TheMReport — News and strategies for the evolving mortgage marketplace.
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30 | TH E M R EP O RT FEATURE W hen an Ameri- can bought a car 50 years ago, there was an 85 percent chance they bought a car made by General Motors, Ford, or Chrysler—then known as the "Big Three" U.S. automakers. Two of those brands are still among the three best-selling car mak- ers in the U.S., but the third is a company that almost no one had heard of 50 years ago: Toyota. The 1970s oil embargo and gas crisis played a huge factor in the fate of Japanese automakers like Toyota, Nissan, and Mazda. Over time, more Americans switched away from heavy gas-guzzling V-8 engines and toward lighter, four- cylinder cars that had enormously better gas mileage. Today, another "new" option has emerged in the auto industry with hybrid and electric vehicles, which are quickly gaining popularity with the buy- ing public. You'll find that, given enough time, new options have disrupted every industry. The mortgage industry is experiencing similar widespread changes right now. The loan origination system (LOS) is at the center of this dis- ruption. Record high loan produc- tion costs and massive changes in borrower expectations have led to technological advances that have well known, "tried and true" loan origination systems struggling to keep up. Now, lenders face three very different options when it comes to LOS technology, and lenders need to be aware of their differences as they seek to improve their profit- ability. The Platform Packages F or more than a decade, four or five technology companies have dominated the LOS market. Though some have changed hands and delivery models, they have generally been running the same technology for years. They are trustworthy insofar as they have been around a while and have invested significant sums in maintaining their products. Gen- erally speaking, they each have an established client base which they must continuously answer to, which would seem to make them less risky than going with newer technology. On the other hand, these same LOS providers are built on technology that was developed decades ago. Most were initially sold as premise-based solutions— that is, they were not accessible over the internet and had to be installed within a lender's systems. As digital technology and cloud computing have swept through the mortgage industry, these pro- viders have struggled to transition their products to internet delivery models. An associated challenge with using older technology is that they aren't easily integrated with other software products, such as consumer-facing borrower "portals," third party services such as technologies that verify a bor- rower's income and assets. This limitation is becoming a major headache for most lenders, as the internet and mobile technology, in particular, are revolutionizing the way consumers shop and access financial services, including mortgages. Most consumers now start their search for mortgages online, compared to the tradition- al method of going to their bank or using a broker referred to them by their real estate agent. Unfortunately, most traditional LOS products were not built with the consumer experience in mind. Lenders that want to adopt consumer-facing, do-it-yourself mortgage websites that enable borrowers to initiate and com- plete a good deal of the mortgage process themselves, have been forced to acquire this technology separately and integrate it with their LOS at additional time and expense. Another shortcoming with tra- ditional LOS products is that they are not readily adaptable to differ- ent types of financial institutions or business channels. Certain products are known for being bet- ter suited for large lenders while others are marketed to smaller lenders or mortgage brokers. This does not make it easy for lenders to adopt new business models to stay competitive, whether it's a retail lender adding a wholesale channel or a credit union that wants to originate and sell loans on the secondary market Built from Scratch/ Heavily Customized Solutions B ecause of the limitations of packaged software, some lenders have decided to take the time and money to build their own platforms or adapt existing technologies and heavily custom- ize them to their liking. The obvious benefit of a do-it-yourself platform is that it can be designed Peeking Behind Door No. 3 Emerging options in LOS technology allow lenders to choose the path that fits their needs. By Steve Octaviano