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Mon, 04/30/2012

By Scott Kersner

With so many complex systems available, lenders and servicers have to be discerning technology shoppers.

If someone wrote mortgage technology fairy tales, all solutions would solve actual problems, all relationships would be win-win, all integrations would be seamless and all systems compliant. Every piece in an end-to-end system would measure up as best-of-breed.

In the real world, not so much. Some say too many lenders today are asking too few questions, short-changing the due diligence process and too often being misled by slide show presentations, rather than demanding live demos and opportunities to test drive a system with no salesman hovering over them. And many misunderstandings arise simply because people use terms like "end-to-end" to mean different things.

"Where do you start and where do you end?" Asks Fred Melgaard, COO of Newport Beach, Calif.-based DRI Management Systems. He said every system "has a happy path" that works beautifully most of the time. He said it is up to mortgage tech shoppers to ask about the exceptions and how the vendor handles them.

Not so long ago when lenders wanted a new system, they formed a search committee of employees, assembled a short list of candidate systems and spent several months winnowing through demos.

The committee, made up of employees on both the business and IT sides, would evaluate references and feedback from departments most affected by the proposed purchase. Eventually, they picked a vendor and embarked on a lengthy development and implementation process.

Today, fewer companies spend their time and money doing all that. Lenders and servicers are coping with shrunken IT departments, a soft market and an urgent need to meet compliance requirements. Particularly when shopping for a software as a service-based system, the process is all too likely to boil down to a few decision makers watching a couple of demos, checking a few references, making a pick and quickly signing a contract.

Often times, searches seem driven by a desire to get whatever everyone else is talking about. A popular buzzword these days is virtualization. When tech shoppers use that term, said Shawn Burke, DRI's vice president for systems engineering, "What they're really asking is, 'How do I make it turnkey?'"

DRI, a longtime player in the default servicing technology sector, puts particular emphasis on helping companies harness virtualization as a way to reduce the number of servers and other technology they have to manage in-house. To really maximize virtualization, Burke said, "you have to do your virtualization right," and that means having the accumulated experience to manage a virtual environment.

Burke said Dallas-based specialty servicer Wingspan Portfolio Advisors is a customer that uses virtualization wisely.

"I will often stop a client from jumping in at first. They need to start by trying it out in a test environment. Instead of virtualizing your SQL database, keep that physical and virtual your other servers," Burke said.

Impulse buying remains a bad idea when shopping for mortgage technology and lenders and vendors alike said there is an important difference between trusting what the vendor says and letting a vendor do their customers' thinking for them.

"Think outside the box" before even starting to shop for a new system, said David Zugheri, co-founder of Houston-based lender Envoy Mortgage. A shopper's first step should be to prepare to tell a vendor what functions the organization needs that aren't provided by its current systems. Otherwise, he said, replacing technology is only a lateral move with few, if any, improvements.

For lender Michael Wilson, it is vital to "test the system in a live environment with no salesman at your elbow. If they won't do that for me, I don't even want to talk to them."

Wilson is the director of operations at San Diego Calif.-based iServe Residential Lending and has previously been on loan origination system search committees for several lenders, including National City Corp.

Wilson also recommends that shoppers should call the vendor's general sales number to ask for information.

"How long does it take for them to respond to you? You learn a lot about them from their initial customer service," he said. "That same level of service is going to emanate throughout the rest of the company."

Keven Smith, president of Southfield, Mich.-based Mortgage Builder Software, has been in business long enough to see promising LOS vendors come and go. He stressed examining a vendor's financials.

For a vendor to keep a software system updated, he said, "you have to have a lot of cash to burn. Make sure a company is going to be around for the next five years" before signing a contract, he said.

Smith also warned against dealing with technology firms with limited mortgage industry experience. "Deep subject matter experts are crucial," he said.

Talking to peers is a key way for lenders to get the benefit of in-the-trenches experience, said Zugheri. He cited that need as a key reason his company is a member of the Lenders One Mortgage Cooperative.

