Monday, June 30, 2008

Joe Casa: Settlement Services industry loses a leader

October Research Corp. announced today that founder and publisher Joe Casa died on Saturday after a battle with cancer. The company announcement is here.

I worked for Joe for a while and will miss him very much.

Friday, June 27, 2008

HousingWire: from Web to Print

There have been plenty of publications that have made the transition from print to the Web, some better than others. Here's a story about a publication moving in the other direction.

Coming soon, leading housing industry blogger Paul Jackson will bring his HousingWire blog to your desktop (I mean your actual desk's top, not your non-laptop PC).

I'll be doing some tech reporting for him and I can't wait.

Find out more about his plans here.

King: The lenders wish list

Terry King, Group Director for MRG Document Technologies has a piece in the most current Mortgage Technology eNewsletter that I found very interesting. King picks up the age-old discussion about best-of-breed versus end-to-end and does a good job of summarizing the current state of the industry, but then he adds some real value.

Near the bottom of his article, King provides a menu of products and services that he says are at the top of the tech-savvy lender's wish list. His list closely mirrors my own experience interviewing many lenders over the years.

While King maintains that the end-to-end system doesn't exist yet, we've seen news over the past few months of companies forming partnerships and alliances or acquiring firms to at least give the impression that they have such an offering. Recent announcements that spring to mind include those made by Metavante, OpenClose/LION, Xerox/Blitzdocs, ISGN's new branding efforts and MRG's own alliance with Lydian. Companies like ISGN and Wolters Kluwer have made no secret of the fact that they are willing to buy up anything that fits into the mortgage transaction in order to offer an end-to-end solution. But will lenders ever really go for it?

I doubt it. A lender would really have to trust a vendor to put all its eggs in that basket. With SOA and industry-wide data standards, there is no pressing need to do so because hooking up with other service providers is much simpler than it used to be. But it could happen if originators take a page from the AMC playbook. That's Appraisal Management Companies, by the way.

There's a lot of turmoil in the collateral valuation space right now. No one is sure what the landscape will look like when the dust clears, but what we are seeing are more companies that offer valuation cascades. These tools allow a lender to step up or down through a risk-prioritized series of collateral valuation products until the overall deal risk matches their pre-set tolerance. It's usually a factor of valuation product accuracy (often measured by a confidence score), other risks already present in the deal (FICO, LTV, property type, etc.) and the cost of the valuation method.

While plenty of vendors are happy to tell lenders that they can accurately match up lender risk tolerance with their own valuation products, few lenders trust them enough to actually let them do so, choosing instead to either use their own staff appraisers to test valuation methods and place them into the matrix or, increasingly, to call on an outside expert.

Lee Kennedy, Managing Director of AVMetrics, Simi Valley, Calif., told me recently that his company is busier than ever helping lenders use complex and powerful cascading technology, like Veros Real Estate Services' VeroSelect, to make best use of these tools. All of the lender's eggs may be in the basket of one collateral valuation provider, but the way they utilize that vendor is governed, in part, by an outside consultant.

We've had consultants on the origination side for many years. They spend a lot of time helping companies install new LOSs and set up the business rules to make them run smoothly. But in the future, these experts will likely spend less time setting up complex, behind-the-firewall technology platforms and more time helping lenders choose the right mix of best-of-breed Web services to build their own end-to-end platforms.

Thursday, June 26, 2008

FNC scores another bank

One of the challenges technology vendors often face is getting their high-profile customers to let them talk about their relationships. After covering these firms for many years, I suspect it's not so much that the big banks aren't pleased with the service, they do a great deal of due diligence and often demand rigorous service-level agreements to ensure that they are. There are just too many questions raised when a big bank decides to outsource a critical part of its business.

Why couldn't the bank do this on its own? Does it have an inferior IT department?

How much will it cost to get the new implementation up and running? And how long will it really take? Will this be another horror story?

Who else did the bank look at for this work? Did you really do your due diligence?

What's the expected ROI (beware forward-looking statements) and what will it mean to your bottom line/share price?

Big banks would rather just not play.

In a mortgage lending environment where home values are falling through the floor, it's difficult to think of an area more critical than collateral management (unless you think of fraud, or the inability to find money to lend). In this environment, even the biggest players are forced to release news using generalities.

Case in point: Oxford, Miss.-based FNC reported today that it's appraisal management software, Collateral Management System (CMS), has been chosen by the "the largest financial institution founded, owned, and headquartered in the Washington-Baltimore metropolitan area." The unnamed bank will use CMS to streamline its multi-channel appraisal process at the wholesale, retail, and servicing levels, the company said.

Generally, I don't advise companies to put out news they can't really talk about, but it seems like we're seeing it more often. I've put in a call to the company for more information.

Wednesday, June 25, 2008

The PPE value proposition

I had an interesting conversation today with Linn Cook, Marketing Director for Costa Mesa, Calif.-based PriceMyLoan. The company just released news that it had won two additional lender clients for its Product and Pricing Engine (PPE) and Cook was explaining the value prospects are seeing in his company's product.

