Note Holder: The person to whom the note was issued as original obligee or, if the note has been transferred, the current transferee entitled to enforce the note.

"Ready-to-use electronic document management and electronic document delivery technologies have emerged as essential tools in the transition to a paperless environment. They enable all loan documents to be viewed, edited, delivered and stored in electronic form. They also enable companies to simplify work processes one step or department at a time and gradually spread throughout the enterprise." --Donna Schultz, vice president of sales and marketing at SwiftView, Portland, Ore.

Non-Prime Lenders Look at New Business Models
Sorohan, Mike
WASHINGTON, D.C.-Steve Nadon, president of H&R Block Mortgage Co., Kansas City, Mo., recalled his first job at Transamerica Corp., back in 1977.

"We had to do everything-find the customer, take a credit application-in which you had to physically call TRW and get the credit file by phone. Once it was approved you were ready to close the loan," Nadon said yesterday at the Mortgage Bankers Association's Non-Prime Lending and Alternative Products Conference. "We typed up all the documents ourselves, typed the checks, called the borrower and made arrangements for the closing."

Nadon regards the experience as a valuable learning experience. "One of the upsides of that was, you learned the impact of the decisions you make-something that you don't get today," he said. "Until, in relative terms, not all that long ago, that is how things worked."

"Finance companies," the less-than-desirable term given to what was essentially non-prime lenders back then, changed dramatically in the 1980s as industry players changed the way business was done through securitization.

"We didn't see it coming, which is why many of the main players in the mortgage market back then don't exist today," Nadon said. "We benefited from a new way of doing business, as did consumers. The downside is that with a lot of entrepreneurial setups, a lot of people didn't know what they were doing. Some failed; some survived."

Today, the non-prime market has more mainstream acceptance, and is dynamic, increasingly important-and still just as volatile. One issue, Nadon said, is whether the current non-prime mortgage operations model-largely taken from the prime mortgage banking model-will prove successful over the next several years.

"Microsoft has an expression-'you're always two years away from being out of business.' I'm sure that we have to think that way as well," Nadon said. "We've had a tremendous interest rate environment. Consumer purchasing power has increased as rates fell. We saw homeownership rates rise to record levels. It's been a driver in our nation's economy. From my perspective, we have a great story to tell. But good times don't last forever."

Nadon said non-prime lenders, in the next 12-24 months, should rethink their current business model. "We should find out over the next 12-24 months if we are incredibly good people who succeed with these models, or were we just lucky and don't have strong and sustainable business models," he said. "We're seeing changes. The swap rate has changed, and our margins are smaller. It's a lot more difficult to make money in this business, with more players out there trying to grab a piece of the pie."

MBA Director of Industry Analysis Marina Walsh corroborated Nadon's comments, noting that results of a recent MBA/STRATMOR Group report on 2005 non-prime mortgages showed tighter margins for non-prime lenders. Overall non-prime production net income declined to 52 basis points in 2005, from 119 basis points in 2004 (and compared to just 16 basis points for prime loans).

"Margin decline was primarily due to a sharp decline in gain on sale, partially offset by decreased production costs," Walsh said.

"We always wondered what would happen if the non-prime market became a commodity, and I think it's happened, for better or worse," Nadon said. "In 1997-98, non-prime players were small. Today, the largest players in the country-Countrywide, Chase, WaMu-are the new players in the business and can make money from the non-prime market. The market has changed forever, and everyone is going to have to adjust for their own long-term survival."

So, what would Nadon do? He said non-prime companies should be in an introspective process, focusing on the following four factors:

1) Can we eliminate any tasks? "There are still a lot of legacy-type things that we do because we felt we needed to do," Nadon said. "These tasks take time and money. At H&R Block, we're looking at ways to eliminate certain functions completely;"

2) If we can't eliminate, can we automate? "Labor-intensive projects are more expensive-can we automate?" Nadon said. "And if not…"

3) Can we outsource? "We have an operation in India that not only services loans, but originates as well," Nadon said. "We'd rather have our branch managers serving customers, not doing paperwork;" and

4) Can we do it with fewer steps, less activity, more efficiency? "Our operations are still going to end up on the lower end," Nadon said. "I don't think we'll ever see the 150-200 basis point margins anymore. So whatever pricing power we can give to our company is a plus."

