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Industry in depth
Technology with a human face
5 May, 2007
Richard Davis looks at the changing face of technology in the mortgage market
Currently one of the industry’s hot topics, technology is transforming the way we do business. But as firms look to upgrade their technical capabilities and reach, there remains a strong case for continuing to invest in people to provide the essential and complementary human support. This is borne out by feedback from the intermediary community, especially from those brokers and packagers active in the specialist sector.
Over the last three years or so, all the stakeholders in the mortgage supply chain – lenders, intermediaries, insurers, valuers, estate agents and credit search bureaux – have made significant investments in their IT. Individual objectives may vary, but the overall purpose is the same – that is to simplify, streamline and speed up processes.
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As part of this, lenders and packagers want to make their processes more straightforward by integrating IT innovations with their own systems, particularly their online underwriting – or e-decisioning – systems. This is important because the best e-decisioning systems do a great job of making a highly complex integration of mortgage supply chain providers look straightforward to the intermediary and the end customer.
They start with integration at a system-to-system level with a sourcing engine but should also include electronic identity (e-ID) checks, an automated valuation model (AVM), credit searches for risk assessment and product selection. These systems are now becoming well established and mature so it is worth reflecting on their relative success and the alternatives available when the computer says ‘no’.
Referral processes
There is a significant tranche of mortgage business that can be processed on a straight-through transaction basis, such as prime low loan-to-value (LTV) remortgages on standard property types. But there is also a substantial amount of business that ticks most, but not all, the boxes in the e-decision process.
This type of business is often acceptable to specialist lenders but is likely to be turned away by e-decisioning systems unable to cope with its inherent risk complexities. Computers are not necessarily good at taking a commercial view or making ‘maybe’ decisions, so a hand-off for a manual review by a skilled underwriter will ensure the opportunity is not lost without giving it the attention it deserves.
But well-designed e-decisioning tools can also be flexible. The best, for instance, will indicate why an applicant falls outside criteria for a plan – such as the LTV being above the cap for the AVM – and suggest the solution, which in this case would be a physical valuation of the property. Similarly, a good system should provide brokers with comprehensive pre-submission data regarding what is needed by the lender.
A lender’s sales team – its business development managers and internal sales desk – should also provide a vital link between itself and its brokers. A good sales desk should be able to deal with a whole range of enquiries from brokers while also extending flexibility in criteria terms where appropriate. It is very difficult for computer systems to accommodate such flexibility, which can be crucial to supporting a relationship.
Coexist
Some systems are undoubtedly more advanced than others. But despite the rise in technological sophistication there are few, if any, examples of mortgage lenders dispensing altogether with the people behind their processes in favour of computers. This is understandable given the nature of the components that typically comprise the mortgage assessment process.
For instance, e-ID has become very popular over the last two years and automated success rates of over 80 per cent are achievable. But lenders still operate back-up systems that include manual ‘Know-Your-Customer’ checks, supported by proof of residency and personal identification documentation.
Lenders also typically base their assessment of credit worthiness on a combination of historical indicators, such as court judgments and mortgage arrears or default data. Of these, arrears can be the most challenging to evaluate automatically. This is particularly so where a lender’s criteria assesses arrears performance by discrete periods, for example, in the last three months, or seven to 12 months ago. There are various scenarios where there will be insufficient e-data available to fulfil this assessment, so the submitting intermediary will need to provide a written mortgage reference to substantiate it.
Nevertheless, it is recognised that there are components of the mortgage process where human interaction is not necessary. A good example is the AVM. Typically, this either succeeds by producing a valuation within expectations – and with a suitably high confidence level to support the decision – or it doesn’t. Where it fails, a full valuation is the obvious alternative – which may, it is accepted, feature a degree of interpretative opinion in reaching its conclusion.
The technology trade off
Lenders’ written underwriting criteria can be both comprehensive and complex. Systemising it fully would result in an unwieldy e-decisioning process given the range of questions required. In truth, there has to be a balance between asking the essential questions to provide a decision and keeping the e-decision process down to a realistic number of pages.
