Hybrid Mortgage: A mortgage whose closing package combines some electronic and some paper documents.  Parts of the closing transaction are conducted electronically, but some documents (other than the promissory note) are still paper

"Among the top 50 lenders, there have been huge expenditures in technology spending, and it's stayed constant. Companies recognized the need to invest in technology, and they've kept the volumes up. Companies that are going to stay in business are investing in tech, and they must, in my opinion." --MBA Chief Economist Doug Duncan.

On Paper, ID Theft More Likely Offline
Murray, Michael
If the saying "there's safety in numbers" is true, then online transactions are the safest method for consumers to protect themselves against identity (ID) fraud, according to the Javelin 2006 Identity Fraud Survey Report.
 
The survey showed 30 percent of ID fraud took place when a consumer's wallet, credit card or checkbook became lost or stolen and another 30 percent stemmed from information taken by trusted individuals, including business employees (15 percent) or by friends, acquaintances, relatives or in-home employees (15 percent). Information stolen from a company that handles data and misuse of data from in-store, on-site, (paper) mail or phone transactions accounted for 13 percent of ID fraud. Garbage accounted for 1 percent.
 
"Putting [paper statements or checks] in a mailbox is like the equivalent of going to a Web site that is not secure and typing your credit card number in. There are a lot of people who handle those checks and financial statements and that information is moving in the clear," said James Van Dyke, founder and principal analyst of Javelin Strategy and Research, Pleasanton, Calif. "That is where our thinking…is really upside down and people that are close to us on a daily basis have a real advantage because they are close to all of those pieces of paper without encryption and with all of that confidential information."
 
The Internet accounted for 8.3 percent of total ID fraud. Computer viruses, spyware or hackers made up 5 percent of the pie and 3 percent resulted from "phishing" expeditions," or scams in which unscrupulous e-mailers pose as financial institutions or other firms to "phish" for information. Only 0.3 percent of online transactions translated into ID theft.
 
Van Dyke said the 8.3 percent could have overlap, but it is all from people who would only have been victims of ID fraud if on the Internet. The report represented 5,000 adults, including 505 victims of ID theft.
 
"Our decision to go on the Internet or not go on the Internet has nothing to do with whether or not our information is being traded on the Internet or our transactions are being made in our name on the Internet," Van Dyke said.
 
The survey also found that consumer control contrasted with business controls. It asserted that consumers have identity fraud protection in their own hands. However, financial institutions that want to remain fiscally-sound still need to take action against perpetrators, according to Robert Schlecht, director of industry technology security and compliance at the Mortgage Bankers Association.
 
"While the data shows only 35 percent of the losses are under business controls, the end result is that businesses are responsible for over 80 percent of the financial costs," Schlecht said. "Regardless of the source there is a financial cost to identity fraud. Well-educated employees, partners and customers will benefit the bottom line."
 
Van Dyke said well-educated Internet consumers can protect themselves by using anti-virus protection, do not respond to bank e-mails and make sure to log-in to a secure site prior to making an online transaction. Based on consumer data, Van Dyke noted that Internet users are less likely to have paper financial statements and more likely to check their accounts frequently online, a 7-to-1 ratio to consumers who check it less often.
 
"Should a crime occur, people who are online discover the crime faster and, therefore, the amount of damage is greatly diminished," Van Dyke said.
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'Exotic' Loans Not for Every Borrower--or Every Lender
Sorohan, Mike
SAN DIEGO-When the credit card was first introduced in the 1950s, suspicions ran high-many considered them to be the bane of the economy. In the 1970s, auto leasing aroused similar suspicions, as did adjustable-rate mortgages in the 1980s.

Today, "credit cards are a good facilitator of the economy," said Steven Gozdan, senior vice president and COO with Cenlar FSB, Ewing, N.J., speaking here at the Mortgage Bankers Association's National Technology in Mortgage Banking Conference & Expo. "Auto leasing and ARMs are vital options for consumers."