"Lenders One provides a forum and a connection with your peer groups from different parts of the country that are not afraid to share ideas," Zugheri said. "Everyone lets their guard down to share ideas and lessons learned-what they have done wrong, not just what they've done right-including the lessons to be learned about false promises."

He said having access to such conversations means St. Louis-based Lenders One "rivals the MBA in terms of what lenders get."

Web-Based or Web Enabled?
In an era dominated by online technology systems, a basic question that mortgage lenders have to ask about their existing IT systems as they consider looking for a new one is whether an existing software is Web-based or merely Web-enabled. If a system is only Web-enabled, then lenders have some significant catching up to do.

In the late 90s, when big banks found themselves bringing gray-haired COBOL programmers out of retirement to Y2K-enable their legacy systems, they knew they were wedding themselves to those legacy systems for a significant amount of time-there was no way that CFOs were going to bless any further technology transformations that required junking the recently updated, Y2K-enabled legacy systems.

But when the dot-com revolution followed hard upon, many of those same companies decided they should start turning in their green-screen terminals in exchange for desktops that could connect with those precious legacy system by using a Web browser and a graphical user interface.

With that transition, those Y2K-enabled systems thus became Web-enabled as well-even if their employees could only browse the company intranet behind a firewall screening them from the untamed Internet at large.

As Internet-based functionality advanced, new players started coming to market with technology natively written in Internet-based technology.

Leading mortgage LOS providers joined the revolution by developing new versions of their systems in Microsoft .NET, rendering those systems Web-based and ready to "play well with others," linking the LOS to the systems their users relied on for compliance, product and pricing, automated underwriting, default management and other best-of-breed functionality. Whether the total system worked optimally depended on the depth and durability of those integrations.

Beyond Standalone
Mortgage lenders like Envoy Mortgage have learned to minimize the number of system-to-system integrations that are necessary to perform their mission-critical functions.

Founded 15 years ago, Envoy is now "pretty settled" on its technology vendors, principally branch management system Accounting for Mortgage Bankers, DocMagic for document management and Avista for its LOS, said Zugheri. Today, as many processes as possible are integrated into Envoy's LOS, particularly product pricing.

"Product selection is really easy now," he observed. "We are going back to 1992 in terms of products. There is no more pricing at the loan officer level."

One way or another, lenders and servicers alike are demanding that their systems be able to offer real-time auditing and reporting throughout for compliance purposes. Envoy and others say the term "best-of-breed" has to be more than a synonym for any stand-alone product or service; it has to mean mission-critical functionality that their core system does not offer.

Best-of-Breed vs. End-to-End
As end-to-end systems become more popular, lender criteria for partnering with a best-of-breed provider become more rigorous. In the case of Burlingame, Calif.-based ComplianceEase, the company has responded to those demands by building integrations with more than 20 LOS platforms.

At a time when the search for regulatory compliance guarantees drives nearly every mortgage technology purchase, the company's ComplianceAnalyzer technology is used by regulators to audit lenders, specifically in state Limited Scope Electronic Examinations conducted by the Multistate Mortgage Committee, an organization comprised of state regulators in the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators.

With regulators using its software, ComplianceEase can give lenders concrete assurance that integration with ComplianceAnalyzer delivers compliance with a product that's used by the regulators themselves.

But for their core operating systems, mortgage companies are not looking for a string of best-of-breed tools they have to finesse into working together.

Republic Bancorp's priority in its latest LOS purchase was to replace two existing systems that did not work seamlessly with one another.

Attaining cohesive system integrations across an origination business is a common objective for many lenders. To accomplish this goal, the Louisville, Ky.-based lender picked the hosted LoanQuest LOS from MortgageFlex.

To serve call centers in and out of the mortgage realm, some vendors are providing fully integrated, end-to-end packaging of customer relationship management and call center software, along with business intelligence and other add-ons to analyze consumer data. The objective with these bundled packages is to reduce costs and at the same time enable call centers to deploy more sophisticated analytics.

