Volume 7 | Issue 85 | Thursday, May 01, 2008
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"Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters."
--From yesterday's Federal Open Market Committee statement.
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Top National News
Residential Finance News
Fed Eases, Signals Pause; Economic Growth Anemic Again in First Quarter
FOMC Statement
Commercial/Multifamily Finance News
Despite GDP Increase, Rents Forecast for Slower Growth
DealMaker of the Day
MBA News
Participate in MBA Residential Compensation Survey
New Executive Podcast Previews MBA Secondary Markets Conference
MBA NewsLink Reprints
Spotlight: Technology
SaaS Drives Software Industry
Bankers Pan Appraisal Revamp Plan
Wall Street Journal (05/01/08) P. A6; Hagerty, James R.
In a recent letter to New York Attorney General Andrew Cuomo, the Mortgage Bankers Association (MBA) voiced opposition to an agreement he forged with Fannie Mae and Freddie Mac to reform the appraisal industry and a new code of conduct to be implemented by the government-sponsored enterprises on Jan. 1. Under the code of conduct, lenders cannot exert pressure on appraisers to inflate residential values or underwrite loans using in-house appraisals, affiliated appraisal companies or appraisals ordered by mortgage brokers. Additionally, appraisers cannot be selected by bank employees involved in the underwriting process. While the code of conduct aims to prevent inflated appraisals, MBA worries that it will boost borrowing costs. In urging that the plan be withdrawn or altered, the industry group insists that Cuomo has neither shown that in-house appraisers are more vulnerable to coercion nor taken into account that lenders already are motivated to seek out fair appraisals because they reduce losses tied to inflated valuations.
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Fed Cuts and Signals Halt
Washington Post (05/01/08) P. D1; Irwin, Neil
The Federal Reserve on April 30 reduced its key interest rate by a quarter of a percentage point to 2 percent, with hopes of preventing the downtown in the economy from worsening. The cut in the federal funds rate is expected to eventually result in lower borrowing costs for consumers who take out adjustable-rate mortgages. The central bank has lowered the interest rate seven times since September but suggested in a statement that the campaign has ended, unless the financial markets deteriorate further. "They're saying, 'Look, we've had monetary policy on steroids for the last few months, but that is changing now,' " says Christian Menegatti, an analyst at RGE Monitor.
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Investors Move In to Save Broken Mortgages
Los Angeles Times (05/01/08); Reckard, E. Scott
A growing number of investors are purchasing problem mortgages from lenders for as little as 31 cents on the dollar, which allows them to make money and still help homeowners. By taking the loans off lenders' books for less than their face value, these investors have the power to reduce mortgage amounts or make other modifications. The model is being praised by lawmakers and regulators as a means of curtailing foreclosures, especially at a time when borrowers with little home equity increasingly consider turning their properties over to the lender. FirstFed Financial Corp. is a Los Angeles mortgage lender that retained most of the loans it made in recent years, allowing it to consider 10 workout options--such as reduced interest rates, write downs and interest-only payments--before initiating foreclosure proceedings. However, FirstFed Chairwoman Babette Heimbuch says as many as half of its delinquent borrowers fail to contact the company when payment problems arise, which she attributes to their inability to forge payment arrangements with second-mortgage lenders or the fact that they lied about their incomes on the loan application. Still, experts urge borrowers to return phone calls from their lenders, with Vertical Fund Group's Gus Altazurra noting, "They're probably going to help you, given the current situation."
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Mortgage Defaults Up a Staggering 37 Percent
Toronto Star (05/01/08)
Mortgage Insurance Cos. of America says default rates for home loans carrying private mortgage insurance recorded their 15th consecutive jump in March. Defaults on these loans surged 37 percent to 58,131 from 42,362 during the year-over-year period ended in March. Over the past year, the housing slump caused a drop in market share of more than 75 percent for the nation's three largest mortgage insurers.
