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The Secondary Desk: A Paradigm Shift

*Navigating A Changing Market*
**By Ivan Darius**

***The mortgage industry is undergoing a vast and dramatic shift. It’s more than regulations or investor relations; we are looking at an actual shift in the paradigm of how the mortgage product is assembled. While process management still plays an important role, we are seeing a fundamental shift towards more active management and more intense verification of data.

****Most existing “Database-of-Record” systems are not designed for this paradigm; instead they are primarily used to capture the data. But it’s not good enough to just have static, end result, data. Particularly for compliance, mortgage bankers need to understand where the information came from, what the context was when it was collected, and how it might be needed in the future. Of course, if we can all agree that data quality is the key, the questions center around when and how the data is validated. Do a simple Google search on loan data quality and more than 20 million hits are returned, most of them from vendors promoting loan quality. And what is technology’s role?

****Reading some of the articles, it’s clear that most of what is written is based on the perception of how a mortgage is underwritten and processed. In reality, it’s more about the workflow, access to information in the form of data, open systems, seamless unification of platforms, and Software-as-a-Service, or cloud-based environments that promote greater agility to be able to assemble and validate information in an automated fashion. It’s also about drawing a line between the origination process and data quality. Origination focuses on gathering facts about the consumer and the collateral, processing the data, and efficiency. Data quality and validation is (should be) done in parallel. Working symbiotically with the LOS, constructing and validating the mortgage product and loan level information in a separate system or process, that can then be merged with information in the “Database-of-Record”, ensuring a validated loan file that has minimal repurchase and compliance risk.

****For lenders, it makes sense for that parallel system to be an adaptive product-eligibility, pricing and secondary marketing automation platform. In the last few years these systems have evolved from core pricing and eligibility engines, to a much more complex platform. In the early days of PPE’s, it was a loan officer product and search tool that included basic automation of the locking process. Today, the workflow has matured adding things like automated underwriting, mandatory delivery, hedging and loan committing, consumer point of sale, investor credit overlays, etc – all things that have significantly enhanced the origination and lender workflow functionality. This information is so fundamental to creating a mortgage that it needs to be accessible from the consumer to capital markets and any point in the workflow between. By continually validating the loan level data throughout these steps, a lender is ensured that the output is a higher quality and compliant loan. Investor credit overlays are a good example. All of the above allows lenders to manage risk from the standpoint of both origination and capital markets.

****As the mortgage process evolves, and compliance grows in scope and importance, it is imperative that the industry evaluates how the market is changing and adjusts accordingly. Today, alongside LOS and servicing systems, product, pricing and secondary marketing automation platforms are equally, if not more, relevant. In the proper implementation, these platforms work hand-in-hand, creating a workflow designed to support the industry’s move towards data verification and compliance.

ABOUT THE AUTHOR: Ivan H. Darius, Ph.D. is co-founder and co-CEO of Plano, Texas-based Optimal Blue LLC, an Application Service Provider (ASP) for product eligibility and pricing engine (PPE) technology and content management. Dr. Darius founded Optimal Blue in 2002 with more than 30 years of executive experience in technology, product development and operations. In his current position, he is responsible for managing the day-to-day activities of the company as well as focusing on the technical and strategic product direction. He designed the Optimal Blue system to leverage the convergence of technology with content management to seamlessly connect investors, lenders and originators to more efficiently source, manage, price and lock a loan in real time. Prior to founding Optimal Blue, Dr. Darius was president and CEO of Sollen Technologies LLC in Dallas. While there, Sollen became the first successful ASP selling automation and process improvement tools to the mortgage industry.

Video Insights: Increase Origination Volume

*Thrive In A Down Market*

***At the ENGAGE 2011 Event presented by PROGRESS in Lending, lots of quality discussions and ideas were exchanged. For example, are you struggling to survive in a lending world with less origination volume? Help is on the way. We discussed new techniques and methods to ensure success. Our speakers for this panel included prominent lenders, vendors and consultants. Here’s what they had to say on this topic:

httpv://www.youtube.com/watch?v=XaFS6rqqNYA

Market Analysis: Figuring Out Ellie Mae

*What Can We Learn From Ellie Mae?*
**By Tony Garritano**

***What can we learn from Ellie Mae? First, that an origination technology player can go public. I think that’s a good thing for other origination vendors. It sets a good standard to follow. Some criticize Ellie Mae’s revenue, but times are trying. In the end, Ellie Mae’s total revenue for the third quarter of 2011 increased 23% to $14.7 million, compared to $11.9 million in the third quarter of 2010. Software Solutions revenue increased 30% to $11.8 million, compared to $9.1 million in the third quarter of 2010. Network revenue was $2.8 million, compared to $2.8 million in the third quarter of 2010. But Ellie Mae’s financial reporting tells me something else about the mortgage space that goes beyond just Ellie Mae. Here’s what I mean:

****First, let’s get through the numbers. Ellie Mae reported that net income for the third quarter of 2011 was $1.0 million, or $0.05 per diluted share, compared to net income of $1.8 million, or $0.10 per diluted share, in the third quarter of 2010. Included in the results for the third quarter of 2011 was $0.4 million of one-time expenses related to the acquisition of Del Mar Datatrac. Included in net income and adjusted net income for the third quarter and nine months ended September 30, 2011, was a one-time tax benefit of $266,000 which resulted from a refund of prior years’ R&D tax credits.

