Daily Briefing Weekend Edition

Study: Recovery Requires Fixing Mortgage Lending Process

By Anthony Garritano

CLEVELAND-While market conditions remain bleak, a research report done by Mark Dangelo, managing principal at Innovative Relevance here called "Mastering Survival Integration for the Mortgage Industry," points to problems in the process that if fixed, could lead to a healthy mortgage market again.

"I wanted to talk about this in a day-to-day, process type way," explained Mr. Dangelo. "Coming away from MBA annual last year we at Innovative Relevance were convinced that the industry had not come to terms with the extent of the downturn. We're looking at a double bottom with a mini-bounce in the middle. We saw that bounce in January with the refinance surge and now we're headed to the second bottom.

"When we begin to look at solutions to our problems we look at technology. Technology however is just a catalyst. It's a means to an end, but it's really about the process. We have to look at the data, we have to think about how we collect that data, how we bring it together, etc. From there, we have to examine what data we collect and why. If we understand what data we need to run our business and our process around that data, we can do a better job of sourcing that internally, to a vendor or to an outsourcer."

The deck for the report states: "Covering over 200 processes within eight functional classifications, this detailed sector report provides the framework for sustainable operational improvements that must be made by organizations seeking answers, while incorporating downstream financial implications." The report details everything a mortgage lender does. When discussing the process, the report doesn't just talk about processing a loan.

This point is made in an illustration called the Mortgage Process Wheel, which has FSI/Mortgage Banking at the core, which is surrounded by, marketing and PR, human resources, compliance and risk, information technology, research and analytics, finance and administration, and legal, that it's not just about loan processing. From there the report details the different pressures being placed on the industry and how the process must change.

"You can't go to the market looking for a technology solution to suit your process. So, we thought: What are the typical processes. We isolated 205 processes that go into making a mortgage lender," noted Mr. Dangelo. "So, we built a process framework. Once you build the framework you can better understand how to automate.

"Every organization can go through this framework to see where they fit. Lenders can apply this to their own organization and apply a best-in-class approach to gage processes and technology. The best way to use the report is to understand there are going to be permanent changes in the industry going forward. From there use the process framework to decide where to start.

"With every quantitative approach, whatever the methodology, you have to know where you're at. We're defining the environment. How are you managing the process? How am I using the data? From there, how do I make it better? By using a structured approach you can apply the information in the report directly to the lending institution."

The conclusions in the report are being substantiated by change management specialists like Ruth Thompson, senior principal, mortgage document preparation, at Wolters Kluwer Financial Services. "There's no doubt that the lending process will have to change. There will be more regulation as well. There will be a need to increase transparency. Stocks are being sold in large percentages. International companies are going to have a big impact. Lenders will look to experts to start outsourcing to subject matter experts. There will be a need to audit everything. Best practice and execution will be important and it won't always be about the best cost.

"It's a more global market. There have been those that say we have the resources to fix this here, but I don't agree. International companies are playing a much bigger role. Lenders will have to turn to people that have knowledge process outsource tools. The winners will have an understanding of how to manage their technology tools. Software as a Service behavior is one way to get there. As lenders look at efficiency they'll outsource things like regulatory compliance and change management."

Compliance and document creation executive Roger Gudobba, chief strategy officer at Compliance Systems, added, "Regulatory changes for the mortgage industry are no longer a question mark, but rather it's about when and how the industry will be forced to make changes. The challenge will be to take the time and formulate a concerted effort to improve the mortgage process.

"This report provides analysis of the industry with some very thought provoking ideas on what and how to change. Mr. Dangelo considered both internal and external dynamics in his analysis, everything from the subprime crisis, regulatory oversight, the influence of Sovereign Wealth Funds, mergers and acquisitions, consolidation and outsourcing.

"Lenders will surely outsource securities, data management, etc., because you don't win there. Lenders aren't data management shops and they shouldn't try to be that either. They need to focus of their core competency, which is providing a product for the consumer. Going forward, lenders will and should re-think what is core to what they're really trying to do in this market."

But Mr. Dangelo says that change can't happen until lenders understand their existing process and its weaknesses. "You clearly have to understand all the process elements before you make purchase decisions."