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Mortgage Demand Hits '08 Low
Investor's Business Daily (05/01/08) P. A1
The Mortgage Bankers Association reports an 11.1-percent drop in home loan applications last week, following a 14.2-percent plunge the previous week. Purchase loan requests slipped 4.8 percent to their lowest point in five years, while refinancing applications declined 16.7 percent to their lowest level this year. Experts are not optimistic about the spring home-buying season, due to weak demand for mortgages.
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New York Rate System to Challenge Libor
Wall Street Journal (05/01/08) P. C2; Mollenkamp, Carrick; Whitehouse, Mark
In response to concerns about the accuracy of the London interbank offered rate (Libor), ICAP PLC has announced plans to launch a new measure of U.S. interest rates. Dubbed the New York Funding Rate (NYFR), this new rate system is targeted at giving both banks and market participants a new gauge of what it costs banks to borrow money. London-based ICAP, which also has offices in Manhattan, plans to begin publishing the rate as early as next week. The move is a direct challenge to the Libor system, which has been one of the world's most important financial indicators for more than 20 years now and is the basis for interest payments on trillions of dollars in individual mortgages, corporate debt and derivative contracts.
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Foreclosure Bill Would Help Troops
Stockton Record (CA) (05/01/08); Shaw, Hank
The House Veterans Committee on April 30 passed a veterans mortgage bill that includes an amendment that would allow service members and veterans to borrow up to $729,750 to refinance their federally backed loans, up from the current cap of $144,000. Rep. Jerry McNerney, D-Calif., sponsor of the refinancing proposal, says the amendment is necessary for high-cost areas such as Northern California and because service members deployed overseas often lose wages, face suspended or canceled contracts and turn to zero-down, subprime and adjustable-rate mortgages. McNerney says lending to service members would be a low risk, and data from the Mortgage Bankers Association shows that the 30-day delinquency rate on Veterans Affairs-backed loans was 6.6 percent last year, compared with 13 percent for regular FHA-backed loans and 16.3 percent for private subprime loans. The proposal would cost $10 billion over the next decade to create a fund for repaying banks for any defaults on the loans.
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New Law Extends Foreclosure Notification Period
Boston Herald (05/01/08)
In Massachusetts, a new state law that took effect on May 1 provides a 90-day "cooling off" period for homeowners on the brink of foreclosure. The law requires lenders to give borrowers 90 days after a notice of delinquency to resolve their debt instead of the 30 days' notice mandated by the previous law. Gov. Deval Patrick (D) is now urging lenders to use the 90-day period to restructure as many home loans as they can. A new Warren Group study shows that foreclosure deeds in Massachusetts more than doubled last month versus the same month a year earlier.
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| Fed Eases, Signals Pause; Economic Growth Anemic Again in First Quarter |
MBA (5/1/2008 ) Velz, Orawin
The Federal Open Market Committee cut the federal funds rate 25 basis points to 2.00 percent, following a 75 basis point cut on March 18. This is the seventh rate cut since it started lowering the target rate in September of last year for a total of 325 basis points.
In the post-meeting statement, the committee noted that economic activities “remain weak”—a slight change from the previous statement that economic activity “has weakened further.” It cited soft household and business spending and weakening labor markets. The committee did not mention business spending in the previous statement. The addition of a reference to business investment likely reflected the negative development in the first quarter (see below.)
The Fed maintained that while core inflation readings have improved, rising energy and commodity prices have risen. The committee noted that it will continue to monitor inflation closely as the inflation outlook is uncertain.
Perhaps a hint that an extended pause is likely was the removal of the sentence that said “downside risks to growth remain” from the March statement. The committee concluded that it will continue to monitor economic and financial developments and will “act as needed” to promote growth and price stability. In the March statement on future actions, the Fed said it “will act in a timely manner as needed.” Removing the words “in a timely manner” suggested that the Fed may choose to wait to give the fiscal stimulus a chance to impact the economy.
The fed funds rate cut decision was not unanimous. Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher voted for keeping the rate unchanged.