****On a non-GAAP basis, adjusted net income for the third quarter of 2011 was $2.0 million, or $0.09 per diluted share, compared to adjusted net income of $2.2 million, or $0.13 per diluted share, in the third quarter of 2010. Adjusted EBITDA for the third quarter of 2011 was $2.3 million compared to adjusted EBITDA of $2.5 million for the third quarter of 2010.

****Total revenue for the nine months ended September 30, 2011 increased 20% to $36.7 million, compared to $30.6 million for the nine months ended September 30, 2010.  Software Solutions revenue for the nine months ended September 30, 2011 increased 24% to $29.5 million, compared to $23.8 million for the nine months ended September 30, 2010. Network revenue for the nine months ended September 30, 2011 increased 8% to $7.3 million, compared to $6.8 million for the nine months ended September 30, 2010.

****Net income for the nine months ended September 30, 2011 was $0.2 million, or $0.01 per diluted share, compared to net loss of $(1.1) million, or $(0.33) per diluted share (($0.07) per pro forma diluted share including the conversion of 11.8 million shares of convertible preferred stock in connection with the IPO), for the nine months ended September 30, 2010.

****On a non-GAAP basis, adjusted net income for the nine months ended September 30, 2011 was $2.1 million, or $0.11 per diluted share, compared to adjusted net income of $0.7 million, or $0.04 per diluted share, for the nine months ended September 30, 2010. Adjusted EBITDA for the nine months ended September 30, 2011 was $3.2 million, compared to adjusted EBITDA of $1.9 million for the nine months ended September 30, 2010.

****Ellie Mae says the key operating metrics as of and for the quarter ended September 30, 2011, excluding the Del Mar Datatrac acquisition:

****>> The number of lender users actively using the company’s Encompass enterprise solution (“active lender users”) increased 10% year over year to 43,183;

****>> Of all active lender users, 20,349 or 47%, were using the SaaS version of Encompass, an increase of 78% year over year;

****>> Of all active SaaS lender users, 16,196, or 80%, subscribed to the company’s bundled success-based-pricing model (SBP), representing a 139% increase year over year;

****>> 4,050 SaaS SBP users were sold, or booked, during the quarter, including 1,910 new users and 2,140 conversions of existing licensed Encompass users to the SBP model;

****>> Lender Encompass revenue for the third quarter of 2011 increased 27% to $12.1 million as compared to the third quarter of 2010; and

****>> Average revenue per active lender user in the third quarter of 2011 increased 12% over the comparable period in 2010 to $286.

****Certainly reporting on their income and revenue is a story, but that’s not the whole story. For me, the fact that the company continues to report big gains in the area of Software as a Service and that the SaaS clients are taking advantage of bundled services is the real story. This means that lenders want flexibility. They want to be in charge of their own destiny. The more vendors realize and deliver of this trend, the better off their lender clients and the mortgage industry will be.

Tony Garritano

Tony Garritano is chairman and founder at PROGRESS in Lending Association. As a speaker Tony has worked hard to inform executives about how technology should be a tool used to further business objectives. For over 10 years he has worked as a journalist, researcher and speaker in the mortgage technology space. Starting this association was the next step for someone like Tony, who has dedicated his career to providing mortgage executives with the information needed to make informed technology decisions. He can be reached via e-mail at tony@progressinlending.com.

Powering Today’s Lenders: Are You Missing Out?

*Are You Happy With Your LOS?*
**By Daniel Liggett**

***Is your LOS doing everything it should for you? An LOS should address the entire loan origination process…and then some!

****Lenders today are tasked with doing more with less.  More rules and regulations, changing investor guidelines, tighter underwriting standards, and the constant pressure to bring in more business, all while having less staff to accomplish stated goals.  It’s clear that the requirements of lenders have significantly expanded  in terms of the scope of tasks that need to be performed to be competitive and successful. These now include both lending and non-traditional tasks that are required.

****First, it goes without saying that your LOS should be able to handle mortgage loans of all kinds from all of the traditional channels. But it should also be able to handle consumer lending products such as personal loans, auto loans, equity and lines of credit, and construction lending products as well. It should use the same database and take advantage of the same security, data validation and related tools to maximize efficiency and eliminate the need for your staff to learn multiple system and infrastructures.

****Your LOS should also handle doc prep, secure messaging and doc delivery as well as the traditional tasks. Most importantly, your system must have in-depth integrations with business partners to help perform these tasks. Integrations allow you to offer clients faster service, decrease manual requirements and increase the quality of the information flowing in and out of your LOS. Simply put, the right LOS integration makes your operation better, stronger, and faster!

