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BY_JEFF LEBOWITZ_MORTECH_LLC
We are working in a time of unprecedented technological change. Compounding technology change is an historically disruptive regulatory environment. It is reasonable to conclude that change today is truly dierent than what we as individuals and as managers have ever known. Some say that the change we now experience can only lead to a process of creative destruction that will change the structure of the industry and upend lenders traditional business models. (See Exhibit 1)
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Creative destruction is a concept related to economic innovation, but few pay attention to what it means for a company. The term describes change as incessantly revolutionizing commerce and market structure, incessantly destroying traditional approaches to business, and incessantly creating new business models appropriate to coping with changing business conditions. In mortgage, there has been a change in the world view of who makes the rules determining product definitions and market behavior. Regulators have forced
a rethinking of how managers define and deal with underwriting models, the definition and management of risk, how to recognize a qualified borrower, what rules govern the relationship between primary and secondary markets, and what data is valuable and what uses are to be made of the data. Large-scale regulatory intervention is an external shock to traditional business models. It is difficult to interpret and respond to, and it causes disruption in the normal working of markets mortgage markets in this case.
Mortgage bankers are suffering the consequences of the early stages of a paradigm shift. Mortgage banks and mortgage subsidiaries of chartered banks made an average profit of $743 on each loan they originated, down from $1,528 per loan in the second quarter, according to MBA data for the third quarter of 2013. In the same MBA report, average production volume was $391 million per company, down from $439 million per company in the second quarter. The volume by count per company averaged 1,788 loans, down from 1,921 in the second quarter. (See Exhibit 2)
EXHIBIT 1: M ORTGAGE ORIGINATIONS IN 12 YEAR DECLINE IN VOLUME LENDERS IN A BATTLE FOR MARKET SHARE
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Unlike past episodes of profit decline, it is conceivable that bankers are experiencing something worse than a typical business cycle. Mortgage companies reflexively turn their focus to cost management. However, if we are in something more than a cyclical downturn, cost reduction alone will not be enough to compensate for shrinking volume. Traditional business methods will need to change. After the financial crisis of 20072008, government has intervened in all levels of mortgage operations. The federalization of the secondary market has caused a true, dyed-inthe-wool paradigm shift. Neither the government nor the industry have yet to reach a consensus on what will be the effective governing policies or business models appropriate to the incoming paradigm. Will it be run with private market funding? Can populist policies that subsidize mortgages to maximize home ownership reemerge? Will the industry restructure into an oligopoly with a small number of large lenders determining the rules of trade in the mortgage industry? No matter the outcome, successful market participants will embrace and integrate new technologies, alternative distribution channels and fact-based strategies formed around good data and analytics that describe and more importantly predict optimal firm behavior.
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the Federal Housing Finance Agency, to implement UMDP. Their overarching goal is to put in place single-family data standards that will improve the quality of data and provide consistency of definition throughout the mortgage industry. FHFA mandates what lenders have voluntarily pursued since 1999 with MISMO. It is MISMO that initiated a standard approach for two businessrelated firms to streamline shared data contained in forms or reports. Government mandate and industry forces have laid the ground work for digitizing mortgage operations. The value of data has appreciated further as the U.S. Congress and the Obama Administration propose expansion of risk-management requirements. High demand for data forces new automated applications which can raise technological risk.
(See Exhibit 3)
sers resist a new system when they U have to be retrained and change their traditional way of working. ltimately, users do not want to U be accountable for whether or not investments in new systems payoff as expected. rojects do not end with installing P the new system. To actualize the potential of a new technology application, business processes have to be reengineered. onverting data from old to new C systems is risky and more difficult than planned for.
Changing technology platforms represent one dimension of technological risk, and brings with it uncertainties and potential failure. No change comes without risk. There is always risk, no matter how small.
equirements for a new system R change as the business changes. sers have limited input in selecting U the new system. taff does not expect the new S system to change workflows.