Gozdan said it was important to keep these examples in perspective as debate continues over new "exotic" mortgage products that have gained in visibility and popularity. "Just as credit cards and auto leasing and ARMs aren't for everyone, so it is with new mortgage products such as interest-only loans, option ARMs and home equity lines of credit," he said.

Joe Dombrowski, executive sales consultant with Fiserv Lending Solutions, Chicago, noted that these products have emerged as borrowers undergo a "fundamental change" in how people view their homes.

"They [borrowers] are looking at their home as a kind of credit card," Dombrowski said, "and we have to be flexible in understanding and accommodating that."

Jackson Pence, CMB, vice president of strategic alliances with Fiserv Lending Solutions, Plantation, Fla., noted that these loan products are what they are-niche products-and thus have specific, smaller target audiences whose situations should be considered carefully.

"These products are good for people with an uneven income flow-someone who works on commission, for example, who has lean periods and flush periods," Pence said. "They're for someone who is financially sophisticated, who understands the nature of finances. It's for someone who needs a low payment to qualify, but who might have a high credit score. And it might be for someone who is betting on the appreciation of their home."

Pence said IOs, option ARMs and HELOCs have breathed new life into a mortgage industry that seeks ways of boosting business as the refinance boom eases. "They are arguably helping to boost the economy, because we are putting people into homes in a period when home prices are going up," he said.

These products are not without risks, said Tara Wilson, CIO of Specialized Loan Servicing LLC, Highlands Ranch, Colo. Such risks-an unseasoned pool of loans, for example, that has yet to demonstrate identifiable patterns-have been widely discussed as points of concern among economists and regulators.

From a servicing standpoint, Wilson said, option ARMs require a number of servicing scenarios that makes it difficult to forecast. One of the biggest challenges facing option ARM servicing, for example, involves delinquencies. A late payment of even one month causes a recalculation of the monthly payments, which can tax a servicer in terms of forecasting. "From an investor side, you have to be on board with what technology can do in accommodating the flexibility that option ARMs require," Wilson said.

Wilson also noted that option ARM servicing involves more customer service, as customers often have questions about payments. This requires retraining of employees and allocation of resources to accommodate customer service, she said.

David Miner, executive vice president with Graystone Mortgage, Sudbury, Mass., said new loan products require sophisticated technology. He said integrated technology can keep the lender/servicer in control as the market changes.

At their core, Dombrowski said, option ARMs, IOs and HELOCs require the same core due diligence as standard fixed-rate products. "Fresh out of the gate, lenders and servicers should always be looking at credit risk scores," he said. "With a 30-year fixed situation, I have specific trigger events that I look at to determine ongoing creditworthiness. The same must occur for HELOCs, IOs and option ARMs. We have to look at the credit technology as to what it is telling us about the borrower, and what trigger events should be in place.

For technologists, the technology challenge is how to devise the tools that lenders can use to determine a borrowers' creditworthiness. "Developing credit alerts, for example, enable lenders to look at trigger events that can help them make better decisions," Dombrowski said.

In many of these situations, lenders have to look at the market value of the home itself. "If a borrower finds his dream home at $455,000, you don't want to have a situation where his payment jumps after five years but the value of the home has fallen to $300,000," Dombrowski said. "In some areas of the country, there are places where there are heightened artificial prices. So you have to do things in a strategic way that enables you to concentrate certain loan types in certain zip codes, for example."

Ten years from now, it's possible these "exotic" loan products could be considered as mainstream, or a template, as other previously exotic products. The key, Pence said, is managing the risk intelligently.

"We're living in exciting times in the mortgage industry-something I've been saying for the past 20 years," Pence said.
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eSignatures Take More Steps Forward
McAfee, Jamie
SAN DIEGO-Since enactment of the Electronic Signatures in Global and National Commerce Act (ESIGN) in 2000, eSignatures have been adopted slowly. As the mortgage industry moves closer and closer to the elusive eMortgage, eSignatures is one of the areas still under debate here at MBA's National Technology in Mortgage Banking Conference & Expo.