****Lastly, your LOS must perform non-traditional tasks such as assisting with marketing and customer retention. Your LOS should help you attract new customers with fast and easy point-of-sale features, instant approval messages and instant loan status updates. It should also serve as a repository of data on current customers so that you can quickly and easily reach out to them with offers on other products, or re-finance opportunities, before your competition does.  Today your technology solution must reach beyond the traditional definition of an LOS and include:

****>> Consumer facing web portal for quick, secure applications w/ real time status updates to the borrower

****>> Dynamic point-of-sale functionality

****>> Secure document delivery

****>> Secure messaging

****>> Processing

****>> Underwriting

****>> Closing

****>> Document Preparation

****>> Custom documents & letters

****>> Mortgage processing

****>> Consumer processing

****>> HELOC processing

****>> Construction Loan Processing

****>> Integration with banks business partners

****>> Ability to quickly and compliantly respond to rule changes

****To effectively respond to the challenging lending environment that lenders are faced with today, lenders need to turn to technology to answer the call.

Daniel Liggett serves as Director of Client Services for Associated Software Consultants’ PowerLender Loan Origination & Processing System. He has more than 20 years experience in mortgage lending and loan automation systems. Danny oversees the configuration, training, support and project management efforts for loan origination and secondary marketing at ASC and serves as a development and marketing advisor.

Rethinking Originations: Changing Dynamics

*Changing Dynamics*
**By Mark Phlieger**

***As the market has shifted, so has the face of the average lender. What’s changing? We’re seeing the rise of the community bank or credit union owned mortgage banker. Depositories are king. These institutions are buying independent lenders and starting robust mortgage departments.

****What happens after the sale of that independent lender closes? They need technology. There’s a lot of interest in loan origination systems today. The deals are coming in left, right and center. We are seeing a surge of companies looking for a Web-based LOS. In the cases of these community banks and credit unions picking up independent bankers and coming into mortgage, they’re looking to the Web as well. Here’s why:

****They want to be up and running quick. They are looking at low barriers to entry. They want rapid implementation. They want to avoid a large capital expenditure. They are steering clear of all the old school technology. They want a turnkey solution that the provider will run.

****All of this leads to cloud computing and placing the entire mortgage office on the cloud. What’s great about this new market dynamic? The depositories now own the mortgage companies and these depositories don’t have legacy technology. They aren’t stuck doing things the same old way because they’re used to doing things that way. They want to innovate. They want to be efficient and nimble.

****This is very different as compared to how things used to be. We used to see lenders look to upgrade from client server technology to Web-based technology. We saw evolutionary change. However, we’re seeing those guys get acquired by a community bank or credit union and then bring in a whole new system. Now we’re seeing revolutionary change and an opportunity to leapfrog these new lending institutions into this century with the latest technology.

****Another important factor to note in this changing dynamic is when you talk Software as a Service and cloud, you as the vendor can drop code into the LOS quickly to meet changing regulatory requirements, which keeps the lender compliant. We at Avista had an LQI solution in place in late September because of the agility that Web technology affords. That’s just on of the huge benefits of moving toward the Web. I think it’s also important to differentiate between Web-based and Web-enabled technology as we have this discussion. If it’s truly Web-based you could do the demo with the vendor from your computer’s web browser and if you can’t it’s because the technology is just Web-enabled and requires client downloads or client installed software to run. This Web-based model better supports the lender in this new world. Core technology has moved to become on-demand vs. installed technology. Don’t be fooled, join the new mortgage lending dynamic.

A longtime leader and technologist for the mortgage lending industry, Mark Phlieger is president and CEO of Avista Solutions, the Charleston, South Carolina- based creator of innovative all-channel, Web-based loan origination systems. Co-founding the company in 2001, Mark has led Avista since its inception and has an impressive record of achievement in pioneering and development in the mortgage technology space. Mark was a team member on the Fannie Mae project that developed the groundbreaking technologies of Desktop Underwriter and Desktop Originator and later became responsible for their implementation and adoption as the industry standard among Fannie Mae lenders. He went on to create Resource Bancshares Mortgage Group’s core Web-based e-business platform, e-RBMG.

Technology Spotlight: Subprime Flying High Again?

*Nonconforming Is Making A Comeback*
**Quadriga Mortgage Group Profiled**

***Who said nonconforming is dead? The Quadriga Mortgage Group specializes in portfolio funding nonconforming mortgages with low loan to value (LTV) ratios on a wholesale basis, originated through licensed mortgage brokerages and other third party lending professionals. Quadriga manages a mortgage pool that is funded by private investors who are taking advantage of the benefits of investing in a diversified pool of well secured residential mortgages. To further streamline its operation and grow the company has chosen to implement the Mortgage Builder LOS. Here’s why:

****According to Sue Villa, a 30-year mortgage industry veteran and chief underwriter at Quadriga, picking a loan origination software package for the new company was not an easy task, but one made simpler by Mortgage Builder’s design concept.  Her research on LOS systems revealed that Mortgage Builder offered an “everything’s integrated” approach, including the availability of advanced electronic document management (EDM) that would allow Quadriga Mortgage to have a paperless operation from the very beginning. The portal capabilities built into Mortgage Builder allow third parties to submit loans and supporting information instantly online, resulting in faster, more efficient decisions – a great advantage when dealing with more complex loans originated by others.