H&R Block is in the process of restructuring itself, Nadon said. "We are convinced that the operating models that we used to be successful over the past 10 years will not work in the future, and over the next 18 months we are going to completely reintroduce new models and changes," he said. "We're doing it because we believe it's that critical to our future. The sense of urgency that we put behind those changes, and the willingness of senior management to implement those changes, are critical to success."

The ability of the overall industry to adjust will determine who succeeds and who goes out of business, Nadon said. Failure to do these steps "puts us in the realm of the fringe player, in danger of going out of business. Smaller companies are doing things very successfully. We don't want to be like the old finance companies that don't exist anymore. If you can't rally your company and your employees around a culture of change, then you could be on the outside looking in."
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Mortgage Fraud Continues to Rise
McAfee, Jamie
WASHINGTON, D.C.-A tightening mortgage market has led to a predictable rise in incidences of mortgage fraud is on the rise as the market tightens. At the Mortgage Bankers Association's Non-Prime Lending and Alternative Products Conference here, panelists discussed ways to identify procedures that could be enhanced to help protect companies from further financial losses and streamline reporting financial fraud losses.

"Fraud is on the rise. The contracting market allows opens the door for more fraud to get through. Thinning margins and less volume means lenders may have employees who are more inclined to accept loans of dubious quality," said Jacqueline Dreyer, managing director of training and education with The Prieston Group, Novato, Calif. "They are not the cleanest deals like what we have been seeing over the last couple of years. These deals are really pushing the mark, requiring a lot of exceptions to underwriting guideline, really looking for compensating factors-it results in a lot more fraud."

Financial losses are not the only concern-lenders are concerned about the industry's image to consumers as well. "While mortgage fraud causes losses to all segments of the industry, the issue of mortgage fraud is of particular concern for those of us who originate in the non-prime and non-conforming sectors of the market," said Terry Theologides, executive vice president of corporate affairs with New Century Financial Corp., Irvine, Calif. "Aside from the dollar losses, that fraud causes to a lender our segment of the market is particularly vulnerable to the reputational damage that could result if we allow our borrowers to be victimized by fraudster that we fail through our own internal processes to detect."

More than half of the fraud that occurs occurs from insiders. "More than 70 percent of the mortgage fraud and identity theft cases originate internally," said Marc Loewenthal, senior vice president of corporate affairs with New Century Financial Corp.

According to Loewenthal, prevention starts by knowing how your security practices work. "It all starts with your own information security practices. A key to preventing frauds is to identifying your company's weaknesses and how to fix it those weaknesses," he said. "You have to know where your known-risk indicators are in the business so you have a way to address the control points and establish responsibilities and put people in control that are able to manage them. At the end of the day it is the management of that information that's going to make a difference."

Education is another factor to fraud prevention. "One thing we can do is use the tolls that are out there. I want to caution on the over reliance of technology," Dreyer said. "We still have to train our people. Training does make a difference. On average, we see a decrease of 70 percent of claims for lenders who have been properly trained."

Teaming up with other members of the industry is another way to help fight fraud. The total of financial fraud losses that were reported for fiscal year 2005 were $2.7 billion. Of that total $1,014,000 or 721 cases were mortgage fraud, according to Ronda Heilig, supervisory special agent for the FBI's Financial Institution Fraud Unit. Since there is no mandatory reporting in the industry this number could be higher. Heilig said she hopes to streamline the reporting process. However, the industry must be a part of the streamlining, she added.
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Collateral Risk Up in First Quarter, CoreLogic Says
Sorohan, Mike

The first quarter Core Mortgage Risk Monitor from CoreLogic, Sacramento, Calif., shows that the U.S. collateral risk index-a measure of the risk associated with the accuracy of a property valuation and the sustainability of that valuation over the life of the mortgage contract-rose by 6.4 percent from the fourth quarter 2005.

The Mortgage Risk Monitor is a predictive map forecasting the geographic "fraud hot spots," or markets most likely to experience the economic consequences of increased levels of fraudulent activity over the next 12-18 months. According to the Monitor, data indicate that mortgage fraud and risk management continue to play a significant role in the housing market economy.