Patrick Hatfield, partner at Chicago-based Lord, Bissell & Brook LLP , discussed a five-point framework to analyze the risks associated with electronic signatures and ways to mitigate those risks:

Authentication Risk: How do you ensure that only the person who is applying an electronic signature? "Someon says, 'That's not my signature,'" Hatfield said. "There are variety of ways to verify the identity of the person signing an electronic document. Mitigating these concerns, the use of shared secrets is the most common one," said Hatfield. Examples of this include a PIN, mother's maiden name, date of birth and the other shared secrets."

Repudiation risk: This is the risk that an electronic document is altered after it has been signed. "The person says, 'Yes, that is my signature but the contents were electronically altered after I signed it, I'm therefore repudiating the contents,'" Hatfield said. "This risk is relatively simple to mitigate well below traditional means."

Mitigating the repudiation risk involves technological gatekeepers to keep records safe. "You can electronically seal, hash or encrypt the transaction so that the record could not be altered without being detected," according to Hatfield.

Compliance Risk: "The risk is the consumer, the regulator or the plaintiff failed to require all the right disclosures. You failed to obtain this information or this authorization," Hatfield said. "This is relatively straight-forward to mitigate compared to traditional means. An eRecord or an eProcess can be designed so if you can't get to the next step those acknowledgments can be obtained."

Adoption Risk: A process can be designed to be virtually risk-free. "It may be risk-free, but one on uses it so cumbersome, it takes forever to get through," Hatfield said. "However, you have to have a process that people will use." To mitigate the adoption risk "test, test, test," Hatfield said. "Get [users] involved in the process, hear how burdensome it is."

Relative Risk : "The goal of an effective ESIGN process is not necessarily to be risk-free. The goal is the ESIGN process needs to be better than the traditional process," Hatfield added.

Mitigating the relative risk involves getting different types of users to test the process and then ask how it compares to the traditional process, Hatfield suggested.
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Laying More Foundation for eMortgages
McAfee, Jamie
SAN DIEGO-Fewer than 500 electronic mortgages have been completed, based on research conducted last year by TowerGroup, Needham, Mass. eMortgages are still complex; adoption has been slow, with much groundwork yet to be laid.

"It has not been driven by the GSEs; however, it's been supported in many ways by the GSEs and lenders and MISMO and others in the industry," said Craig Focardi, research director of the Consumer Lending Advisory Service at TowerGroup, speaking here at the Mortgage Bankers Association's National Technology in Mortgage Banking Conference and Expo. "But in the middle of the refinance wave and a lot of other IT projects, the fact that eMortgages focuses on the note and the deed predominantly with a few other documents, lenders have broader issues that relate to the whole issue of enterprise content management-what do I do with the rest of the loan file."

Efforts have been made in automating loan data flow, but less for document flow. Loan document automation is focused on the post-closing and only parts of the origination process. Focusing on the electronic closing process and automating the participants to that process is the real key to eMortgage adoption, according to Focardi. "The technology is there, the documents are there, the standards are there now it is about bringing those players together to make it happen," he said.

Analyzing adoption in the supply chain reveals good news and bad news but everyone is affected. "In terms of where we are at with adoption, many people have said that 2006 is going to be a year of change," Focardi said. "We saw earlier this year that Wells Fargo Home Mortgage announced that they have done eMortgages. While there are a few announced transactions, once [those transactions] have been perfected, the adoption is likely to happen much more quickly."

One of the challenges in the supply chain is that is fragmented. "I think you are going to see higher adoption in the retail channel going forward at least initially where the whole environment can be controlled much more narrowly with fewer closing agents, fewer parties," Focardi said.

"I think the environment we are in now where volumes are dropping could help spur eMortgage adoption for the simple reason is for the more computer and internet savvy consumer," he added. "Therefore likely to want to look at documents online at home, maybe even sign some of the documents that are not mission critical online and still physically go into the closing agents office and electronically sign on a digital pad those electronic documents. I think speeding up the closing process to the end consumer could have help going forward, but it is a big business process change."

