U.S. Lending Industry Meets Mortgage Process as a Service
Contributed by Rajeshwer Chigullapalli, Aala Santhosh Reddy, Nathan Longfellow, John Geertsema, Svetlana Malu
The U.S. lending industry has emerged from the subprime crisis with an opportunity to break down crippling silos in the mortgage processing lifecycle.
The U.S. mortgage market is navigating its way out of the subprime crisis. The institution of tougher regulations in combination with new systems architectures and service delivery models offers banks and other lending entities the opportunity to embrace more cost efficient and effective ways of breaking down the silos that confound mortgage processing across the lifecycle.
Figure 1 : Mortage Origination Estimates
Loan originations peaked at $3.8 trillion in originations in 2003; this year the U.S. mortgage industry forecasts around $1 trillion in originations (see Figure 1). Residential mortgage backed security (RMBS) issuance, which rose to roughly $724 billion in 2005-2006, dropped to $39 million in 2010 (see Figure 2). The steep fall in home prices and rising job losses pushed foreclosures higher. Foreclosures rose from under 1 million in 2005, to their peak in 2010 of over 3.82 million.
Figure 2 : RBMS Issuance
There are emerging signs of a market revival, however. Mortgage servicers are working through their defaulting loan portfolios and housing prices are nearing a bottom. Lower interest rates, reduced home prices, increasing credit availability, improving job prospects, and rising consumer confidence are among the key factors that could stimulate mortgage loan demand and in turn increase the supply of loans to RMBS investors.
These developments coupled with the U.S. Treasury's plan to wind down the government sponsored entities (GSEs), is being interpreted by private investors as a favorable sign for returning to the secondary mortgage market. A U.S, Treasury report to Congress in February 2011 states, “Our plan presents several proposals for structuring the government's long-term role in a housing finance system in which the private sector is the dominant provider of mortgage credit.”
The DoddFrank Wall Street Reform and Consumer Protection Act has given broad directives regarding what constitutes a qualified residential mortgage, reasonable lending practices, and risk retention requirements for loan originators and mortgage securitizers. The intent of the legislation is to promote a safer housing finance market by spreading the share of risk in the securities for originators and mortgage securitizers and improving lending standards and practices.
A Revitalized Market Requires a Fresh Approach
As banks and private investors work to implement and comply with these new regulations, many are challenged by the existence of silos within their organizational structure. Traditionally, compliance and business needs are separately addressed, a gap that has widened over time as systems have evolved. Legacy systems are traditionally inflexible and incapable of adjusting to rapid changes within the banking industry. These older hardcoded systems rely on manual intervention to provide workarounds and overcome process limitations.
The revival hinges on the banks' improved risk management efforts to mitigate repurchase risk while gaining the trust of RMBS investors. The banking industry's business processes and IT systems need to undergo considerable change in order to meet the unfolding regulatory requirements as well as build new competencies to be successful. The emerging business processes as a service (BPaaS) delivery model offers a viable option to mortgage banks in need of a technology refresh and process makeover. This approach enables banks to rely on service providers with expertise in mortgage processing services to shoulder the cost of ownership of technologies, infrastructure and people.
The emerging suite of services referred to as “Mortgage Process as a Service” (MPaaS) offers several solutions to revitalize the housing finance market. Mortgage process as a service (MPaaS), provides banks with talent and systems wherewithal to handle essential lending services. Ensuring loan quality and providing data transparency will help reduce risk and increase private investment. Additionally, the lender will be able to leverage The MPaaS partner's capabilities to be more flexible and respond to regulatory changes. By removing the cost of ownership of technology infrastructure, applications, platforms and people, and adopting a payperuse model, MPaaS enables banks to save money. They can then focus on increasing market share, while relying on their MPaaS partners to streamline processes, manage and extend systems capabilities and provide meaningful loan information to help them make better, compliant business decisions.
MPaaS solutions must address the critical aspects of the lending business beyond the need for capable bodies. Loan processing solutions, for instance, need to provide outputs that provide clear visibility into loan data at a document and field level, in addition to deeper analysis that will enable effective and compliant decisions. Critical loan origination values such as “Total Monthly Income” need to be encapsulated with the specific documents, document areas, document metadata (values extracted from the document) and calculations utilized to arrive at the critical value. The information collected should be compared against other available information and analytics to provide a more trusted understanding of the accuracy of the information. In essence, the service must move beyond the checklist prepared file to the risk and objective prepared file that clearly and methodically provides trust and transparency, in addition to analysis that allows downstream consumers of the service to extract more value.
By leveraging a MPaaS partner, mortgage banks will be better positioned with critical information to make better loan decisions. MPaaS providers, for instance, can act as infomediaries to provide independent and unbiased information about the mortgage transaction to enable originators to make sound lending decisions and underwrite quality loans. In addition, such information will also aid the originators to present quality information about their loans to mortgage purchasers. The MPaaS partner can offer and package information that is specific to the vintage of the loans, the demographics, the overall credit quality, etc. As infomediary, the MPaaS partner will ensure transparency in loan sales by offering flexible platforms which comply with underwriting criteria as requested by the user. The information available to the user will foster trust and build sustainable business foundations. The mortgage purchasers will have greater knowledge regarding the pools of loans that they are buying, which will remove the mortgage purchase risk that was prevalent in the past.
Better loan information, will lead to better loan originations, informed loan purchases, increased loan performance, reduced risk, reduced repurchases, and a stronger housing finance market.
For more information, please read the complete white paper U.S. Lending Industry Meets Mortgage Process as a Service (PDF) or learn more about Cognizant's Banking & Financial Services practice.