****“We are a new company but one with generations of experience in mortgages and financial services,” says Ms. Villa. “We wanted an origination technology that could do everything, was already integrated with leading vendors, and would allow us to operate with great efficiency but without necessitating a huge investment. Mortgage Builder’s hosted delivery model let us open our doors with an industry-leading LOS platform while incurring costs transactionally,” she explains. “It is a very advanced, streamlined system and one our brokers will benefit from, as well.”

****Quadriga Mortgage is a unit of Auriga Holdings, a privately held investment firm based in New York City. Recognizing the demand for mortgages from borrowers with less than perfect credit, non-standard income streams or an appetite for investing in rental properties in today’s restrictive underwriting and credit environment, Quadriga Mortgage expects that its offerings will resonate well in its target markets. The company is focusing initially on California, Arizona and Nevada, with nationwide expansion planned.

****“Our model broker is a retail originator specializing in conforming loans but who wants an alternative for good loans that don’t qualify for current government and agency programs,” Ms. Villa says. “Mortgage Builder gives us great flexibility with different loan scenarios and is totally scalable.  With loans available up to $1 million on 65 percent LTVs, there is a pent up demand for us to tap and Mortgage Builder’s features will help us accomplish that.” After two to three years of steady payment history, she expects their loans to refinance into mainstream programs with other conventional lenders.

****Having a good deal of industry experience has its benefits: Ms. Villa knew exactly what she wanted and precisely what she wanted to avoid when considering an LOS system. “With all the details of a startup operation to take care of, the last thing we needed was a complicated technology implementation,” she notes. “Research told me that Mortgage Builder’s customer service was excellent and our experience has verified that their reputation is well deserved. The implementation has been very smooth and there is always someone knowledgeable on hand to help when we need it,” she says. “And that is just how we want people to describe the lending experience at Quadriga Mortgage.”

****Keven Smith, Mortgage Builder’s president and CEO, observes that while Quadriga Mortgage’s market niche is potentially quite sizeable, the larger lenders are leaving it for the smaller companies, at least so far. “We have seen the mortgage qualification pendulum swing far to the opposite side over the last few years, to where many worthy borrowers are now excluded from having access to credit,” he says. “I expect there will be numerous observers watching companies like Quadriga Mortgage to gauge their success as they serve this segment.”

Technology Spotlight: Lender Looks To Cash In

*Lender Looks To Drive Business Growth*
**Independence Mortgage Company Profiled**

***Independence Mortgage Company, a division of Detroit, MI-based First Independence Bank, has decided to switch its LOS to Avista Solutions. Independence Mortgage Company’s Avista Agile LOS will be up and running no later than November 1. Independence Mortgage Company Director Jim Wickham, a Certified Mortgage Banker (CMB), wanted to implement a new mortgage loan origination system that would help drive the company’s business growth plan.

****Independence Mortgage Company’s 2011 restructuring plan included moving to a cloud-based server, using Microsoft Office 365 and equipping its sales team with iPads for work on the go. Avista Solutions’ cloud-based, all-in-one format fit the company’s new business profile, provided much-needed data security and freed its IT department from cost and resource burdens, Wickham said.

****“My big push for Avista was that it complements my IT objective for the group globally,” Wickham said. “It’s secure, has a central source of maintenance, offers remote access and is not device specific. We’re moving to Microsoft Office 365 and the cloud-based server for our business unit, and when we complement that application with Avista’s web-based format, we achieve our goals.”

****Wickham cites ImageFlow, Avista’s fully integrated, electronic document management solution, DataMart, Avista’s onsite data storage and reporting tool, and the system’s workflow queues, which allow for loan life tracking and department performance accountability, as key system features that won his company over.

****Avista Solutions Senior Vice President of Sales, Michael Picker said, “In order to realize the growth outlined in its business plan, Independence Mortgage Company needed a multi-channel, all-in-one lending platform that users could access anywhere, whether they’re working from a PC in the office or an iPad on the road. Our robust, secure, cloud-based system allows for complete mobility.”

****“I was on the Avista Agile LOS with a previous employer, and the system’s single source solution was our driving motivator,” Wickham said.

Understanding The News: LOS Stirs Things Up

*BREAKING Loan Origination System News*
**A New Approach**

***MortgageFlex Systems, Inc., a leading provider of mortgage lending solutions for over 30 years, announced today the official launch of the newest generation of LoanQuest, the company’s flagship enterprise loan origination system (LOS). The milestone release combines over 30 years of mortgage lending system functionality and experience with the latest generation of Microsoft technology. Here’s why the company thinks this LOS will stand out:

****Staying true to the company’s vision, the origination platform allows lenders to differentiate themselves from the competition by providing a lending solution that meets their unique needs while still being affordable and easy to maintain. The system provides extensive user configuration flexibility of the core system and a comprehensive, easy to use tool set for additional system tailoring. The technology platform puts lenders in control of their system functionality, not the vendor. Lenders can build to their strengths while enhancing staff performance, increasing capacity and improving quality and customer service.