On the software supply chain and data flows, looking at the mission critical documents-the note and the deed and related documents-they are coming from a limited number of company sources.

"The large lenders in particular have the volume to automate the channels they have and the markets they control," Focardi said. "If you can reduce the number of variables and the number of different systems, they will have greater control."

One challenge will be to create and manage separate processes for few documents and for certain loans that are going to be electronic originals and others that are not. "There is going to be a transition period over a long period of time when you go to sign the mortgage papers that will be either paper or electronic process," Focardi said. "I think reengineering the title/closing agent and dealing with the cost of that and the training of the individuals is a key challenge. The more work that can be done sooner on that will be very critical."
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Tech Case Study: Converting Browsers to Borrowers
McGuire, Jon

WHO:
Stonecreek Funding Corp. is a Denver-based mortgage banker that directly services the homeowner and new home purchaser. They have offices in seven states and are licensed to operate in 30 states. Most of Stonecreek's retail leads come through Internet leads from consumers "browsing" for a loan or direct marketing to realtors.

CHALLENGE:
The challenge for any lender getting retail leads from the Internet or call center is to turn these browsers into borrowers. Part of the process is getting three-day disclosures to borrowers and obtaining their signatures, if possible.

Stonecreek had tried sending disclosures as email attachments, but security concerns in light of Gramm-Leach-Bliley put an end to that. Standard practice was to either use an overnight delivery service to send disclosures to applicants along with return overnight envelopes or to pay local title company notaries to present the disclosures in person.

These practices were effective for getting commitment by the borrower to Stonecreek, but the extreme expense had become a real issue. According to Jon McGuire, Stonecreek Funding's director of business applications and development, "The reason we would actually pay someone to go present the disclosures in person is that when you have a 'live one,' you need to 'strike while the iron is hot,' as they say. It is very expensive, but there is a very high yield in converting applicants to borrowers."

SOLUTION:
When McGuire heard about SwiftView's new SwiftSend eDisclosures™ Service, he realized it might enable Stonecreek to save a lot of money and get disclosures securely delivered even faster, while potentially improving the ability to get the applicant's commitment. McGuire signed up for the service, and after a short trial, deployed it to all Stonecreek offices, making the service available to 100 Stonecreek loan officers.

Founded in 1985, SwiftView, Portland, Ore., develops and markets value-added tools and services that help organizations view, print, distribute and organize electronic documents and drawings. The company's SwiftView PCL Viewer is used by eight of the top 10 lenders, most document preparation and title companies, and thousands of companies with millions of users in other industries worldwide. 

RESULTS:
"The beauty of eDisclosures is that now the disclosures can be delivered online to borrowers even as the loan officer is taking their application over the phone," McGuire said. "The loan officer can take borrowers through the documents and even get an electronic signature on the disclosure. So we're actually able to strike while the iron is even hotter-no delay for overnight delivery. We can get buy-in prompted by our loan officer right at the time of application… for a fraction of what we had been paying." 

McGuire notes that "the best place for many borrowers to be called and receive documents is at work. Since installing new software on company systems may not be welcomed, SwiftView's breakthrough eDisclosures technology works with nothing to install-which is a critical reason why this service works. It probably wouldn't otherwise." 

"It takes a while for people to try something new, but already 50 percent of our loan officers are using the service," McGuire said. "Needless to say, we're strongly encouraging the others to adopt it-too much savings to ignore."

For more information: www.SwiftView.com.
 
(Has your company solved a work challenge through technology? MBA Tech NewsLink accepts case studies that document challenges, steps taken to address those challenges and documented results. Submit inquiries to Mike Sorohan, editor, at msorohan@mortgagebankers.org. Case studies published in MBA Tech NewsLink do not connote endorsement of any particular product, technology or process and are presented for information purposes as a benefit to MBA members.)
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Document Classification Moves Toward Standardization
Sorohan, Mike
SAN DIEGO-The concept sounds simple enough: a uniform standard for mortgage industry document classification. And while some progress has been made, in reality, such as standard is still-literally-thousands of documents away.