For example, to include all the questions which might relate to property types in an e-decision would run to several pages. Just covering the range of different concrete types and approved concrete repair property types would run to several pages. It is also questionable whether the mortgage intermediary or the customer would know this data before they have sourced the valuation. Therefore, while LTV restrictions may apply at the specific construction type level, it may not be possible to capture all this detail in the e-decision.
Improving offline solutions
So, how can lenders improve their refer mechanisms? Let us assume that the broker is using the lender’s website to undertake an online decision-in-principle. If they run into questions regarding the application, how might the hand off to the lender’s staff be supported by technology?
Firstly, lenders can consider instant message systems on their website as an alternative to e-mail. These have the merit of allowing the broker to type in a question and receive responses real-time and for the sales team to handle several of these enquiries from brokers concurrently. If the broker does call in, it is useful to have call statistics in order that the effectiveness of calls can be monitored and appropriate resource put in place for busy periods. When calls are received, a call logging database can be useful to avoid enquiries falling into a ‘black-hole’ and to ensure that agreed criteria exceptions are logged.
The challenge for lenders is that technology can be replicated by other lenders but it is the quality of the staff defining how the technology will work, and by the knowledge of their own user base in guiding intermediaries through using it, that will differentiate them in the long term.
If there were five or six major lenders with broadly equivalent technology offerings and processes – possibly because they have purchased their systems from the same IT vendor and consequently arrived at the same destination in terms of the capabilities – they would be offering brokers the same solutions. In such a scenario, the competitive nature of our business would dictate that a differentiator is found. This is where people would come into their own.
The reality is that there has already been a drift towards this ‘me too’ effect, particularly in the areas of pricing, product design, arrangement fees, and optimisation around sourcing system rankings. Lenders are beginning to look very similar in each of these categories. It is therefore highly likely that as some lenders increasingly pursue the same pure technology solutions others, perhaps supported by disaffected brokers, will continue to force their own proposition based on their commitment to technology with a human face.
A necessary evil? Thomas Reeh
What is it with technology? Does it really make our life easier in the mortgage world or are have we just become slaves to lenders trying to save money? And what about good old fashioned service? Is there still a place for quality human intervention in the technology centric within which we live?
From a mortgage intermediary perspective we are constantly hit with the latest time saving systems and technologies which are set to revolutionize the way we work. Indeed on face value it’s easy to get caught up in the hype of POS-D, POS-V, POS-ID and POSITIVELY-Confuse-me, there are so many new processing platforms on the market. GMAC have fundamentally changed the mortgage transaction process, and cut a significant amount of paperwork with their new processing systems. Other lenders like Mortgages Plc, Advantage and Money Partners are right on their heels. Speed is king, especially in the sub-prime sector. But let’s be clear about one thing. Technology is great but it’s also a fact that the lenders have offloaded more and more of the processing and administration duties in the lap of intermediaries. And dare I say with no consummate growth in commissions paid. Cheap shot, but I took it because it’s true. It’s also important to remember that the compliance risks have also increased as intermediaries are doing more of the processing and specifically data input. Key something in wrong and the lender may well be chasing the intermediary for compensation in years to come.
Mortgage business is fundamentally a people business – and that won’t change. Lets look at Automated Valuations (AVM) vs traditional site visit. We should take heed from the US experience where technology has been used extensively in the mortgage process. Wall Street has taken the extraordinary step of penalising listed mortgage bonds where anything less than a full traditional property valuation has been completed. Fitch Ratings one of the biggest risk assessment firms for the global bond is down grading mortgage bond pools by up to 15% where anything less than a ‘Full Monty’ valuation has been completed. This is where an (AVM) has all of sudden become infallible. Let’s face it, this example demonstrates perfectly the delicate balance between a computer systems best calculated guess and what an onsite human valuation will provide. A computer system simply won’t know that the property it’s trying to value is actually the worse house in the street, unkempt garden, run down with windows kicked in. AVM’s are obviously enough of a concern for Fitch Ratings that they are knocking off up to 15% of the reported AVM values - extraordinary. On the face of it that would be one in the eye for technology. The reality is that where it’s appropriate AVM’s have a place, perhaps where LTV’s are less than 70%.