The increase indicates that the risk of mortgage fraud causing economic impact in vulnerable markets continues to rise at an unprecedented rate, said CoreLogic Chief Economist Mark Fleming. 

The five markets showing the most noticeable increase quarter over quarter are: Alexandria, La.; Pascagoula, Miss.; Laredo, Texas; Morristown, Tenn.; and Lakeland, Fla. The top five U.S. markets at risk are Youngstown, Ohio; Akron, Ohio; Memphis, Tenn.; Toledo, Ohio; and Buffalo, N.Y., which replaced Dayton, Ohio from the fourth quarter 200.

Fleming said the data confirm comments by other analysts, including those at the Mortgage Bankers Association, that the housing market is experiencing a "soft landing." He pointed to annualized growth rates that, while still robust, steadily declined from 12 percent in the fourth quarter 2005 to nine percent in the first quarter.

Key findings from the report include:

o Real estate affordability is declining: Although house prices are not rising as quickly as before, this is offset by interest rate increases and incomes have not been able to compensate.

o Relative affordability is also down: Measured as affordability today relative to affordability a decade ago, only 152 markets were more affordable in the first quarter of this year compared to 174 more affordable markets in the fourth quarter last year.

o Default notices are on the rise:  Default notices-the lender notification to borrowers that they are in default on their loans-are on the rise.  The slow down in price appreciation is exposing more borrowers to the default option in an environment where interest rates are rising.

o Impact on Mortgage Fraud Risk: As the housing market slows, there is a greater propensity for increased fraudulent activity. With fewer loans coming in and going out and the resulting decrease in money changing hands, unethical parties involved in the process may compensate by committing fraud.
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Some Outsourcers Vote for Onshore Operations

Murray, Michael

The trend to offshore certain back-office operations remains a hot topic for companies to explore, but some mortgage technology firms prefer to outsource their wares here in the U.S. based primarily on technology efficiency and communication.

Del Mar Database, San Diego, a subsidiary of Fiserv, Brookfield, Wis., integrates vendor services into its loan origination system (LOS), targeted toward small-to-mid-size mortgage bankers. Del Mar Database will announce the addition of the Mortgage Electronic Registry System (MERS) to a platform that includes Freddie Mac's Loan Prospector, Fannie Mae's Desktop Underwriter and DocMagic, Carson, Calif.

John Walsh, president of Del Mar Database, said Del Mar needs to maintain control and communication throughout the process.

"It is one of those things that everybody is talking about but today, no," Walsh said, noting that Microsoft and Dell are pulling some operations back from overseas. "Clearly the cost per man hour is [much] less. The challenge is productivity. It is not a matter that offshore engineers are any worse than our engineers. I don't frankly think that's true. The issue is communicating what it is you want to somebody else, and that can be really difficult to do as clearly Dell and Microsoft found out over three thousand miles. I think the trend is going to be there and I wouldn't be surprised if some point in the future, Del Mar does so but, to date, we have been building technology so rapidly that we needed to have control."   

Guardian Mortgage Documents Inc., Lakewood, Colo., a doc prep provider and outsource entity in a "broker-to-banker" relationship as Guardian Mortgage Services (GMS), also said communication is a primary reason to stay in the U.S. 

"It has been a hot topic for a long time," said Tim Anschutz, vice president at Guardian Mortgage Documents Inc. "There are a lot of economic reasons why there is some motivation…there are legislative [reasons] that make it an attractive idea."

However, Guardian does not outsource its business overseas because, according to Anschutz, their closing and post-closing operations do not lend themselves as a good candidate for India.

"Wholesale or retail just doesn't make sense for somebody from India trying to contact a broker or even talk to an end consumer," Anschutz said. "The touch points needed by people, it just doesn't work very well…something as simple as verifying employment…even timing, time differences…just that portion of it right now, they have enough touch points and they get enough synergies through people talking to people…and the timing…it just doesn't work. It doesn't make that much sense."

