Friday, September 2, 2011

September 2: Changes in mortgage technology & their impact on originators


[I am away from the computer on a daily basis, and I cannot respond to

e-mails until September 11th. In my place are daily commentaries from a

series of very knowledgeable mortgage industry people with different

backgrounds, and they have been given very little direction about what to

write about - the latest is below. Our views may or may not coincide, but I

thank them for their time in volunteering and helping  out.]



Reshuffling of the deck



Last month's news that Datatrac was being acquired by Ellie Mae definitely

created some shock waves in the industry.  Shockingly, there are many who

still haven't heard the news! Any time the two leaders of an industry

segment join together it  changes the landscape and I for one am curious to

see how this combination will  affect the market. As the recent press

releases have stated, the combined entity now supports 30% of the mortgage

community and we all know they're looking for that number to grow. Like many

other industries, the mortgage market has become increasing dependent on

technology and while there are more offerings, it's clear that with  this

move, only the strong will survive. And I always say that competition breeds

innovation so I imagine that other LOS providers have their development

teams working overtime.



This acquisition was clearly a combination of alternate business models,

Datatrac has employed a module based model where its product offerings are

external and integrated origination, document management , web portal, and

commission systems

  tied into its core banking software Datatrac. Included in this model was

the premise that clients could use the "best in breed" philosophy in

allowing clients to select their choice of third party vendors to integrate

into Datatrac. It gave the clients more versatility in vendor selection and

if the integration was built, it provided a seamless process. The multiple

software connections sometimes proved to be cumbersome for support but

overall the model worked well. The best is breed philosophy led to many

vendor relationships wanting to develop integrations with Datatrac. The

system began as a mortgage banking software truly tied to mortgage banking

procedures from submission through post-closing. Over the years they saw the

need to integrate into other areas of the loan process through technology.



Ellie Mae on the other hand took the route of building an end to end

solution. Through acquisition and development, the Encompass 360 banking

software increased its offerings within the same product. The system evolved

overtime to offer increased amount of functionality within the same system.

Through the Ellie Mae network, clients have the ability to also engage third

party vendors and have the results in most cases delivered back into the

system. It has a robust offering of services that come with the product and

has made the end to end promise a reality. Through the acquisition of a

document company, pricing system, and compliance engine, it has made the

Encompass

360 banking platform a one stop shop.



The combination of the two firms creates an interesting merger of

philosophies and it will be intriguing to see how, if and when they combine

and integrate the systems.

 I'm sure they're working overtime as well, looking at how to pull the best

part  of each system and roll out a unified system in the future. Imagine

the best of  the Datatrac suite of products being re-branded or re coded to

an Ellie Mae product in one form or another.  There is an incredible amount

of talent within each company and the combined mindset working together

instead of as competitors makes for a game changer for the market. The new

entity will control a good portion of the market and will look to take on

more with a unified message. As the unified approach becomes clearer the

best of both systems will be obvious. I think that the current products

being offered will change for the better and ultimately will benefit the

user which is the most important It appears that the end to end model is

taking the lead on  what the future holds for mortgage technology .



The bigger picture speaks to the future of technology providers and further

consolidation.

This is only one of numerous acquisitions in 2011 but I'm sure not the last.

The remaining players, although strong, have to be thinking about strategic

moves in  order to complete.  If Datatrac and EllieMae can combine forces,

anything is possible.

Vendors will also be re-thinking integration options as the new Ellie Mae

will be a strong entity and will most likely determine who they would like

to have relationships with.  With Calyx purchasing Loan Score this year,

there have been integration moves that point to merging technology under the

same platform. Who's next? This is only the beginning of technologies

merging as unfortunately, if they fail to do so I'm afraid they'll begin to

lose their competitive advantages. As with any integration, changes take

time and although the benefits of the combined entity are clear today I

think it will take some time for them to be achieved and reach the market.

Ellie Mae was already a strong system and got much stronger with the

Datatrac acquisition.

I look forward to the combined entities offerings as I am sure it set the

bar for the entire industry.



Good night Irene..... Not so fast



Being in the Northeast, I can honestly say that Hurricane Irene left her

mark in  more ways than one. Due to her sheer strength she left a trail of

destruction that went up the coast from the Carolinas through to Vermont. I

mention not to repeat  the obvious but more to let you know that her effects

will be felt in the mortgage industry for months to come. Residential

Appraisers and Appraisal Companies were  finally getting busy with the

recent refi surge and now they will be over whelmed with recertification

requests on the same properties.  The already busy pipeline  is going to be

slowed by the after effects of the appraisal requests due to the  hurricane.

If you add the accessibility challenges due to downed trees, power lines,

and inability to get in contact with homeowners, you have to be looking at

delays that will weigh on your pipeline. If you have any properties in the

affected states, you should pull them and be creating a separate process for

these properties as the collateral conditions and expected timeframes will

be delayed. This will have an effect on your turn times and will definitely

have an impact on your locked pipelines.

Any property in an affected area that has a lock expiration date in the next

two  weeks should be pulled for collateral review. If the appraisal is not

in, you should be making rate lock extension provisions as the timeline for

these loans is yet

to be determined.    It will also be hard to gauge because most appraisal

companies

will not be able to provide confident feedback. It is not their fault as the

ability to get to properties is not within their control. Be in contact with

your clients and get updates on the status of the property. If cell phone is

the only contact  available, make sure the appraisal company has this

information to assist in their contact.



In regard to your closed pipeline, as has happened in the past, investors

will create their own set of collateral provisions for affected properties

which will delay purchase turn times. Reach out to your investors now and

see what will satisfy those conditions now rather than wait for them issue

conditions. It will only delay their purchase and keep loans on the lines

longer. Speaking of warehouse lines, they may also be issuing collateral

requirements as well for any affected properties that  are on their line.

Locked pipelines grew over the past few weeks and the concerns about

internal efficiency crept up. You could have the best operation around but

the effects of Irene could still wreak havoc on your pipeline. Do not wait

and let this become an issue. Get ahead of it and create a separate process

for these deals as they will be delayed which leads to secondary exposure

and profitability erosion. Get ahead of it and be prepared. That is what I

head all weekend so I am passing onto you as a public service announcement.



Frank Fiore



Partner









Rob

(Check out


or www.TheBasisPoint.com/category/daily-basis. For archived commentaries, go

to www.robchrisman.com. Copyright 2011 Rob Chrisman.  All rights reserved.

Occasional paid notices do appear. This report or any portion hereof may not

be reprinted, sold or redistributed without the written consent of Rob

Chrisman.)

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