The gross domestic report (GDP) released earlier in the day supported the Fed’s view on the economy. The economy barely expanded in the first quarter of 2008, supported by an inventory buildup. Real (inflation-adjusted) GDP grew 0.6 percent, according to advance estimate of the Bureau of Economic Analysis. (Unless otherwise noted, data in the GDP report mentioned here are seasonally-adjusted annualized rates.)
Economic growth matched the pace seen in the fourth quarter of 2007. Inventory investment was a positive for growth in the first quarter, reversing the decline in the fourth quarter of 2007. Inventory investment contributed 0.8 percentage points to growth. Real final sales of domestic product, which is real GDP minus the change in inventories, fell 0.2 percent, compared with a 2.4 percent growth in the fourth quarter. This was the first decline since the fourth quarter of 2005.
Slowing demand likely caused an unintended increase in inventories, which bodes ill for the economic growth in the current quarter as businesses will likely pare down production to reduce unwanted stockpiles. About half of the increase came from motor vehicle inventories. Some automakers are already planning to cut back. This week, General Motors Corp., the world's largest automaker, reported that it is cutting production of large pickup trucks and sport-utility vehicles by 138,000 this year.
Offsetting the inventory buildup were weaker real personal consumption spending (PCE), higher imports and a decline in nonresidential investment. Government spending grew at the same pace as the fourth quarter last year.
Consumers pulled back significantly in the first quarter. Real PCE rose only 1.0 percent, moderating from 2.3 percent in the fourth quarter. This was the weakest growth since the second quarter of 2001. Real PCE added 0.7 percentage points to growth in the first quarter, less than half of its contribution in the fourth quarter last year. Real spending declined for both durable and nondurable goods. The drop in real spending on nondurable goods was the largest since the fourth quarter of 1991.
The housing market remained the biggest drag, with real residential investment declining 26.6 percent in the first quarter—the biggest quarterly drop since the fourth quarter of 1981. Real residential investment subtracted 1.2 percentage points from growth, the same as during the fourth quarter last year. Housing has been a drag on growth for nine straight quarters, the longest downturn since the mid-1950s.
Nonresidential investment fell 2.5 percent as a result of declines in both nonresidential construction and equipment and software investment. This was the first decline since the fourth quarter of 2006.
The trade sector, which has been a positive influence on economic growth over the past year, barely added to growth in the first quarter as imports rose strongly. Net exports of goods and services added only 0.2 percentage points to growth in the first quarter, after adding one percentage point in the previous quarter. This was the smallest contribution from trade in a year. Final domestic sales—real GDP minus net exports and minus the change in inventories—dropped 0.4 percent. This was the first decline since the fourth quarter of 1991.
One positive in the report was that inflation based on PCE eased in the first quarter. The PCE deflator rose 3.5 percent, moderating from 3.9 percent in the fourth quarter last year. The Fed’s favored measure of inflation, the core PCE (excluding food and energy items), was up 2.2 percent, slowing from a 2.5 gain in the previous quarter.
A separate report also bodes well for inflation, showing that, in the first quarter of 2008, labor costs grew at their slowest pace in two years as the labor markets loosened. The employment cost index (ECI) rose 0.7 percent, as wages and salaries grew 0.8 percent while benefit costs were up 0.6 percent.
Treasury yields declined following the FOMC meeting. The yield on the 10-year Treasury note fell seven basis points stayed around 3.74 percent by mid-Tuesday afternoon. Fed funds futures showed a 75 percent chance that the Fed will keep the target rate at 2 percent at the June 25 meeting.
(Orawin Velz is senior director of economic forecasting with the Mortgage Bankers Association. She can be reached at ovelz@mortgagebankers.org.)
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| FOMC Statement |
MBA (5/1/2008 ) MBA Staff
The Federal Open Market Committee issued the following statement yesterday:
"The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.
Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred no change in the target for the federal funds rate at this meeting.
In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta and San Francisco."