The same can be said of underwriting. Its unfortunate that lenders will often hide behind their technology, and we are losing the time honored tradition of ‘under writing’. Proponents of technology (lenders) tell us that technology driven underwriting decisions take out the human error factors of manual underwriting, and their matrices are based on years of accumulated data and fancy profiling. It also helps lenders gain better multiples on their securitization portfolios, as anything that doesn’t fit the profile is rejected by ‘the system’. This is of course at the cost of human factors. Customers can damage their credit ratings for genuinely ‘soft reasons’. For example, change address and forget to switch the mailing address for your credit card or dispute a traffic infringement – and you could be slapped with a default or CCJ before you have even blinked an eyelid. The same customer applies for a remortgage with their high street lender, and you will be literally frog marched out the door because ‘the system’ says you are credit risk. Technology has its place and it’s revolutionizing the way we work – but its not perfect, and its not likely to be anytime soon.
Into the fold-John Webster, CEO Swift
Using technology these days, in any industry not just the mortgage market, seems to be about ‘pushing the envelope’ or, for want of a better phrase, ‘boldly going where no man has gone before’. Sometimes it does not even matter that the uses for this newly-engineered technology will be minimal to say the least, perhaps even non-existent, the point today seems to be all about harder, quicker and faster.
Musing on this point reminds me of the CERN underground facility on the Franco-Swiss border, where this year a ‘Hadron Collider’ (bear with me), which is a 27km circular particle accelerator, will be switched on. This machine will attempt to produce miniature versions of the Big Bang by colliding protons into each other at phenomenal speeds. The idea is that the scientists will try to find out how matter was produced at the start of the universe and to do this the machine will make tiny black holes.
All laudable stuff until you realise that there is a chance (albeit a very small one) that the machine will form a black hole which will ultimately destroy the planet.* Right, do we want to have a rethink on this one then?
My point is that technology, especially for mortgage intermediaries, has to be an enabler. Lenders and technology companies will rightly continue to develop their automated services, their POS-Os, their cascade underwriting, and so on, but if the overall service proposition is not up to scratch, technology alone won’t be able to produce a black hole big enough to drag in any business.
Systems that possess all the bells and whistles can be a joy to work with but when they fail to function (which they do from time to time), intermediaries cannot always get answers and information from the other end of a phone line. The key area in all this is human intervention. Humans build these systems and they should never forget the importance of usability and functionality. It is after all their fellow humans at the sharp end who rely on the lender to be able to consistently arm them with the information required to satisfy the needs of their customers.
Technology is wonderful but I believe in the adage ‘horses for courses’. In the non-conforming lending market, automated systems will never completely replace the person that sits opposite, or talks on the phone, to the client. For example, in years gone by, many talked of the internet and on-line trading as a nail in the coffin for mortgage intermediaries. Yet what we see today is record levels of internet usage, coupled with record volumes of mortgage business going through the intermediary distribution channel. The internet has been an enabler in that it’s provided customers with information to carry on going to their mortgage intermediary – the reason being that there are so many products out there and the market is so competitive that consumers want to ensure they have access to all products and that they get peace of mind through the advice and recommendation from a professional. To my knowledge computers can’t pass CeMAP – they can’t even sit it.
To coin a phrase, ‘systems are [not] doing it for themselves’ – every mortgage intermediary wants technology that will allow them to automate time-wasting tasks and effectively work smarter, but at the same time let’s remember the principle that ‘it’s a people business’.
*By the way, the scientists behind the ‘Hadron Collider’ estimate the chances of it destroying Earth as ‘extremely low’ – that should allow you to sleep well tonight.