Leveraging their deep mortgage industry expertise, two companies that have evolved their business models in that same end-to-end direction are Vienna, Va.-based VirPack and Costa Mesa, Calif.-based PriceMyLoan.

While VirPack has done business as a best-of-breed e-doc delivery company, PriceMyLoan made its name as a best-of-breed automated underwriting and product and pricing provider.

Both have since joined the ranks of vendors that incorporate workflow and other functionality to create end-to-end offerings for mortgage lenders.

VirPack now offers its Enterprise Center as an end-to-end platform for paperless operation. The platform features one-click delivery to 18 different investors, supporting both best efforts and mandatory deliveries. Meanwhile, PriceMyLoan has incorporated its best-of-breed functionality into a Web-based end-to-end LOS called LendingQB.

"An end-to-end LOS has to enable tight cohesion and ease of communication throughout the entire lending workflow, from the point the application is taken by an LO through underwriting, closing, secondary marketing and servicing," said Jason Madiedo, CEO of Venta Wholesale & Alterra Home Loans, a LendingQB user.

Previously, Madiedo's Las Vegas, Nev.-based company used three different systems cobbled together to create an end-to-end solution, "but our workflow was encumbered," he said.

"Various disconnects became an impediment for employees to communicate efficiently with one another." Madiedo said adopting LendingQB did away with those issues. Furthermore, he said, "LendingQB extrapolated our data, and then translated it into meaningful, actionable information that consistently empowers us with business intelligence to increase responsiveness and profitability."

Another LendingQB convert is iServe. When iServe went shopping for a new LOS, said Wilson, executives wanted "something that could handle it from origination all the way to post closing and delivery to the investor and included interim servicing."

Wilson added that they wanted to implement an origination system that would "eliminate rekeying of data and eliminate having to add conditions into the system."

In addition, Wilson said that executives at iServe wanted to have loan-specific conditions automatically populated directly into their system.

Like Mortgage Builder, MortgageFlex, Avista and others, LendingQB boasts that it has created an end-to-end LOS that also delivers best-of-breed performance at every step of the process, either built in or through tight integration with best-of-breed providers such as ComplianceEase and DocMagic, with which LendingQB also has strategic alliances.

"The key is ensuring that those integrations are built well," said LendingQB president Binh Dang. "Most LOS vendors term themselves an end-to-end system and the lender is then left to determine what that means,"

"Many vendors get caught up into initiating what I term 'feature wars,' because their innovation philosophy is driven by features rather than goals," Dang added. In contrast, "We term ourselves end-to-end, but what we really mean by that is we have a seamless mortgage lending platform that resides on one database. It's not about features or the type of technology it's engineered with; it's about achieving seamless workflows."

Dang said the business intelligence baked into the system helps identify and eliminate unnecessary steps wherever possible, rather than merely making them easier for an employee to perform.

According to Wilson, iServe has been able to reduce its cost per loan by 30% using the LendingQB origination system. But before moving forward with the LOS purchase, he had an opportunity during the due diligence process to test drive LendingQB by running a loan through the entire system via the vendor's Guest Suite Invitation.

Right now, that testing opportunity likely serves as a competitive differentiator, but how long will it take for others to do the same? As Envoy's Zugheri observed, "The shelf life of any good idea is really short."

Making a List
Mortgage technology shoppers should start by making a list of their search objectives. Here are some key points:

* Decide whether the organization's need is to have a vendor or a full technology partner

* Be wary if the first demo is a slide show presentation

* Make vendors prove claims that are too good to be true

* Drill down for demos of specific features and details, especially when salespeople use buzzwords

* Note when there are glitches during a demo

* Ask for relevant test results

* Get references and comb them for peers to contact that have similar business models and objectives

* Demand proof and cost estimates about system-to-system integrations

* Examine vendors' financials

* Make sure hosted systems are in an advanced, secure and certified environment

As Published by Mortgage Technology Magazine, May 2012