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| Despite GDP Increase, Rents Forecast for Slower Growth |
MBA (5/1/2008 ) Murray, Michael
Positive gross domestic product growth in the first quarter could avert a possible recession, but high fuel prices, less consumer spending and layoffs in the financial sector will likely lead to a slowdown in rent growth across all commercial real estate properties, based on a forecast from Property & Portfolio Research (PPR), Boston.
PPR forecasts annual rent growth will slow “severely,” as retail posts a nearly 1 percent loss, and office rents post a net loss this year, accounting for an 800 basis-point swing from 2007 levels. The report said retail rents drop most in Phoenix and Las Vegas while Seattle and San Francisco will see some of the largest gains. PPR forecast office rent growth in Houston and Seattle at more than 6 percent this year.
PPR forecasts retail to get hit the hardest with a vacancy increase of 190 basis points. PPR forecasts office as second highest in vacancy increases followed by warehouse and a 70 basis point rise in apartment vacancies.
First quarter demand was well below levels from one-year ago in apartment, office, retail and industrial properties from the largest 54 metros in the United States—as determined by PPR.
PPR forecasts warehouse and apartment rent growth at less than 2 percent. Apartment and retail had the biggest slowdown with a 75 percent drop in demand for apartment properties. While apartment and warehouse will have a major pullback, they should also come back by 2009 because of having less volatility, PPR’s report said.
“Office will also be a weak performer, as heavy office using tenants, like those in the financial activities sector will go from hiring mode to hiring freeze,” said Andy Joynt, real estate economist at PPR. “This will halt expansion plans and leave net absorption at a paltry six million [square feet] in 2008, compared with 90 million square feet in 2007.”
The PPR said that Los Angeles, San Francisco, Chicago, Boston, Atlanta and Dallas will see office vacancy increases of less than 100 basis points.
"There has been 7 [percent] and 8 percent rent growth over the past two years, so coming off that is not completely shocking to the market," Joynt added.
Without the commercial mortgage-backed securities market, the transaction market slows and puts downward pressure on pricing of assets, but it would still not affect fundamentals because supply slows down without financing, said Clint Myers, capital markets analyst at PPR.
"Projects that would be underway right now are not, and that means 12-18 months from now, when this supply would be hitting the market, it doesn't hit the market. It either doesn't happen at all or it gets pushed off a year or two. It means the fundamentals into 2009 are actually quite a bit better than they would be," Myers said.
Prior to yesterday’s positive GDP result, however, PPR forecast a modest recession as its most likely scenario, expecting it to last during the first two quarters of this year until the fiscal stimulus package and the Fed's easing monetary policy induces a "bounce back in the latter half of the year.”
“In the property type markets, this suggests that 2008 will be a challenging year, as we have already seen through the first quarter,” the report said.
The Mortgage Bankers Association also forecast a modest recession—negative GDP growth in the first and second quarters, bouncing back up to 2.7 percent in the third quarter.
Myers said the U.S. is not out of the woods for a recession, based on high energy and fuel costs, the housing and liquidity crisis. He expects a revision in the next year of the first quarter's positive .6 percent GDP growth to turn negative, adding that retail sales growth stood at 4 percent while inflation was higher, showing consumers cut down in spending last quarter.
"It's already happening to the consumer and it probably will get worse," Myers said.
However, PPR credits exports and the weak dollar in playing a part to keep a recession moderate as well as expecting the consumer to perform "above expectations."
"We do think [consumers] slow down throughout the second quarter as well, but there are a couple of reasons to point to in the second half of the year that they will not spend like they have in the past couple of years...their homes are worth less now than they were and they are going to depreciate," Myers said. "But they are using their credit cards, they are spending out of future wealth and the American consumer is just hard to hold down, especially when you have a Fed that is being quite accomodative in pushing capital into the system."
Despite PPR's forecast for a moderate recession, Myers could see the economy moving in an alternate direction as well. "It could become more serious—absolutely—and that is probably more likely than no recession scenario," he said.
The more serious scenario would be based on dual forces of the U.S. consumer holding back, which could lead to corporate defaults and bankruptcies, as retail already has seen with Linens 'n Things and Sharper Image.
