U.S.

Lending Industry Meets Mortgage Process as a Service

Cognizant Research Center | October 2011

2011, Cognizant

Why the U.S. Lending Industry is ripe for MPaaS (Mortgage Process as a Service)
Economic and industry indicators are pointing to a slow revival of the U.S. Mortgage industry. Plan to wind down government-sponsored enterprises (GSEs) is a big positive factor for revival of private investments.

Improved risk management will be the key to win the trust of residential mortgage backed securities (RMBS) investors and mitigate the repurchase risk.

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The U.S. Mortgage Industry remained dormant since the meltdown

Post financial meltdown home sales declined significantly and with it the volume of originations. RMBS issuance bore most of the brunt.
Home sales have remained flat and are forecasted to increase marginally in 2012

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The U.S. Mortgage Industry remained dormant since the meltdown

Steady decline in mortgage originations from 2003. Forecasted to touch $1 trillion in 2011

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The U.S. Mortgage Industry remained dormant since the meltdown

RMBS issuance reduced drastically from $700+ billion in 2005-2006 to $39 million in 2010

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Economic indicators point to a gradual recovery

Corporate profits, a key determinant of employment are rising.

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Economic Indicators point to a gradual recovery

Research by Federal Reserve Bank of St. Louis points to lower longterm unemployment rate.

Household formations, which declined to 578,000 in 2008, rose to 950,000 in 2010. And this figure is expected to rise gradually, aiding recovery of housing demand. - The Wall Street Journal
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Household formations, a traditional lead indicator of demand for housing is also on the rise.

Industry indicators too, point to a gradual recovery

Improvement in credit conditions, declining foreclosures, improved affordability and rising rentals, point to gradual recovery.

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Industry indicators too, point to a gradual recovery

Delinquencies on a declining path

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Industry indicators too, point to a gradual recovery

Loan-to-value (LTV) ratios are rapidly rising since 2007

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Industry indicators too, point to a gradual recovery

Consumers have became more averse to debt and begun saving more

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Industry indicators too, point to a gradual recovery

The price-to-income ratio (an indicator of affordability) is at the lowest levels seen 90s

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Industry indicators too, point to a gradual recovery

The oversupply of homes and rising rental incomes should increase the attractiveness of buying property

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But the Banking Industry is challenged to gear up.

Compliance which is a key to survival is pushing banks to significantly improve/alter their business models, processes and systems. Compliance costs are expected to rise and so are the costs of origination while the banking spreads are on the decline.

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But the Banking Industry is challenged to gear up.

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But the Banking Industry is challenged to gear up.

Going forward, cost of originating a loan is likely to increase significantly

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Gearing up for a New Mortgage Industry

After the Dodd-Frank Act, banks need to enhance their business processes and IT systems. Many banks need to address the challenge of IT system silos. To gear up for the revived mortgage business, banks need to embark on a deep, end-to-end technology and process evaluation. Crucial to the revival is improving credit quality and assuring the concerns of RMBS investors through improved lending practices and processes.

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Enter Mortgage Process as a Service (MPaaS)

The emerging suite of services mortgage process as a service (MPaaS) provides lenders access with access to people, processes and technology, while transferring the burden and risks of their ownership to the provider through offering pay-per-use models. Enables to switch from Cap-Ex to Op-Ex embracing pay-per-use model. Unlike the traditional mortgage BPO provider that is measured on how well it executes a lenders process, MPaaS also addresses more strategic aspects, such as repurchase risk and compliance. Banks can seek improved risk management enabled by enhanced data quality and by requiring the MPaaS provider to play the role of an independent infomediary. Coupled with a lenders ability to manage business processes via MPaaS, banks have a significant opportunity to manage challenges in the new landscape more effectively.

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Risk Management Imperative for Revival of the Mortgage Market

The Uniform Mortgage Data Program (UMDP) establishes for lenders uniform requirements and file formats for appraisal and loan delivery data. Ensuring data quality during the loan application and credit underwriting process will remove some of the risk associated with purchasing mortgages. MPaaS solutions provide loan transparency to enhance the quality of loan originations and reduce repurchase risk. This will result in increased mortgage performance, and will gradually produce a stronger mortgage market and increase borrower and investor confidence in the housing finance market.

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What to Look for in Your MPaaS Partner

Can offer services in a utility-like model, providing variabilization of fixed costs. Strong domain expertise and consulting services Best-of-breed workflows, data products, analytics and process controls that are aligned to the needs of a changing mortgage business. Delivers a solution that can process mortgage application documentation and critical underwriting data that empowers the originator and loan purchaser to make better investment decisions. A partner with the resources and capacity to assist in navigating regulatory hurdles can make perceived barriers to market re-entry less challenging.

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Thank You
Authors
Rajeshwer Chigullapalli, Head, Thought Leadership Practice, Cognizant Research Center Aala Santhosh Reddy, Senior Research Analyst, Cognizant Research Center Nathan Longfellow, Director, Cognizant Banking and Financial Services Consulting Practice

John Geertsema, Manager, Cognizant Banking and Financial Services Consulting Practice Research

Analyst

Svetlana Malu, Senior Research Analyst, Cognizant Research Center

For more information / downloading the report, read the white paper
U.S. Lending Industry Meets Mortgage Process as a Service (PDF) http://bit.ly/MPaaS

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