If ever a sector within financial services were in great need of technology and automation, it would be the mortgage industry. This industry continues to be plagued by time-consuming processes that are both paper- and labor-intensive. Front end systems often do not communicate efficiently with back end technologies and third parties such as appraisers and county registries are often not integrated into the process by electronic means. Large portions of the fulfillment procedures are therefore left to be completed manually, often resulting in a backlog of transactions. In essence, most Internet lenders have done little more than substitute a Web page for the call center that has originated loans for years.
The size of mortgage transactions creates another barrier to online adoption. The large dollar amounts synonymous with mortgage loans result in a large percentage of mortgage transactions being handled over the phone and at branches, an extremely expensive channel for banks. Mortgage seekers have shown a willingness to turn to the Internet for rate comparisons and information, but adoption of this channel for mortgage closings has been slow, as human interaction is preferred.
Given these factors, lenders, until recently, have had little incentive to invest in technologies that promise so few benefits. Mortgage solution providers, however, are optimistic. They promise next generation solutions that will provide time- and cost-savings on the back end and for the consumer, a combination necessary for greater adoption.
Current Market ConditionsCelent estimates that online originations comprise only 5-6% of all new mortgages. The top ten lenders, such as Countrywide, Washington Mutual, and GMAC, are responsible for most of those transactions. The majority are refinancings, but this will change as interest rates fluctuate. Although volumes will decrease as interest rates rise from record lows, advances in technology will increase the percentage of mortgages originated online to over 10% by the end of 2005.
Technology Drivers Three major forces are driving the need for advances in mortgage origination technologies. These forces are shaping the marketplace and leading to higher penetration rates.
Changing Attitudes: The mortgage product itself has been a barrier to online advancement. Mortgage loans have significantly higher nominal amounts than most financial transactions. Application completion also often requires the borrower to have some knowledge of mortgage terminology. Finally, mortgage loans require consumers to submit significant personal information which they may be uncomfortable transmitting over what many consider an insecure medium. These factors, coupled with the notion that consumers are not yet ready to adopt the Internet as their primary channel, have encouraged many borrowers to rely on live agents to walk them through the mortgage process. Today, however, consumers are more comfortable with the Internet and have become more accustomed to completing many of their smaller financial transactions online. Adoption of online mortgages is a predictable next step.
In order to truly increase adoption, however, solutions need to become "smarter" and to provide full optimization. Online calculators and the ability to perform "what-if" analysis have helped bring borrowers closer to the self-service Internet model. But more needs to be done to increase borrowers' comfort with the medium and reduce their dependence on live agents. The burden of product selection needs to be lifted from the borrower just as it is when using a live agent. For instance, the system can ask a series of preference questions in order to determine constraints and recommend the most appropriate product.
Insufficient Back-End Solutions: Consumers have grown to expect convenience as well as time- and cost-savings from the online channel. They not only expect pre-approvals on the front-end in less than five minutes, but also fully automated, time-saving back-end systems. That this ideal is not yet a reality often frustrates customers. Next-generation solutions promise greater efficiency and the introduction of more third-party participants into the automated process. Credit-decisioning engines and links to credit bureaus have been available for some time, but the more labor-intensive steps, such as assembling mortgage loan packages, and ordering title searches, appraisals, and flood certifications, have yet to be fully automated. Their eventual automation will eliminate the time spent sending faxes and making phone calls. Eventually, all documents will be sent electronically. New browser-based solutions will replace older, inflexible legacy systems whose limited automated capabilities reduce efficiency.
Greater automation will also help to alleviate some of the anxiety associated with applying for a mortgage and make the customer experience less stressful. Borrowers will obtain more timely information than is currently available and they will have the ability to track the completion of their loan at various stages, thereby providing a greater sense of control and eliminating delays due to human involvement.
Cost Cutting: The mortgage industry is vulnerable to interest rate fluctuations. This unpredictability creates the need for lenders to invest in technologies that can handle increased volume during good times while providing cost-cutting efficiency during bad ones. Cost-cutting is especially important today as an increase in interest rates and an end to the refinance boom seem inevitable. The rate increase will likely lead to decreased overall mortgage volumes, but the slowdown in business will also give lenders more time to deploy new technologies. By automating the labor-intensive steps mentioned above, and by increasing the number of documents sent electronically, the lender can spend more time answering clients' questions and maintaining relationships, while also cutting costs and saving time. Offline mortgages cost between $1200 and $1500 per unit. Online originators claim costs of less than $500 per unit.
Mortgage origination technologies still have a way to go to meet expectations, but the stage has been set and solution providers know what is expected. Creating greater automation to make the investment worthwhile for lenders, and the experience more pleasant for borrowers, is perhaps their greatest hurdle, but one that can be overcome. Greater use of digital signatures will play a large role in helping to move the market closer to where it wants to be, but the reality of a truly paperless mortgage seems to be nothing more than a distant vision.
Christine Barry is an analyst in the banking group at Celent Communications, a financial services research and advisory company headquartered in Boston, Massachusetts. Christine may be contacted at [email protected]