"There is serious risk to a serious recession," Myers said. "We just think the most likely scenario is a more moderate recession which runs through the third quarter of this year."
With apartment vacancies on the rise in Phoenix, Las Vegas, some California metro areas—Inland Empire and Orange County—and all of the six major metros in Florida, PPR said metros will get hit "quite hard in the office and retail markets as well, with the worst offenders seeing increases between 4 percent to 5 percent in 2008 alone."
"The problem is that this isn't a huge downturn that we are going to experience so the bounceback is not going to be that great," Joynt said.
In the northwest, San Francisco, San Jose and Seattle should show apartment vacancy declines while apartment vacancies should drop in the Midwest—Indianapolis and Kansas City, PPR forecasts. Apartment rents, however, will take the biggest hits in Phoenix, Las Vegas and Fort Worth, Texas, PPR said.
"There is significant overbuilding, not only in Dallas and Houston, which are already established markets, but in San Antonio and Austin—which are not very big markets," Joynt said. "We often look at supply growth as a percent of current inventory, so it's easy for Austin and San Antonio once the building boom starts going for them to have these huge numbers in supply growth as a percent of inventory because their current inventory is fairly low."
The report added that supply in Texas is also somewhat manageable because the energy sector is thriving and help to keep demand afloat.
"In Texas, they are helped a bit because the energy sector is still pretty strong, but there definitely are some headwinds facing the Texas markets," Joynt said.
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| DealMaker of the Day |
MBA (5/1/2008 ) Murray, Michael
Affiliates of Q10 Capital LLC, Brentwood, Tenn., leveraged its life insurance co. sources to finance portfolios and project developments from northern New Jersey, Ohio, Maryland, Nebraska and California.
Shelley Magoffin, president and CEO in Q10 | Dwyer-Curlett's Los Angeles office, arranged $11.8 million in 25-year fully amortizing financing through its exclusive correspondent relationship with Great-West Life Insurance and Annuity Co., Greenwood Village, Colo., for a 113,142 square-foot neighborhood shopping center in La Crescenta, Calif.
Q10|New England Realty Resources, Boston, leveraged its relationships with two undisclosed lending sources and secured $62,610,675 in acquisition and permanent financing for real estate portfolio of high bay distribution and light manufacturing space consisting of 14 assets spread throughout northern New Jersey and Cincinnati, valued at more than $95.8 million.
A private equity fund sought to acquire the portfolio, and Q10|NERR structured financing to compliment the borrower's plans as an equity investor while providing flexible terms for future potential sales.
“Our borrower’s investment requirements demanded and we obtained terms such as partial release provisions, and limited escrows and reserves," said James Murphy, chairman of Q10 Capital LLC and its affiliate Q10|NERR. "In addition, the deal required a closing in 30 days. Our relationships allowed us to commit and close the deal in 24 calendar days.”
Dan Shiff with Q10 Capital affiliate Q10|Phillips Realty Capital in the Washington, D.C.-metro area secured a $71 million, non-recourse, construction/perm loan through a life co. on a 301-unit Class A apartment development in Rockville, Md.
The project, Meridian at Grosvenor Station, will be a new, 15-story, 325,000 gross square-foot rental residential building with underground parking and street level retail.
Bob Chalupa, senior vice president at Q10|Daisley Ruff Financial, arranged an $11.3 million loan through a correspondent life insurance co. for an 82,000 square foot, three-story, single tenant office building in La Vista, Neb.
Chalupa secured a fixed rate loan commitment 10 months prior to completion of construction, allowing the developer an early rate lock. The non-recourse loan provided the borrower with a 15-year term.
Q10 Capital services a commercial loan portfolio of more than $17.6 billion—much of that placed with life companies.
“Our long standing relationships with major national and international life insurance companies provide the foundation to deliver capital solutions where others are faltering. They know us and trust us,” Murphy said.
