At what point does technology cease to be the answer and start to become the problem? This week, MortgageOrb spoke with John K. Hurley, a 21-year veteran of the mortgage industry and a principal at Secondary Solutions LLC in Burke, Va., regarding the right way and wrong way for the industry to use its high-tech tools.
Q: On a scale of 1 to 10, where would you rate the state of information management in the secondary marketing side of mortgage banking?
Hurley: Purely based on my experience with small- and medium-sized companies, I would assign a rating of no better than 5 on this scale. In giving such a grade, I'm not implying anything negative about the companies or their management.
However, manpower and knowledge resources are typically lacking in their application toward using the systems for functions that go beyond the basic necessities such as processing mortgage loans and producing closing documents.
Because management at these companies feels that no one who is employed by the company has the time or knowledge to figure out how to more fully utilize the capabilities of their system, these companies are forgoing a lot of valuable information management and the aid in decision-making that it can provide. The amount of information that is retained, or could be retained in the typical mortgage loan origination system (LOS), is extremely valuable in assisting management in how to steer their companies through a difficult market environment.
It is my opinion that company owners and managers have to look at applying the time and resources to the effort of more fully exploiting the capabilities of their LOS as an investment, and not as a nuisance expense.
Q: What role, if any, did the reliance – or, perhaps, overreliance – on information technology play in the creation of today's ailing market? Specifically, were lenders placing too much faith in technology?
Hurley: In offering my own opinion, I would say that the prevailing notion during the first half of this decade was that credit scores provided sort of a ‘life score’ on people. Many believed that they measured more than a borrower's history of making payments on debt. These scores were also informally touted as an assessment, to a degree, of a borrower's propensity – or lack thereof – to enter into financial obligations that they were unable to meet.
I think the genesis of this belief was the fact that credit scoring was used for many commercial purposes for many years and did not involve lending (i.e. insurance, employment applications, security checks, etc.). These scores were born out of the massive information technology environment in which we all live and work.
As a result, while we certainly have loan issues with subprime, or low-credit-score borrowers, it should not be understated that there are many loans out there that went bad, or will go bad, that were made to borrowers who had excellent credit scores at the time that they applied.
It was the credit scores that provided many of these borrowers with the eligibility for reduced documentation and more flexible lending terms in the first place. Failure to document and more rigidly apply traditional lending guidelines for borrowers with high credit scores contributed greatly to these problems. I know this firsthand from my experience as a former chief lending officer, and I'll never forget the lessons that I learned in that role.
Q: In your professional opinion, how often should a lender re-evaluate his information management system to determine whether it is doing the appropriate job?
Hurley: When I think of information management systems, I have to include financial accounting statements and other data systems, along with a mortgage LOS, in that definition. As such, I think that these systems should be re-evaluated as often as management reviews their financial statements.
If mortgage lenders have good, communicative financial statements, then they will immediately know what types of information their LOS and other data systems need to provide them with. Good financial statements provide management with a report card on what they are doing operationally. Looking at and understanding those financial statements on a frequent basis will result in an evaluation of the types of information that they need to extract from these systems.
When management sees underperformance in a particular area of their financial statements, they are forced to make strategic or tactical decisions to correct matters. If they are smart, they will want to monitor the progress in implementing those decisions before their results are revealed in the next round of financials. You need to know if you are on the right track toward the full implementation of any important change in policy or strategy.
If your LOS or other information management tools cannot monitor important activities, in real time, then your situation is analagous to driving your car while looking through the rear-view mirror. You'll know if you hit something or you don't, but you cannot see where you're going.
Q: In view of what has happened to the mortgage banking industry, what do you see as the future the technology companies serving this industry? Will there be more tech companies coming into the sector – and, if so, in what areas will they be focusing?
Hurley: Information, information and more information! For instance, the pendulum of credit underwriting has swung too far in the opposite direction of where it was during the height of the boom. I think that, without a solution, this will be very damaging to the real estate market, in particular, as well as the overall economy.
Having said that, I fully understand the feelings of fear and conservativism that are exhibited when lenders create loan programs and underwriters issue loan approval decisions. However, opportunity can be found in the midst of any crisis. The opportunities in this market have already been evolving over the past couple of years.
Information is the most important variable in the decision-making process. Subscriber-based systems that can verify information that is provided by borrowers, as well as with regard to the integrity of appraisals, and participants in real estate transactions will prove to be immensely valuable and offer good returns to those who can provide it. As such, they will give lenders greater comfort in the decisions that they make.
I'm confident that new providers will enter this market, and current providers who do not perform will be driven out. In addition to information on borrowers, collateral and transaction participants, there is an immense opportunity for providers of affordable information technology that will guide lenders toward making the optimal decision with regard to pricing and selling the loans that they originate. Such sophistication has long been the privilege of the large lenders.
However, I'm already seeing very good systems that are assisting the ‘little guys’ in these areas, as well. I expect to see more of them.