Good Times, Bad Times

It's a familiar-enough story. When times are good, everyone's too busy to worry about cost-cutting. But when times are bad, who's got the money for a brand-new infrastructure? That seems to describe the state of the mortgage industry, according to a recent report from Celent Communications, headquartered in Boston.

The refinancing boom, fueled by falling interest rates, had many mortgage originators scrambling to keep up. "With efforts focused on handling high transaction volumes, mortgage lenders have had little time to focus on cost efficiency since the start of the mortgage boom," writes Christine Barry, Celent analyst and author of "Mortgage Technologies: Paving a Path to Full Automation."

Rising Customer Complaints

The quality gap has been evident in customer satisfaction measures. For instance, the Office of the Comptroller of the Currency (OCC) reports that complaints about mortgages now comprise nearly 25 percent of all loan complaints, up from 11 percent of all complaints filed in 2000.

Furthermore, the complaints haven't gone away now that interest rates have been heading back up. The most recent raft of complaints has come from disgruntled consumers complaining about rate locks that were not honored to their satisfaction, as per prior agreements.

But now, mortgage originators should have some breathing room. That's why Celent expects that almost half of the top 100 originators will deploy new loan origination systems by 2005.

The smaller originators may not follow suit immediately. Out of about 7,700 mortgage originators in the U.S., only six percent are expected to deploy new loan origination systems. In total, Celent estimates spending on origination systems to exceed $200 million from 2003 through 2005, excluding maintenance and license fees for existing systems.

But even without economies of scale, the smaller players might thrive. "Although scale has proven to be an operational advantage thus far in originations, automation can allow sub-scale players to stay in the game," according to Barry.

Do-Not-Call Obstacles

Indeed, it's the high-volume originators that stand to lose the most when refinancing volumes fall off. Also, new regulation threatens to have a significant impact on the origination business, particularly for the larger players. "Additional cost-cutting pressure will be placed on lenders in the months to come as a result of the federal government's recent launch of a national 'Do Not Call' registry designed to curb residential sales calls," reports Barry. "The registry represents a major challenge to the mortgage industry as telemarketing is vital to the generation of much of its business."

As such, the registry will further increase the pressure on the largest originators to cut costs, and make the Internet more important for marketing, retention and service, she forecasts.