Walsh said it is impossible to ignore the effective costs of a move offshore, particularly in comparison to California, but he noted that the cost per person needs to be assessed with the cost "per line of effective code." Walsh also noted that the design team will always stay in the U.S. because that portion is tied to the mortgage industry.

"That piece, I don't think will ever move offshore," Walsh said.
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Two Years Later, HMDA Data Controversy Continues
Sorohan, Mike
WASHINGTON, D.C.-The Federal Reserve's revised reporting requirements to the Home Mortgage Disclosure Act have been in place for two years now, but time has not dampened the debate over what the data really mean.

Glenn Canner, senior advisor with the Board of Governors of the Federal Reserve System, acknowledged as much, noting polarizing degrees of interpretation of 2004 HMDA data, which asked lenders for the first time to include annual percentage rate (APR) calculations.

"Obviously the data were closely monitored along racial lines," Canner said here at the Mortgage Bankers Association's Non-Prime Lending and Alternative Products Conference. "When we get involved in fair lending enforcement activity, we look at both the incidences and the spreads. For a number of lenders in the data, it's not so much incidences, but the spread-we're going to ask how they calculate basis points and how it compares to other products. But the public [debate] focused on the incidences-and the lenders targeted tended to have a mix of business, prime and non-prime."

Canner said the Fed is "on schedule" to release its reports on 2005 HMDA data in September, based on 35 million loans. And he acknowledged that, from a lending standpoint (including that of MBA), that the HMDA data are "limited" and do not fully take into account other criteria for determining an APR, such as credit scores.

The Fed amended HMDA in 2002 "to keep it up to date with mortgage market environments," Canner said. "The subprime market has grown to be a substantial part of the marketplace. The Fed's view was that fewer people were being rejected for loans, but they were being offered higher loan terms. So it decided to focus the changes where the concerns were greatest, which is why the reporting has been changed for higher-price loans."

Canner said the Fed doesn't try to argue with semantics. "We don't call them 'subprime,' or 'non-prime' or 'near-prime.' We call them 'higher-priced,' because the higher prices don't necessarily reflect a higher-risk borrower. There are other factors involved, such as geography. And pricing is not necessarily done off of a rate sheet. Brokers have discretion in setting prices, and the price quoted to the consumer is based on negotiations."

Lenders should not fear the Fed investigating them based on incidences. "We're going to focus on more subtle differences, centering on objective factors, based on pricing, which are pretty well understood by the agencies and the banks; and subjective pricing, such as loans received by brokers or other channels. Those factors tend not to be explained by objective factors. When those prices show a racial pattern, it becomes an issue," Canner said.

Canner said because the data are public, it's in the lender's best interest to review that data and see what is driving any differences in pricing. "When we come in to do an investigation for the institutions that we supervise, we're going to be looking for explanations," Canner said. "The first thing we're going to do is say "we're seeing these patterns-do you have an explanation?"

But John Konyk, senior vice president with National City Mortgage Co., Pittsburgh, said without explanations, the HMDA data are "just numbers."

"HMDA numbers don't necessarily reflect patterns of abuse, which I think gets lost on people," Konyk said. "So you see an awful lot of analysis done that lead to inaccurate conclusions."

One of the consequences of misunderstood data has been the proliferation of state and local predatory lending laws and ordinances, which MBA says creates an undue regulatory burden on lenders and, in some cases, unfairly catches lawful, legitimate lenders in a broadly cast net.

Konyk noted that in some states, predatory lending ordinances were struck down because they were pre-empted by existing state or federal laws. Others were reworked to limit the extent of "assignee liability," which made legitimate lenders liable for loans they didn't make.

Now, he said, jurisdictions are taking different approaches. In Montgomery County, Md., for example, a predatory lending ordinance set to take effect this year equates lending practices with human rights violations. In Ohio, legislators are trying to skirt around pre-emption by tying lending practices to consumer safety practice violations.

The result, Konyk said, is an unprecedented regulatory burden for lenders. "In the U.S. there are 53,994 different government jurisdictions," he said. "If just 10 percent of these jurisdictions passed predatory lending laws, that would be 5,400 different laws."