****During the past three years, MortgageFlex strategically entered into an extensive R&D mode to rewrite its LOS from the ground up including a redesign of the database schema. LoanQuest retains all the functionality developed over the past 30 years while adding significant enhancements that take advantage of the latest technology. LoanQuest has been completely re-engineered utilizing Microsoft’s latest version of .NET architecture including several technologies not available in earlier versions of .NET.

****In laying a new technical foundation that will perform effectively for many years to come, the new technology offers significant productivity and quality control features including constantly running compliance logic, a powerful and flexible workflow system, a business rule engine, an imaging system, a product and pricing engine, a network of industry leading service partners, and support for web services and MISMO based interfaces. With LoanQuest, lenders will have peace of mind by being regulatory compliant, having data continuously updated and validated, eliminating data redundancies, reducing processes and processing time using business rules, automating tasks with workflow, and having an enterprise level system that addresses all lending channels including retail, wholesale, correspondent and conduit.

****Utilizing world class components such as Microsoft’s Workflow Foundation and InRule’s Business Rule Engine extend the capabilities of this version of LoanQuest far beyond previous versions and other solutions on the market. As a result, the value of MortgageFlex’s solution has increased substantially.

****“Lenders are looking to technology to meet their customer service needs in addition to improving their business efficiencies,” according to Craig Bechtle, chief operating officer of MortgageFlex. “Strict regulatory guidelines demand compliance and market requirements have lenders searching for an origination system that allows consumers easy access while saving the lender time and worry about compliance; we believe this next generation of LoanQuest meets these requirements. Loan quality has always been of paramount importance and now lenders can automate manual tasks by employing smart technology that simplifies and promotes the implementation of processes and services through the use of the rules engine. The melding of other technology features like task automation and business intelligence are accomplished by automating work flow steps together with the rules engine and imaging center which results in reduced labor costs while also improving quality,” Bechtle concluded.

****“The decision to make a deep-pocket technology investment, over 10 million dollars, was one we had in the planning stages for a quite a while before we committed to full blown development,” said Lester Dominick, president, MortgageFlex. “We were patient while we tested several versions of Microsoft’s .NET technology until a version was released that we were confident could deliver all the functionality we required and was stable and scalable. Our existing and new clients agree that this technology can take them to higher levels of customer interaction, increase compliance and help them achieve cost efficiencies while growing their businesses.”

****“Technology buying habits have changed dramatically since 2007,” continued Dominick. “Lenders began buying low-cost solutions that helped them survive in an unpredictable market that stifled growth. Now, lenders are actively competing and many are growing again and they require more sophisticated technology to accommodate those needs. The days of lenders buying just enough technology to get by are coming to a close. They require enterprise-level systems that allow them to automate complex workflows and grow with an ever-changing market.”

****MortgageFlex has been hosting clients for over 10 years, and both the company and its data centers are SSAE 16 audit certified. The hosting solution is unique among the “cloud” offerings in that each client has their own exclusive instance of the application and their own database. This model provides superior security compared to “multi-tenant” solutions and meets the stringent requirements of banks, credit unions, and other clients that desire a high level of security. The design also isolates system performance allowing individual lender performance tuning. Because the code for each client is managed separately, the client controls testing and the scheduling of updates. With multi-tenant systems there have been occurrences where a patch made to the shared code for one client brought down everyone on the shared system simultaneously. The system can also be installed in the client’s environment, with MortgageFlex technical assistance available.

****The demand for this technology has already landed the company 14 new clients ranging from mortgage bankers to community banks, Credit Union Service Organizations (CUSO), national banks, credit unions, as well as state housing finance agencies.

****CUMAnet (Credit Union Mortgage Alliance Network), Basking Ridge, New Jersey,  originates and services first and second mortgages for 51 credit unions in their individual names, according to Jay Romanovsky, Credit Union Relations Officer for CUMAnet, who said “loan processing and fundings per head would increase dramatically” using the new technology, resulting in a “scalable model that will enable us to take on new clients.”

****Romanovsky said “fundings are up considerably” for credit unions and volumes are expected to remain strong, beyond the capacity of their former platform, which was manually intensive and missing the automation functions of the MortgageFlex system. “We really like the new system’s processing features and its ability to provide information to borrowers and members in a live environment, accessible via the Web,” he said.

****One of MortgageFlex’s latest clients, Guardian Mortgage, believes that communications should be open and easy with its customers. To facilitate that approach they wanted a system where a loan officer could start an application and then allow the borrower to finish it at their convenience. “With MortgageFlex, we will be able to respond to an application much faster than before,” said Greg Sweet, senior vice president, Guardian Mortgage Company. “Accuracy is also improved as we don’t need to re-enter application data into a different system to process the application.”

****“Lenders are seeking full featured products and LoanQuest has been honed to a rich functionality set during the last three decades by utilizing lenders and industry best practices,” stated Dominick. “We have thirty years of experience and focus in maintaining the absolute highest standards of compliance that is unmatched in the industry. The level of functionality clients have with our new LOS empowers them to effectively manage growth and capitalize on new marketplace opportunities.”

