The House Of Bricks And Clicks

Last year's failure of Mortgage.com to reshape the industry in its own image hasn't slowed the push toward online origination and automated underwriting of consumer mortgage loans.

But the concept's much-publicized demise has convinced industry participants to take a more measured approach, supplementing the online channel with technology to help real estate brokers, mortgage brokers and loan officers to guide consumers through the still-complex homebuying process.

"There was a lot of speculation in terms of everybody just going to internet-only vendors. That did not occur," said Craig Davis, president of Washington Mutual Home Loans & Insurance Services Group. "Having a combination of both clicks and bricks seems to be by far the choice of the majority of borrowers."

Mortgage.com, the Sunrise, Fla.-based company founded in 1993, offered lenders seeking an online presence an innovative mix of a consumer Internet site with back office, call center and Web site technologies.

Unfortunately, Mortgage.com struggled to generate sufficient online loan volume against a backdrop of rising interest rates and low adoption of online origination. The company was finally forced to close its doors in late October after backers including Bank United and GMAC Residential Funding refused to provide additional funding. In December, Dutch bank ABN AMRO purchased the "mortgage.com" Internet domain name from the ailing dot-com for $2.2 million.

Industry experts cite a number of reasons as to why Mortgage.com failed to catch on with consumers

"To drive people to the Internet site you have this component called 'marketing and advertising' which you don't typically have as much of in the retail channel," said Richard Beidl of TowerGroup. "Brand name hasn't been a really important factor in mortgage lending-it's more about relationships at the point of sale."

"They were really innovators. The industry learned a lot from what they've done," said Richard Barfus, president and CEO of MindBox, Greenbrae, Calif., formerly a Mortgage.com strategic partner. "But the guys that are going to win are the big players that treat the Web as just one more channel."

The big mortgage lenders tend to agree, citing advantages of scope from owning integrated customer channels. "The dot-coms really don't have the depth of infrastructure required to sustain and build that business model," said Richard Jones, chief technology officer of Countrywide Home Loans, Calabasas, Calif. "They have to hand the transaction off to behind-the-scenes players that are not as seamlessly integrated."

TECHNOLOGY SPUR

Despite these problems, mortgage providers remain bullish on the Internet, thanks in large part to technologies such as automated underwriting systems, which have been instrumental in opening up the Internet channel to consumer traffic. These systems supplant the role of the human underwriter in selecting appropriate loan products to offer most borrowers. The leading online originators are starting to offer loan decisions in under a minute. (See sidebar on page 32).

Once a potential borrower using the Internet receives a loan offer from an automated underwriting system, the bricks-and-clicks strategy shows its advantages. "You type in seven pieces of information and get a certificate that's good at any Countrywide branch for a loan for the amount that you requested," said Jones. "That's only been made possible through our automated underwriting and back-end automation of credit analysis."

Although Countrywide has over $300 million per month in fundings through direct consumer transactions, Jones points out that most business still comes through mortgage brokers. The Countrywide Wholesale Business Channel at cwbc.com provides "a toolbox for a mortgage broker" to lock rates, check loan status and send application data to Countrywide, said Jones. "It's extremely convenient for a mortgage broker to do business through cwbc.com."

Washington Mutual's Optis loan origination system provides similar automated underwriting capabilities to its own branches and Internet customers as well as to mortgage brokers. "Optis is designed to really make it easy for mortgage brokers to do business with us electronically," said Washington Mutual's Davis.

Optis evaluates both conforming mortgage loans-which can be resold to secondary market participants Fannie Mae and Freddie Mac-and nonconforming loans to be held in Washington Mutual's portfolio. "The portfolio systems are a little bit more complex," said Davis, who says that even a borrower seeking a nonconforming, high loan amount, low-documentation mortgage can receive a decision with conditions in 20 seconds.

"Ultimately we'll see mass customization of a commodity product. We'll be able to talk to borrowers about their specific needs," said Davis. "Today you can make a fixed payment, but six or seven years from now, somebody may have a couple of kids in college and may want to have a lower payment for some period of time."

HomeAdvisor Technologies, a majority-owned Microsoft venture with equity participation from Chase Manhattan Capital Partners and GMAC Residential Funding, operates an automated transaction services platform for mortgage lenders including Bank of America and Chase Manhattan Mortgage Company. Home buyers can access the platform directly through the MSN MoneyCentral Web site.

"We're sort of revolutionizing the definition of an LOS loan origination system, but in today's terms we're not an LOS," said Tim Newberry, vice president of HomeAdvisor. The HomeAdvisor platform essentially acts as middleware, giving lenders a common set of application program interfaces (APIs) to multiple loan origination systems, automated underwriting systems and settlement service providers. The mortgage division of Fiserv, Brookfield, Wis., has licensed HomeAdvisor technology to include in its offerings.

"We can hide all of the legacy issues behind the platform," said Newberry. "What happens with the big lenders is that they've got four loan origination systems and they just haven't had time to consolidate them into one." Loan applications are passed along to automated underwriting systems including Fannie Mae's Loan Prospector (powered by MindBox) for conforming loans, GMAC-RFC's AssetWise for nonconforming loans and a proprietary Chase system.

The HomeAdvisor platform crosses into loan aggregator territory by providing consumers with quotes from multiple lenders. With rate quotes based on the potential cross-sell value that an investor places on a particular borrower, HomeAdvisor will give consumers "one of the best prices possible," said Newberry. "This allows lenders to create great incentive-based pricing on top of the credit risk pricing."

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An Intelligent Approach to Automated Underwriting

An expert system is an artificial intelligence application that applies a set of rules to a given situation in an attempt to mimic the human decision-making process. Although such a concept sounds futuristic, the technology has already found a home in the mortgage business.

MindBox's ART*ENTERPRISE expert system powers the automated underwriting systems of secondary market heavyweights Fannie Mae and Freddie Mac and mortgage lenders Countrywide Home Loans and HomeSide Lending.

Chris Winner, first vice president of artificial intelligence for Countrywide Home Loans, described MindBox as providing templates for building expert systems in the same manner that Excel has templates for creating spreadsheets.

Countrywide's system currently contains about 2,500 rules, according to Winner, of which 500 trigger for any one loan decision. The rules were built up from an initial base of 1,100 as the artificial intelligence group gained experience and incorporated new products into the system.

Increased efficiency from later versions of the MindBox engine has allowed for faster deployment of new rules, Winner added.