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| Participate in MBA Residential Compensation Survey |
MBA (5/1/2008 ) Toporek, Devin
The Mortgage Bankers Association encourages mortgage lenders and servicers to participate in the 2008 Residential Compensation Survey Program, developed and administered by McLagan, a subsidiary of AON Consulting Worldwide.
As in the past, the 2008 Residential Compensation Survey Program will profile more than 300 positions across all lines of business and functional areas within the single-family mortgage industry. The program will include three specialized benchmark products focusing on mortgage banking compensation, as well as productivity and incentive plan design.
In addition to this suite of program offerings, the program includes for the first time a Reverse Mortgage Banking Compensation Survey, specifically covering positions unique to reverse mortgage lending.
Another addition in 2008: MBA is pleased to announce a new forum, MBA’s Human Resources Symposium, September 11-12 in Washington, D.C. Open to both residential (single-family) and commercial mortgage lenders and servicers, the symposium will take place at MBA’s new headquarters, which will include state-of-the-art conference facilities. Only participants in the MBA Compensation Survey Programs will be invited to register for this optional symposium.
Among the topics to be covered:
• Aligning Human Capital Strategy with Business Strategy
• Pay and Performance: 2007 Trends (Compensation/Staffing Trends)
• Benefit Trends: Health & Welfare, Retirement, Paid Time Off, Personnel Practices
• Recruitment & Assessment
• Training & Development
• Effective HR Communications
• Performance Scorecards for Sales Agents
Learn more about this symposium, including requirements to attend, or register today at www.campusmba.org/products/default.aspx?product_code=E2801622/REGIS.
The following links provide more information on the survey as well as a registration form.
• 2008 Residential Compensation Survey Program Overview
• 2008 Residential Compensation Survey Participation Form
As in the past, MBA members receive a discount. Publication of the survey is anticipated for mid-summer.
Note: MBA also sponsors a specialized compensation benchmark survey focused on the Commercial Real Estate Finance market. This survey program will cover more than 200 positions and provides key compensation data for the commercial real estate finance industry.
For more information, contact McLagan Partners at (203) 359-2878 or one of the following MBA contacts: Marina Walsh at mwalsh@mortgagebankers.org (202) 557-2817; or Adrienne Sund at asund@mortgagebankers.org (202) 557-2879.
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| New Executive Podcast Previews MBA Secondary Markets Conference |
MBA (5/1/2008 ) Roundy, Alicia
Still thinking about attending the Mortgage Bankers Association’s National Secondary Market Conference & Expo next week in Boston? A new MBA Executive Podcast could provide the tipping point.
MBA’s National Secondary Market Conference & Expo 2008 in Boston (May 4-7) is the nation's largest gathering for secondary market executives. It is designed for industry leaders and decision makers from residential and capital markets, including CEOs and senior level executives, mortgage investors, investment bankers, rating agency professionals, risk managers and mortgage lenders.
The Executive Podcast features MBA Chairman-Elect David Kittle, CMB. Kittle, CEO of Principle Wholesale Lending Inc., Louisville, Ky., discuss the current state of the secondary market, in addition to other opportunities and events attendees can expect at this year's conference.
To listen to the podcast, go to http://www.mortgagebankers.org/NewsandMedia/MBAExecutivePodcasts. To download the mp3-files, you will need Real Player: http://www.realplayerresource.com/co/real/realplayerresource/?sid=M2AG0002bGS; or Windows Media Player: http://www.download-zone-free.com/windowsmediaplayer/.
MBA Executive Podcasts provide you with in-depth audio interviews that feature top industry executives giving insight on trends, new technologies and critical issues facing the real estate finance industry. Listen in to the weekly 3-5 minute podcasts and get perspective of different aspects in the industry.
To learn more about the Secondary Market Conference & Expo, which includes a keynote address by House Financial Services Committee Chairman Barney Frank, D-Mass., visit the conference web site: http://events.mortgagebankers.org/secondary2008/default.html?wt.mc_id=KittlepodcastMBA. Registration is still open.
