loan officer, are gone,’ says Don Kracl, vice president of Seattle-based Zillow Inc. ‘I think that model of a pricing engine probably is dead and probably has been for about five years.’
But according to industry experts, the next generation of pricing engine technology needs to be adapted to meet the requirements of today's industry. For Kracl, the current lending environment requires that the technology accommodate both the originator and the customer.
‘We never used to think of a consumer until we had an application,’ Kracl says. ‘If I got 50 calls a day asking for rate quotes, I didn't track them or call them or care about them. I would have liked to care about them, but I simply didn't have the tools or the time to follow up with these people.
‘Now, with the high cost of doing business, getting into a conversation with every consumer is more important,’ he adds. ‘I need to start that relationship, whether the customer is ready to borrow today or 30 to 60 days down the road – or even longer than that. The process has evolved from a reactionary process to more of a proactive attempt to engage consumers. It's about the need to get them to engage with me, versus someone else down the street or maybe even another loan officer in my own office.’
Coupland agrees, noting how this traditionally business-to-business technology may soon need to emulate popular consumer-facing formats.
‘It is about empowering borrowers,’ he says. ‘Look at the way people book hotel rooms and airplane tickets: They have the power to look at particular pricing. The mortgage market is obviously a little more complex, but it faces a situation where the borrower wants to enter information and get an answer back fast.’
Wolf points out that any consumer-friendly upgrade to pricing engine technology will have to incorporate the proliferation of mobile computing.
‘People are on the go, and they will want to price while out in the field,’ he explains. ‘Lenders will want to be confident when they are sitting in front of customers in a coffee house and showing the correct pricing to them.’
However, Wolf points out that this aspect of pricing engine technology enhancement will require additional upgrades to ensure data protection.
‘In a mobile app, the key is the security of the information – and there is difficulty doing that in mobile environment,’ he says. ‘There are also a lot of complications in working with GSEs and getting them to sign off on running mobile apps.’
Within the industry itself, many experts see pricing engine technology evolving to take on further responsibilities. Dominic Marchetti, executive vice president at Blueberry Systems, based in Greenwood Village, Colo., points out that despite the smaller variety of loans available today, the complexity in handling these products has increased.
‘Although there are fewer products, there is an increasing number of overlays that shape the finer points that drive the products,’ he says. ‘There are more nuances now than existed during the height of the industry.’
Binh Dang, president of Costa Mesa, Calif.-based LendingQB, predicts that the next generation of pricing engines will be able to address the specific underwriting requirements demanded by different investors.
‘Even though Fannie Mae might say that it will issue the loan, the bank may say that it will not buy it,’ he says. ‘Traditional pricing engines have no ability to process this type of data. The technology is not using the details of the credit reports that investors have overlays for.’
Tim Anderson, director of corporate technology strategy at Melbourne, Fla.-based ISGN, forecasts that pricing engines will also expand to meet the guidelines being formulated in Washington.
‘With the Loan Quality Initiative from Fannie and the Real Estate Settlement Procedures Act with the Consumer Financial Protection Bureau, the vendors will be forced to adapt sooner than later,’ he says. ‘With the secondary market coming back, we can also see some risk-based pricing models as well.’
Anderson adds that these enhancements may encourage new vendors to come into the pricing engine space.
"I see no barriers to entry," he says. ‘The new players may come from the credit quality risk-based types, not from the traditional pricing engine type of guys.’
For Paul Anastos, president of Walpole, Mass.-based Mortgage Master, the future of pricing engines could not come a minute too soon.
‘Guidelines change so rapidly, and we're pricing change three to four times a day,’ he says, adding that vendors are more than ready for the challenge. ‘We find the pricing engine companies very willing to work with us on ideas we've not seen integrated.’