Many of the systems and technology changes being required today have no obvious payback.
EXHIBIT 3: DATA CHALLENGES: DATA IS IMPORTANT TO SENIOR MANAGERS IMPLEMENTATION HAS ITS CHALLENGES
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Compliance with rapidly escalating rules generation does not enrich lenders and requires smart choices to avoid punitive penalties and increased operations risk. As a result, regulated firms have adapted existing information technology systems created originally for internal management purposes, and now are developing new ones intended specifically to satisfy government mandates. This creates a proliferation of systems that also raises technological risk. Lenders who emphasize decision making based on data and business analytics (data driven decisionmaking) show higher performance results. Value is created from reliable information flows. Revenue and efficiency gains derive from processing verified electronic transactions. Business applications must have access to data that has been integrated from a wide variety of sources, in-house or externally sourced. Data frequently are loaded into separate systems. This makes obtaining a complete, efficient, accurate data set elusive. Operations performed efficiently and effectively require the relevant data to be received, formatted, sorted, validated and readily accessible. The increasingly pervasive reliance on technology comes in the form of information-technology and decision-automation system software and analytics. These are the core capabilities to assess and control risk, and to comply with government regulation mandating its management.
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of supply chain partners in misusing digital linkages and exploiting the inter-firm relationships. The concern over these risks often discourages lenders from adopting digital operations to support their inter-organizational operations. Effectively selecting the right business relationships to be digitized brings flexibility, reliability, and lower cost to various activities. Technological change leaves behind some people, perhaps even a lot of people, who avoid this change to their detriment. Faster response times to imminent change are essential to improving business performance and avoiding obsolescence. Information deficits and delays in getting information promptly offset technological risk and support adoption of digital operating processes. Lending executives increasingly will find appreciation for and use of their data. Focusing on data will lead to new ways to collect the data, utility in using data, and will develop technology applications driven by data. By necessity, lending executives will become technically savvy. They will collaborate directly with IT to build competitive digitized companies.
Industry leaders create and nurture their ecosystems by coordinating and harnessing the collective power of developers, partners, and others integral to their shared success. What is distinctive about viewing business as an ecosystem is that management focuses on more than a
single function and works to make the business entire ecosystem more effective. Focusing primarily on which players in the ecosystem brings new advantage to the business. Successful management of relationships within a lenders ecosystem has become a core competency for senior management.
EXHIBIT 5: DATA REVEALS INNER WORKINGS OF MORTGAGE MARKETS HIGH END SEGMENT OUTPERFORMS LOWER END
In the modern era of computing, lenders need to add one more consideration when evaluating a new technology investment: does the vendor build their capabilities on a platform-architecture? The platform-architecture may be a more complete solution when aligned with particular workflows in a lenders operation. Vendors with services built on a consistent and reusable technology platform can network complementary services into their service packages. Complementary services may be developed by the vendor or attached from a specialized supplier (e.g., risk analytics). Having access to a menu of complementary services from one processing platform allows a lender to customize a solution through one vendor, the vendor that best fits
the lenders operating and financial needs. Lenders benefit from the fact that the platform-architectures inherently run with economies of scale. The architecture reduces a technology buyers costs of searching for a complete solution, offers a more efficient implementation of a solution, and lowers coordination and support costs. Finally, the flexibility of a platformarchitecture reduces technology risks for vendors and their clients alike. Connection to essential technology solutions that hang off a platform is the key to compliance, data integrity, and risk management. Platform-oriented technology is the new driver of innovation and growth. Aligning with vendors operating from a common platform will assure lenders are able to adapt to the uncertainties that are the future of mortgage banking.
Knowledge of mortgage industry Functionality of technical solution Total solution cost Technology competence Financial strength
FOOTNOTES:
1. Reference data: data that describes financial transactions and helps identify the participants in those transactions. 2. 2013 Data & Analytics Global Executive Study