Terry Theologides, executive vice president of corporate affairs with New Century Financial Corp., Irvine, Calif., said the regulatory burden underscores the need for a uniform, national standard for predatory lending practices, one that "picks the best pieces in operation and allows lenders to operate while providing meaningful protections for consumers."

MBA Senior Vice President for Government Affairs Kurt Pfotenhauer said this week that a predatory lending bill is unlikely to pass Congress this year, given the election-year legislative schedule. Theologides agreed, but noted that MBA's goal this year is to move the debate forward this year, so that progress can continue in 2007.

"This is an issue that is now on the radar screen of the House Financial Services Committee-there is time and attention being devoted to it. But there is a long way to go," Theologides said. "Given that it's an election year, with no Senate bill in place, we're going to push the issue and see how far we can get this year. If we can't get it etched in stone, we can at least push the debate forward."

Theologides said it is "critical" to keep the push going for a uniform national standard. "If anything, the states are going to be more aggressive, as they find ways to not be pre-empted," he said.
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Technology Briefs
McAfee, Jamie

Atlanta-based Noble Systems Corp. announced its Contact Center Suite CIM product now includes Glen Clove, N.Y.-based Call Compliance Inc.'s TeleBlock system.

Noble Systems' Contact Center Suite provides information management and operational tools to manage blended voice, email, and Web-based communications. The Contact Center Suite combines a predictive dialer and automatic call distributor (ACD) with an open platform, scripting tools, center resource management and real-time reporting.

All numbers dialed using Noble Systems software are screened against all appropriate Do Not Call (DNC) databases, including the wireless portability list. If a call is placed to a number appearing on any DNC list, the call is instantly blocked. In addition, Noble Systems customers will be able to toggle TeleBlock on and off on a program basis, as well as maintain an unlimited number of program-specific databases.

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SharperLending LLC, Spokane, Wash., partnered with CreditXpert Inc., Towson, Md., to offer its users Credit Assure, a loan closing software tool that pre-scans credit files and identifies opportunities to raise credit scores based on credit data accuracy and credit management.

The SharperLending platform and Credit Assure will alert users of potential issues that lower an applicant's credit score or credit management opportunities, which, if acted upon, may improve the applicant's credit.

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Zoot Enterprises, Bozeman, Mont., released its Diakon Automated Test File Builder. Diakon users can create and modify test files to evaluate an institution's decisioning logic and audit the performance of credit scoring applications. A browser-based architecture, Diakon allows users to build as many custom test files as necessary. It is provided as part of the Zoot ASP, which offers enhanced software management and maintenance services.

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XSell LLC, Jacksonville, Fla. will provide real-time product prioritization and personalized offers for potential home-equity loan customers to pricelinemortgage, Jacksonville, Fla. When pricelinemortgage receives a purchase or refinance mortgage loan application through the Priceline.com Web site, the consumer's application data is then submitted to the XSell Customer Service Marketing platform for scoring.

The XSell platform pre-qualifies and creates offers for as many as five home equity line of credit (HELOC) programs. Then, the product creates a sale guide, which is sent electronically to the pricelinemortgage loan officer.
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Participate in MBA Technology Study/Roundtable
MBA Staff
Technology investment is growing; can you measure your mortgage company's technology spending patterns?

The Mortgage Bankers Association, in collaboration with the Hollister Group LLC, is pleased to announce the third annual residential MBA Technology Study and Roundtable for mortgage originators and servicers. Join the industry's leading organizations by participating in a study that has become a valuable tool for evaluating IT spending, both internally and among peers.

Technology continues to be a key driver of efficient organizational workflow and effective operational capacity management. Decisions to increase IT spending and allocate resource occur without adequate access to industry-wide benchmarking data and usually without insight to best practices.

The 2006 MBA Technology Study provides the relevant data to assist mortgage lenders and servicers looking for effective methodologies upon which they can make sound business decisions. Participants also are invited to a full-day roundtable meeting to discuss results and network with peers.

Benefits of participating in this study:

* Access to comparable definitions for internal analysis of IT expenditures;

* Insight into methodologies and tools used within the industry to evaluate technology expenditures and make strategic technology decisions;

* Increased understanding of strategic approaches and applications of technology among participants; and

* Forum for discussion with other mortgage company IT executives.