Magazine Feature Story

*The Modern LOS*

**By Lester Dominick**

***Today’s modern loan origination systems (LOS) are evolving into more than just loan processing systems. This evolution is driven by lenders’ needs to respond effectively to ever increasing demands from investors, regulators, and consumers. The complexity of the mortgage business today is at an all time high and still peaking. Compounding the intricacies are new regulatory enforcement risks and fines that could significantly impact a lender’s net worth.
Every LOS in the marketplace today is functionally capable of processing and closing loans; however, lenders today are demanding that their systems do much more. A line has been drawn and now vendors have to step up and over that line for them to succeed and for their clients (lenders) to prosper.

****Just as the financial meltdown has been difficult for lenders, it has been equally challenging for LOS vendors. Vendors are facing historically high costs maintaining system compliance as regulators continue to add new and complex reporting requirements.

****The new Consumer Financial Protection Bureau promises to be extremely active in addressing the mortgage industry. They have taken responsibility for several laws that directly affect mortgage originations including the Home Mortgage Disclosure Act (HMDA), the Truth-in-Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), the Home Ownership and Equity Protection Act (HOEPA), the Equal Credit Opportunity Act (ECOA), the Alternative Mortgage Transaction Parity Act (AMTPA), the Community Reinvestment Act (CRA), and the SAFE Mortgage Licensing Act (SAFE). And let’s not forget the Dodd-Frank Act. The industry can certainly expect more requirements as additional rules are written.

****Beyond New Regs

****In addition to the regulatory activity, there are new requirements from the Government Sponsored Enterprises (GSEs) that require a LOS to support the Uniform Mortgage Data Program (UMDP) which consists of the Uniform Collateral Data Portal (UCDP), the Uniform Appraisal Dataset (UAD), and the Uniform Loan Delivery Dataset (ULDD). LOS systems also need to add support for MISMO’s V3.1 Reference and Data Dictionary in the near future. The costs of implementing these significant, time-consuming projects and dealing with normal day-to-day compliance issues are normally fully absorbed by the LOS vendor.

****Lenders receive the benefits of these efforts at no additional cost as they are typically included in the maintenance or transaction costs lenders pay LOS vendors for support.
****Vendors Are Stressed

****LOS vendors not only face a constant barrage of compliance and technology challenges but are operating in an environment where there is a smaller revenue pool due to lower loan volumes and fewer potential customers.

****With this tremendous work load and challenging market not every LOS vendor is going to be able to step up to the line and meet all these requirements. Some vendors have already withdrawn from the market while others are providing minimal amounts of effort to stay in compliance for their existing customers. There have been reports of vendors missing regulatory due dates and problems with system updates meeting the requirements.
****With such a significant regulatory workload, system innovation has taken a back seat the last several years. The vast majority of the loan origination systems in the market today were built prior to 2006. Software development technology changed significantly at end of 2006 when Microsoft released its .NET 3.0 Framework. This wasn’t just an upgrade, it was a substantially new and better way to build and run software. 

****The newer technologies offered by Microsoft and others offer significant improvements in all areas of development including the  graphical user presentation layer, business rule engine, workflow system, communications layer, imaging capabilities, and business intelligence tools.

****These technologies are being used to build more efficient electronic loan delivery systems, compliance engines, product and pricing engines, integration services and data services to support business intelligence gathering.

****Stay Competitive

****For vendors and lenders to remain competitive, all loan origination systems will need to be redesigned and upgraded to take advantage of the many benefits that the newer software architectures provide.

****And it’s not just the applications that need to be upgraded, the data base schemas must follow suit. The schemas were developed many years ago and as those schemas have been modified over the years to accommodate changes to MISMO formats, GSE interfaces and regulatory requirements, they have become inefficient. Even if they started out as a well normalized data model, over time they have lost many of the benefits of normalization.

****Real Change

****Some vendors have taken small steps by putting new User Interfaces on top of old technology. This face lift does not provide the benefits of the new development and runtime technologies; it’s merely a cosmetic improvement that will quickly lose its luster. Only a few vendors have made the deep-pocket financial commitment to redesign their products in the new technologies build a new data schema.
****There are four important areas that lenders using new technology LOS can make a significant difference over previous generations.

****>> Compliance – provides a systematic approach to compliance with the use of the rule engine and strong interfaces with third party compliance tools. 

****>> Loan Quality – simplifies and promotes the implementation of processes and services that improve loan quality through the use of the rules engine to enforce policies, identify potential risks and problems, and via the use of integration services to validate data integrity with independent third party data. 

****>> Task Automation – accomplished by automating duties/steps through the use of the workflow system in conjunction with the rules engine and imaging center to reduce costs by the use of less employee labor while also improving quality. 

****>> Business Intelligence (BI) – supports business decisions and provides constant feedback to monitor performance all the way down to the individual performing tasks.

****The first three difference makers are fairly obvious and success is directly related to managements’ ability to get the best use out of these tools. The fourth, the use of Business Intelligence tools, is less obvious and requires more creativity. 

****BI involves determining what data is important and how to analyze that data to learn more about the business. This leads to the discovery of new opportunities in all areas of the business enterprise. BI allows a business to enhance visibility of organizational strategy and align actions with that strategy.