"The more accurate you are, the better customer service you’ll provide to the broker," he said. "Today when everyone is offering the same product at the same price, it’s all about customer service."

Drexel Lending Group, Ontario, Calif., and Rancho Cucamonga-based MSM Lender have both signed on to implement the PriceMyLoan system (PML).

Cook says that lenders are no longer satisfied with a PPE that just shoves junk into their pipelines. Lenders don't have resources to spend on deals that won't eventually close. Cook says the days of a broker sending a deal out to 20 wholesale lending account execs to see who can close it are over. More lenders want to know in advance whether the deal will fly.

Cook says his firm has a test that allows them to prove to prospects what PPL will do to their closing ration, which he says is all that matters when it comes to PPEs. "Value is only there if their closing ratios go up," he said.

I'll be reaching out to other PPE providers to find out what they promise lenders in regard to increasing closing ratios and exactly how they prove it.

Thursday, June 19, 2008

Another benefit to new architectures

It's been said that bankers will take twice as long to adopt a new technology as just about any other industry. The cases used to illustrate that are generally the automated teller machine (about 10 years, though much of that was consumer resistance) and automated underwriting in the mortgage space (another 10 years). Sure, there are other industries that are also risk-averse that also move slowly into unproven technologies, but the old R&D/IT investment numbers that MBA chief economist Doug Duncan used to toss around stick in my mind. The mortgage business, he said, invests about one-tenth what most other industries do in technology research and development.

But why should they invest more? People that manage risk for a living don't like to take unnecessary risks. As long as there is an old DOS-based system cranking away reliably on the company's accounts, new technology could look like an unnecessary risk. But that may be changing.

The benefits of SOA-based architectures have generally been sold to the mortgage space bundled with MISMO data standards with the promise that they can reliably connect business partners in a fragmented industry without the high costs of system-to-system integration. But lenders are finding that there is another benefit to having loosely coupled systems that can easily be plugged together: making pilot programs easy.

Now, with the insertion of a single business rule, lenders can test out a new fraud detection system by simply telling their processing technology to send every loan that is, say, over $300,000 and not owner-occupied in a certain ZIP code to a new company for analysis. If there is no ROI, they can turn it back off again and go back to their old vendor. Easy. The same holds true for just about every other service the lender might need to close a loan.

Of course, it will take some expertise to build rules that provide good tests, but the point is lenders can do it now and it won't cost them big bucks to try out something new. How's that for mitigating risk?

Friday, June 13, 2008

Mortgage Cadence: changes afoot

Mortgage Cadence, Greenwood, Colo., has upgraded its Orchestrator loan origination system (LOS), according to a report in Housingwire. Those who have been watching the company will notice that Michael Detwiler is the CEO quoted in the release. Michael has stepped back into the leadership role he handed over to Mortgage Cadence Chief Marketing Officer Michael Hammond last year.

"I'll still be working with the company on a project basis," Hammond told us in a recent phone call.

Hammond is based in Troy, Michigan, but had plans to relocate his family to Denver after taking over the CEO position at Mortgage Cadence last October. One problem Hammond has faced was disposing of his Michigan real estate in one of the fastest falling real estate markets in the country. "If I sold my house now, we'd lose almost $200,000," he said.

The solution was a relationship change that will see Hammond serving Mortgage Cadence as a paid consultant, but also seeking other client relationships.

Friday, June 06, 2008

ValuationLogic: fighting industry distress

The appraisal industry is continuing to come to grips with the new Home Value Code of Conduct. The comment period has ended and many have responded. Some are now telling me that the HVCC is dead and will never be implemented, though I'm not sure the GSEs have been informed.

I'll be in San Diego much of next week at the 2008 Predictive Methods Conference where the HVCC will be the subject of the keynote panel. I expect to have a much better grasp of the real situation early next week as a distinguished panel of experts will tear into the issue, including representatives from OFHEO, Fannie, Freddie and the industry.

Regardless of the fate of the HVCC, no one can deny that there are fundamental problems in this part of the business. While some, such as Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association (TAVMA), suggest that we'd be fine if we could just find a way to enforce the laws we already have on the books, others feel that technology can be a solution.

Case in point, Robert Palmer, founder and CEO of Irvine, Calif.-based ValuationLogic and a certified appraiser with almost 25 years in the business. Palmer believes that stronger automated appraisal review capabilities are critical to reviving the distressed housing market.

"The HVCC (Home Value Code of Conduct) puts the focus squarely on the appraiser and the relationship between the person ordering the appraisal and the appraiser," Palmer said. "This does not resolve the lender’s responsibility to review the appraisal for adequacy and the value conclusion."