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| MBA NewsLink Reprints |
MBA (5/1/2008 ) MBA Staff
Articles appearing in MBA NewsLink are available as reprints for a nominal fee. Reprints are done on quality paper or can be sent electronically as a .PDF file. Reprints can be distributed to your employees, to illustrate presentations or for other communication purposes.
For reprint information on stories in MBA NewsLink, contact Stefanie Lauff at (800) 394-5157 Ext. 26.
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| SaaS Drives Software Industry |
MBA (5/1/2008 ) Palaparty, Vijay
In the midst of economic uncertainty and industry consolidation, a report from McKinsey & Company Inc., New York, says the software industry finds itself in a bright spot. Enterprise IT spending on software could increase to 35 percent by 2010—software-as-a-service being the key driver.
“Innovation in the software industry is on the rise,” said Abhijit Dubey, associate principal with McKinsey. “This is good news for the industry, despite the current softness of the U.S. economy. Because the majority of the activity in the software sector occurs in North America, having customers on the lookout for innovative offerings provides some assurance that, despite industry consolidation, there’s growth potential ahead.”
Sixty two percent of respondents in the study, Enterprise Software Customer Survey 2008, said that software innovation in the industry is on the upswing, likely driven by two major trends: SaaS and service-oriented architecture.
In the mortgage space, companies such as PCLender.com, Honolulu, have developed mortgage lending platforms that are built on SaaS. The systems are developed to provide both time and cost efficiences as well as provide higher levels of service while tying in quality and compliance factors.
New American Mortgage, Charlotte, N.C., recently adopted PCLender.com’s InHouse Mortgage enterprise lending system; the company seems to benefit from not having to confront challenges of software ownership and related costs, implementation or security concerns.
“We have a lot more flexibility now with SaaS and have a comparable level of security without the real expense and cumbersome hardware issues that come with building proprietary systems,” said Casey Crawford, president of New American Mortgage. “It substantially reduces our risk and improves our scalability.”
From an efficiency point of view, the company reports savings on hardware and even staff to manage systems. “We are getting efficiencies of scale without having to house internal services or worry about security monitoring,” Crawford said. “We can better control originations without having huge back office structure staff.”
Amanda Knorr, president of Mantria Financial LLC, Bala Cynwyd, Pa., decided to work with PCLender.com because of the ability of SaaS to streamline operations. “Everything is documented and everything is web-based,” she said. “Our underwriters and processors can focus on borrowers who can have an answers back within 48 hours. The efficiencies of SaaS that are made available to us keep things moving quickly and we never run into issues of systems freezing or technical support because it is always available.”
McKinsey also reported that adoption of subscription and on-demand purchasing models—inherent to SaaS and SOA—are also on the rise. Enterprises forecasted spending 21 percent of their software budgets on these pricing models.
“We see that these models already account for nearly that budget level, leading to optimism that the 21 percent level will be easily met and likely exceeded by next year,” the report said. “It is especially good for SaaS vendors who by nature of their products sell either by subscription or on demand.”
“Despite the economic downturn in the U.S., there is a slow but steady growth in software’s share of the overall IT budget,” Dubey said. “In fact, survey respondents projected that this growth will continue for the next two years, indicating that software plays an ongoing important role in delivering business productivity gains.”
In terms of making decisions to adopt technology, purchasing decisions are receiving more input. The CIO and IT professionals remain the ultimate decision markers in nearly half of the enterprises surveyed, but they are consulting with more corporate and business unit functions—from finance and risk management to compliance. This could yield in a more informed decision and better integration of the technology enterprise-wide.
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 ABOUT MBA Newslink
Publisher: Cheryl Crispen, Senior Vice President - Communications and Marketing
Editor: Mike Sorohan 202/557-2855
MSorohan@mortgagebankers.org
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MMurray@mortgagebankers.org
Senior Staff Writer: Vijay Palaparty 202/557-2904 VPalaparty@mortgagebankers.org
Advertising Opportunities: Bill Farmakis 203/834-8832
bill@jlfarmakis.com
Jonathan L. Kempner, President and CEO, Mortgage Bankers Association
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