The study will run this spring. The survey instrument will be distributed to all participating mortgage companies in mid-March or upon registration. All companies will receive a copy of their initial results by June 5 in time for the roundtable, to be held at MBA headquarters in Washington, D.C., on Thursday, June 29. 

For more information about participating, contact:
Gabe Minton at (202) 557-2821, gminton@mortgagebankers.org
Marina Walsh at (202) 557-2817, mwalsh@mortgagebankers.org
Rita Ballesteros at (301) 588-4502, rballesteros@hollisterllc.com
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CampusMBA eMortgage Workshop June 13-15
Sabol, Krista
CampusMBA's eMortgage Workshop is a staple of CampusMBA's eMortgage and technology education programs; the program combines the basics of eMortgage implementation with latest industry trends. This year's workshop takes place June 13-15 in San Diego. Topics include electronic vaulting implementation, eSignatures, SMART Doc™ concepts, legal infrastructure, SPeRS, eRecording and eNotarization.

Tess De Guzman, vice president and manager with Washington Mutual in Seattle, attended the June 2005 offering of the course. She reflects on her experience: "What I found to be beneficial for me was learning where the industry is today as it relates to eMortgages. Also, sharing the experiences from other companies who are ahead of the game in this space is very informative. Overall, the curriculum is very good and the instructors communicated the basic principles of eMortgage in the three day program."

The first day explains the fundamentals-eMortgage process flow, industry standards, ROI and security. The program then split into two tracks on Day 2, technical and business. The business track dives deeper into the business and legal considerations surrounding eMortgage implementation. The technical track drills into the enabling technology: XML, XHTML, SMART Doc™ specification and electronic signature implementation. To round it out, real-world case studies provide the students with an opportunity to ask questions of each other and the instructors.

When asked to identify the single most important thing about the eMortgage Workshop, Harry Gardner, MBA's senior director of industry technology, responds: "This program presents the most effective opportunity for professionals to come up to speed quickly on the fundamentals of eMortgages, as well as the latest developments in eMortgage technology and business processes in the industry." He said the growth curve for eMortgage adoption is accelerating, and in five years, he expects to see eMortgages as a mainstream aspect of the overall mortgage industry. To support mainstream growth, technical solutions for eClosing, eRecording and eNotarization are being adopted by lenders, title companies and county recorders nationwide.

"There is more implementation work and behind-the-scenes activity surrounding eMortgages now than ever before," Gardner said. "There is a greater awareness in our industry on the importance of eMortgage implementation, and the pieces of the puzzle are falling into place. Fannie Mae is accepting eNotes for production delivery and recently released Version 2.0 of its eMortgage Guide, while Freddie Mac has also incorporated eNotes into its infrastructure and released its own eMortgage Delivery guidelines to the industry. The MERS® eRegistry is in production operation and many lenders and investors are actively integrating with it now (if not already online), as they build SMART Doc™ capability into their eMortgage infrastructure."

In support of this industry-wide growth, MISMO continues to grow. "We have added Doc Classification and Fraud Detection workgroups this year, and the eMortgage workgroup has experienced strong growth over the last two years," Gardner said. "The eMortgage workgroup has developed a comprehensive eMortgage Guide designed for executives and business/technology leaders in the industry. Version 2.0 was released at MBA's annual Technology Conference in March." In addition, the eMortgage Workgroup released Version 1.0 of the MISMO eMortgage Closing Guide, which is intended to educate the mortgage industry about the business, legal, and technical aspects of eClosing systems and their potential benefits. These Guides are available at www.mismo.org.

Companies that are in the beginning phases of eMortgage implementation or thinking about implementation will benefit from attending the next offering of this workshop in San Diego, June 13-15. Those who have previously attended the workshop will learn about the latest developments in the industry and how they affect current business strategies.

To register or to learn more, visit the program Web site, http://www.campusmba.org/index.cfm?STRING=content.cfm?section=254,  or call (800) 348-8653.
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MBA Tech NewsLink Reprint Policy
MBA Staff
Articles appearing in MBA Tech NewsLink are available as reprints for a nominal fee. Reprints are done on quality paper or can be sent electronic