As loan underwriters work to determine whether they have a quality appraisal and, if so, whether the characteristics of the subject property match the lenders collateral guidelines, Palmer says they are using Valuation Logic. By returning to a time when this logic was routinely applied to new loan applications, Palmer says the industry could resolve the problems arising in the recent years from the inadequate due diligence process used to review appraisals. But he says it doesn't take an appraiser to do the job if underwriters are properly trained and have the right technology.

Palmer has a number of competitors who also agree that technology is a vital part of the appraisal management process, including Veros Real Estate Services, FNC, and PCVMurcor. Most agree that the more technology employed the less likely appraisers are to be subjected to pressure from originators.

"Historically, the review process provided the checks-and-balances necessary to provide for prudent lending decisions," said Palmer. "Appraisers who consistently pushed values, misrepresented items or were incompetent were rapidly identified and further work was not accepted. The appraiser had the ability to push back against undue pressure because all parties to the transaction knew that it didn't matter what the appraiser represented if the reviewer did not concur."

Palmer's company offers CollateralLogic Automated Appraisal Review, a product that can be customized to automatically evaluate each appraisal in less than two minutes and scores the individual variances from the customer’s guidelines. Palmer says new customers can go live on his system in 20 minutes and have full access to all rules immediately. Changes to a rule setting can be completed in minutes. No promises that cleaning up the current industry mess will happen as quickly.

Wednesday, June 04, 2008

Is Cuomo the new Spitzer?

Before he became Client No. 9, Eliott Spitzer was the man that cleaned up Wall Street, taking investment bankers to task and helping to bring down the man that arguably did more for the New York Stock Exchange than any other chief executive in modern history, Richard Grasso, for making too much money when it was not politically correct to do so. But that's all history now.

Enter Attorney General Andrew Cuomo. After pulling Fannie Mae and Freddie Mac to the table and getting them to agree to overhaul the entire home finance real estate valuation business (to the angry howls of many in the industry)--and even getting the GSEs to cough up the funds to create the agency to oversee the changes--Cuomo has now turned his attention to the ratings agencies.

The bond rating industry is a $5 billion a year business, according to the Wall Street Journal's story today, that makes its money, in part, by charging the firms that provide the bonds it rates. The problems many are attributing to the ratings agencies are so similar to those that Spitzer attacked--investment bankers that sold stock that their own analysts recommended--that one wonders how he missed it. The Journal reported today that a settlement with Moody's Investors Service, Standard & Poor's and Fitch Ratings could come within a week.

Cuomo has only been in office since Nov. 2006. If he gets this done, he will arguably be the politician that has accomplished the most aimed at fixing the housing mess. We'll have to wait and see if any of his efforts actually make things better, but no one can say he isn't swinging the bat.

Most agree that Spitzer's efforts were geared at getting him and his family into the New York Governor's Mansion, two things he gave up when the scandal broke about his leisure activities. Cuomo may be hoping to translate his efforts into a similar position. After all, his father, Mario Cuomo, was New York's governor from 1983-1994.

But before we decide his efforts are only politically motivated, it would be wise to remember that he's built much of his career around US housing. He was Secretary of the Department of Housing and Urban Development under Clinton and Chairman of the New York City Homeless Commission under New York City Mayor David Dinkins.

Tuesday, June 03, 2008

FNC: Streamlining Fannie's appraisals

Oxford, Miss.-based FNC has been chosen by Fannie Mae to provide systems to mitigate risk and streamline its appraisal-related processes, company officials announced. FNC is the developer of the Collateral Management System (CMS) -- a workflow solution used by some of the nation's largest mortgage lenders. Fannie has been using the system since April.

Fannie is using CMS to streamline its foreclosure appraisal processes in two of its divisions: the National Property Disposition Center (NPDC) and the National Underwriting Center (NUC), both in Dallas. Both the NPDC, which processes more than 10,000 appraisals per month, and the NUC, which processes about 1,000 appraisals per month, are concerned about mitigating risk associated with fraud, according to John Scott, FNC's director of alliance sales.

According to FNC, one of the reasons the nation's largest secondary market investor is using CMS is because it includes a built-in fraud tool called GAAR (Generally Accepted Appraisal Rules). Built into the CMS, the GAAR Risk Series automatically reviews appraisals and instantly flags any violations that may be indicators of fraud.

Additionally, the CMS will automate many of Fannie Mae's historically manual processes, including ordering appraisals and the subsequent tracking, receipt, analysis, and reporting processes related to those appraisals.

Recently, Fannie Mae, in accord with Freddie Mac and as part of an agreement with the Attorney General of New York, issued a Home Valuation Code of Conduct that limits the way many industry players can interact with appraisers. The GSEs hope to implement the Code on January 1, 2009, but there is stiff industry opposition. If implemented, the Code would require lenders to either automate the process of ordering appraisals or hand that job off to independent third parties.

While the rising delinquency wave is currently lifting all boats, making it one good reason that a company like Fannie Mae would seek to streamline some of its default management processes, this may also be a case of a GSE taking its own medicine before forcing it down the throats of the rest of the industry.