****BI is an enterprise wide system that makes use of timely data from not just the LOS but other important systems such as accounting, servicing, and secondary marketing. The data can be organized to provide measurements of performance against defined benchmarks. It can be used to understand what factors are driving performance in many areas – sales, customer interaction, third party vendor performance, staffing requirements, operating costs and many more. BI provides personalized and interactive dashboards that can improve business performance at all levels of a company.

****Take BI Further

****Dashboards allow users to track key performance indicators, assign goals, and collaborate and share knowledge across the business. Complex data can be communicated effectively through a visual presentation that users can understand more easily than looking at reports. Dashboards also let users drill into the visual data to better understand what the dashboard is illustrating.

****What does all this new technology really mean for the lending industry? It means lenders will be better equipped to compete effectively in a market that is becoming increasingly complex, with more and more risks.

****The Way Forward

Lenders will improve their ability to compete with companies that have greater resources by being better informed about their business and customers. They will gain a better understanding of where process improvements can be made that will improve bottom lines. They will understand what is working and not working for their customers. 

****And lastly, risks can be identified sooner and mitigated easier. Proper use of these new technologies is a difference maker.

****ABOUT THE AUTHOR: Lester Dominick founded MortgageFlex Systems, Inc. in 1980 as a consulting firm to specialize in the mortgage banking industry. He has served as President and Chief Product Architect since inception. Dominick’s initial work at MortgageFlex Systems focused on systems evaluation, systems design and strategic data processing planning for commercial banks, savings institutions and mortgage companies. He quickly identified the need for lower cost solutions for mortgage loan origination, and LoanQuest, the first microcomputer based loan origination system, was introduced in 1984.

*****http://www.progressinlending.com/TME1011-38.pdf*****

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Magazine Cover Story

*Trend Setting

**Executive Interview**

***Mark Phlieger was among the first to evangelize on behalf of Web-based computing when he launched Avista Solutions. Now his thinking has gone mainstream. The trendsetting company celebrates its 10th anniversary. Avista celebrated other milestones and added a record 37 new customers in 2010, comprising 20 community banks, totaling $12 billion in assets, 10 credit unions and seven independent mortgage bankers. On March 25, 2011 there were 63,000 active B2B user accounts across Avista’s customer base.

****Other milestones include Avista relocating its corporate headquarters to Charleston, South Carolina in July 2010, a city that Phlieger said offers much support for the technology industry and cultivates high quality talent. Since signing on its first customer in 2001, Avista Solutions has: processed more than 100,000 loan applications in one month, reached a 28-day implementation time record. Mark Phlieger talked to us about what happens next now that the Web has gone mainstream.

****Q: As we see more institutions with depositories like community banks and credit unions enter the mortgage space, are you noticing that the bulk of your new clients are these types of institutions?

****MARK PHLIEGER: Yes, absolutely. We signed five banks this month. The market has shifted to depositories doing lending. What we’re seeing is mortgage bankers combining with these depositories. Also, it’s important to remember that banks are heavily audited, so when we talk about the differences between a bank and a mortgage banker, the banks are heavily accustomed to regulation. That is not an insult to the mortgage banker, it’s just that the banks are more used to being under regulatory scrutiny.

In terms of the sales cycle, they are longer these days. How long? Credit unions have the longest cycle, banks are in the middle and the mortgage banker is the shortest. We love dealing with community banks and credit unions.

****Q: Recently the MBA revised down its origination volume projection for next year. Originations are expected to be at their lowest point in 15 years. How do lenders and vendors survive this market?

****MARK PHLIEGER: Less volume means that we have to sign more customers. We are signing four or five a month, but hope to move that up to seven or eight as volume falls. Right now our largest customer is only 4% of our revenue. Our goal is to have a lot of customers in the small and mistier market.

There’s a general attitude that there is rapid change going on that we have to deal with. Banks know that they have to generate fee income to make up for other revenue that they’re losing, which is driving them into the mortgage market. They also don’t want to invest in legacy technology where they have to invest in a heavy IT staff, servers, Citrix, etc. They want to plug and play. They want to go out and find their people and just turn on the technology. We’ve grown a lot in this down market because of our cloud-based model. They also like the all-in-one solution. They don’t want to deal with 10 different solutions.

****Q: Avista celebrated its 10th anniversary this year. How has the mortgage industry changed in 10 years?

****MARK PHLIEGER: I had more hair and I weighed a lot less when we started Avista. Honestly, it used to be more go-go. It was all about volume, but now it’s about quality and compliance. It’s changed a good bit. There is a lot of opportunity for vendors that are interested in innovation and offering a top-quality tool. You want leading-edge technology so you are where the client wants to go. These days we talk about mobile and cloud-based solutions. Your technology has to solve the problems of your client. For technology like that, I think there will always be opportunity.

****Q: Avista was among the first, if not the first, company to come out with a completely Web-based solution. Now it seems like the market is where you were 10 years ago. How does that feel?