"The number of distinct loan documents currently stands at 2,000," said Roger Gudobba, senior principal with Wolters Kluwer Financial Services, Fraser, Mich., speaking here at the Mortgage Bankers Association's National Technology in Mortgage Banking Conference & Expo. "Identifying these documents in a consistent way is a challenge."

Michael Levine, senior vice president of eLending at Wells Fargo, Des Moines, Iowa, observed, "Doc classification is not a terribly exciting thing, but we all agree that it would be nice if we all agreed on the same names."

Document classification stands out as a barrier that has hampered industry-wide adoption of the eMortgage, despite the concept's touted benefits. However, with recent development of MISMO Document Classification Guidelines, the move to a truly electronic mortgage will be facilitated by consistent naming conventions between lenders and vendors. Similar to the MISMO Logical Data Dictionary for data fields, a standard document classification scheme provides for more seamless processing industry-wide.

Things used to be simpler. "When I started in the industry, we had a lot of pre-printed forms," Gudobba said. "Around 1986-87, laser printers came out, and it established a printer control language that enabled custom mapping."

Custom mapping created new documents that were business- and company-specific, which was great for each company, but not helpful in standardization. As a result, Gudobba said, many documents have lost "business intelligence"-the ability to interact with each other.

"A couple of areas proved problematic," Gudobba said. "Some documents were multi-state vs. state-specific; some were fixed rate; others adjustable rate; Fannie Mae and Freddie Mac have 64 different forms for adjustable-rate mortgages. So when you think about the characteristics of the documents-and you think of documents as data-what about the data in the document? What is the loan type, what is the loan product, etc.-you almost want to do reverse logic."

Current data quality problems cost U.S. businesses more than $600 billion per year, according to the Data Warehousing Institute. "This is very important from a regulatory compliance standpoint," Gudobba said. "As more demands are made upon you, such as Sarbanes-Oxley, the data becomes more important."

So what is the answer? MISMO Document Classification Guidelines, for one thing. For another, the continued trend toward SMART Docs (Securable, Manageable, Archivable, Retrievable and Transferable), which bind data, presentation and signature(s) into a single electronic file.

SMART Docs is the next step," Gudobba said. "It's keeping the intelligence of the data moving forward."

Igor Derensteyn, senior vice president at Countrywide, Simi Valley, Calif., and a member of MISMO's eMortgage Workgroup, said document classification and standardization makes sense now.

"The bottom line is, eMortgages can provide great savings today and much more potential savings tomorrow. MIMSO-standard doc types eliminate a need for everyone to map thousands of documents between each other."

Derensteyn said he sees progress in moving toward eMortgages-and the sooner, the better. He envisioned a "continuous transition to paperless mortgages" over the next five to 10 years.

"eMortgages will continue to gain traction and acceptance based on industry standards," Derensteyn said. "During the transition, loan types will be hybrid leveraging imaged docs while gradually adopting electronically signed documents. Document classification is a critical part of paperless mortgages because it enables seamless processing of documents industry-wide.

"Today, we generate electronic documents, deliver them and image them, and we still need to print the documents for signature, and then image them again," Derensteyn continued. "Tomorrow, we'll go from images to eMortgages using XML and eSigned documents. The documents are created electronically, executed electronically, transferred electronically and ultimately stored electronically-the true paperless mortgage."

MISMO standards would allow for easy storage and retrieval, Derensteyn said. "In an imaged document, the process works because the documents and the data are reviewed manually-what we call 'stare and compare,'" he said. "In an eSigned document, each document type has a separation, it can be signed automatically and is easily stored and retrieved, and based on MISMO standards. Moving from paper to electronic documents introduce requirements to identify the documents within a loan file using doc types. By evolving to electronic mortgages, the doc type standard enables electronic documents to be processed automatically, as they are exchanged between lenders, settlement service providers, investors, document custodians, servicers and other business partners."

And to get to that point, Levine said, standardization of document classification must continue. "Everyone has to have the same name for a d