****MARK PHLIEGER: It’s nice to see. We were cloud-based before cloud-based was cool. We’ve been Web-based on Day One. Over the years it has gotten easier with Google and Amazon setting the bar for cloud-based products. We don’t have to evangelize as much. On the downside, there is more competition, but that’s ok because mortgage bankers are going to pick the product that best fits their needs. They want anytime, anywhere access. Just like we made the transition to everything Web, the next transition is to everything mobile. The reality is that I read and consume all my information on my iPad. That’s where we’re going next.

****Q: What does it mean to be cloud based?

****MARK PHLIEGER: Simply put, it’s about delivery as a service instead of selling a product. Think about it this way, you don’t care where the power plant is as long as you plug in your iPhone and it gets charged. We handle infrastructure, platform, etc. Once you sign with us we take you through implementation and set everything up for the client instead of giving them a box and saying: Here you go. It’s a different model. We charge based on the closed loan instead of by the license. When the model is more like a lease instead of a license, there is an incentive for everyone to work together to make the business a success. You have to care.

****Q: There has been a lot of consolidation in the LOS space and that is likely to continue. Most recently we saw Ellie Mae acquire DataTrac. What do you think about LOS consolidation?

****MARK PHLIEGER: This was predicted and it will continue. The players that ran a desktop or client-server model will get consumed. This acquisition validates the cloud model. Speaking of Ellie Mae, you see in their quarterly reports that most of their revenue is coming from cloud-based products.

I believe there is a lot of opportunity to be independent and have a leading-edge platform. Avista is end-to-end and we’ve built everything. So we can compete well with any other LOS. You need a solid infrastructure to support banks and credit unions. You can also be more nimble when you’re independent.

****Q: Avista also made headlines with its FHA Connection link earlier this year. How is that going?

****MARK PHLIEGER: We’ve always had clients that were heavy in FHA. We wanted to build a piece so that lenders doing FHA didn’t have to leave the platform. We’re committed to FHA and customers told us that this was important. FHA share remains substantial so we need to do everything we can to make it easier for our clients to originate an FHA loan. We’ve had a great response. We also enjoy working with FHA. FHA is very professional.

****Q: Continuing to talk about integrations, last year you did integrations with Kroll, Wolters Kluwer and Fannie Mae’s EarlyCheck. What is your integration strategy?

****MARK PHLIEGER: It’s based on what is required from a regulatory or delivery point of view. We also look to where we can get efficiency for customers. Lastly, it’s based on customer feedback. They tell us what companies they like to do business with. We put all that on the roadmap and partner with those companies. We will be live with UCDP within a month. It’s important to make sure that customers have what they need. Integrations are also almost done with Genworth and LogicEase from ComplianceEase. You touched on Wolters Kluwer. We were the first end-to-end product to offer their Expere product. You’ll see more closing doc integrations.

****Q: You talked about signing a record number of new clients last year. How is this year shaping up?

****MARK PHLIEGER: It’s solid. We will best last year in terms of the total overall number of customers signed up and the total value of the contracts signed this year is larger as compared to last year. It is competitive, but we’re seeing opportunity. It’s important to understand what banks and credit unions have to do from a compliance standpoint. It’s intense because they will make sure the vendor complies, but that’s ok for us. We do well up against due diligence scrutiny.

****Q: So, what does the next-generation LOS look like to you?

****MARK PHLIEGER: It’s about more access. People may be coming in from desktops, laptops, tablets, etc. In my opinion, the system also needs to be end-to-end and all-in-one. There is a focus on data quality. You need a common database and consistent process flow. It also has to be quick. The services also have to be baked in like credit, flood, compliance, fraud checks. Everything has to be based on Web services and MISMO XML to get that efficiency. We are a big MISMO supporter. It has been huge for us to reuse code to connect to more services. It’s about technology and customer service coming together. You also need 24/7 access, redundant data centers and thinking through the whole mortgage model.

****Q: How would you define the state of innovation in the mortgage space today?

****MARK PHLIEGER: I like change, but across the industry I’m not sure that’s the case. If the vendor wants to be relevant you have to innovate to solve real business problems. You also need to have an A team to go in and consult with customers. In a transactional model you want to help your clients adopt the technology. You have to go into every client shop to make sure that they are using every feature. You can’t rest on your laurels. In a cloud model we’re not shipping disks so we can roll out new features instantaneously, but we have to educate our clients about all that’s possible. In this market, that’s a big deal.

****INDUSTRY PREDICTIONS:

****Mark Phlieger thinks:

****1. You will continue to see expansion in vendors providing a cloud-based, all-in-one model.

****2. Mobile applications will continue to explode. People want information anywhere, anytime.

****3. Compliance and data quality will continue to be a focus, as it should, in mortgage lending going forward.

****ABOUT MAK PHLIEGER: Mark Phlieger is president and CEO of Avista Solutions, the Charleston, South Carolina- based creator of all-channel, Web-based loan origination systems. Co-founding the company in 2001, Mark has led Avista since its inception and has an impressive record of achievement in pioneering and development in the mortgage technology space. Mark was a team member on the Fannie Mae project that developed the groundbreaking technologies of Desktop Underwriter and Desktop Originator and later became responsible for their implementation and adoption as the industry standard among Fannie Mae lenders.

*****http://www.progressinlending.com/TME0911/TME0911-39.pdf*****

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