The Power of Business Intelligence: A Mortgage Banking Industry Perspective
Faced with systems that didn't adequately track, alert, and analyze data effectively, a BI solution united data from disparate systems to provide analysis capabilities that allowed a mortgage banker to better understand its customers, markets, and risk.
- By Vinod Badami
The mortgage banking industry has seen significant growth and change in the last few years. Record low interest rates drove loan originations and refinancing volume to an all time high in the last two to three years. This explosive growth taxed the existing legacy applications that handled the loan origination process. To process this increasing transaction volume, technology investments primarily consisted of new applications that enhanced the operational processes in loan origination. While these investments gave mortgage companies somewhat of a competitive advantage and alleviated operational problems, larger issues loomed that went mostly unnoticed in the loan origination gold rush.
Another major change was the increased competition and blind eye brought on by new Internet-based mortgage banks and consumer mortgage shopping sites with automated tools for comparative shopping. This resulted in the commoditization of primary products and reduced margins in a traditionally lucrative business area. Customer acquisition campaigns lacked differentiation and were mostly ineffective. Refinancing led to rampant servicing runoff, leaving mortgage bankers hoping that increases in loan origination would offset the servicing loss. The focus remained on increasing loan origination as the way to build up revenues.
The Larger Challenge
While the focus on loan origination yielded front-end operational benefits, the larger challenge facing lending institutions today is the lack of systems and processes that track, alert, and analyze data effectively. The loan origination process generates massive amounts of data that needs to be managed by the asset management, finance, and servicing functions. Key management reporting and data analysis capabilities are critical in dealing with issues such as risk management, portfolio analysis, identification and quantification of trends in delinquency rates and compliance metrics tracking—essentially, the bulk of mortgage banking operations. In addition, these functional areas are responsible for meeting the disclosure requirements of investors as well as regulatory and rating agencies.
In addition, many banks are still performing many processes semi-manually. For example, to produce data for monthly servicing valuations, hedging, tax, management reporting, and forecasting, banks extract data from multiple systems often residing in different locations or individual PCs. After this laborious process, the data is manually consolidated in spreadsheets, resulting in another significant resource and time drain, along with the potential for human error. By the time reports are finally assembled, they only provide a snapshot view that is weeks behind and prone to errors. Overall, these inefficiencies increase the cost of operations, risk, and potential loss to the mortgage company.
Another major challenge in large financial institutions and mortgage banks with multiple lines of business (LOB) is the lack of a cross-LOB view of the customer to determine total customer value. In this scenario, each LOB handles the customer as a new entity, resulting in redundancies and wasted motion. In addition, with the lack of cross-LOB customer value analysis, every customer is treated the same. There is no differentiation between a customer with high long-term value or one-time or short-term value to the organization.
The solution to these problems lies in business intelligence (BI). In simplest terms, BI integrates data from multiple data sources and provides analysis capabilities to better understand customers, markets (and risk) and help users gain greater visibility into business operations. BI is the technology that unites disparate corporate data into one resource, harnesses it as a single source of company truth, and leverages it to achieve the strategic goals of the organization (see figure at end of story). It is the analysis and presentation of information that supports tactical and strategic decisions that impact revenues and profitability.
Bridging the Gap
A BI solution provides a single point of access, thereby reducing the costs of identifying, gathering, and processing data. It ensures that both operational managers and key executives are making decisions based on data that is factual and that has been cleansed using well-defined business rules. BI can be used to analyze the geographic distribution of mortgaged properties to better understand concentration of credit and pre-payment risk based on differences in regional economies, and to analyze loan portfolios to determine customer buy zones, i.e. demographics of the customer sweet spot and similarities among potential defaulters.
Wells Fargo is a great example. In a recent article, Information Week described how Wells Fargo Home Mortgage used BI to predict the performance of its mortgage loan portfolio and individual loans. The BI system produced several quantitative benefits. First, Wells Fargo estimated its loan default rates at one-half of Moody's and Standard & Poor's predictions. This knowledge enabled Wells Fargo to renegotiate loans, assume more risk, and save $250,000 in interest expenses. The more-accurate predictions also helped the bank form partnerships with mortgage-insurance companies. These partnerships generated nearly $35 million in yearly revenue.
BI can also be a critical tool to help mortgage bankers obtain high credit ratings from the rating agencies. The purpose of a rating agency is to assess a mortgage banker’s ability to meet its debt obligations in the future and prevent or mitigate losses. This includes identifying a company’s strengths and weaknesses related to gathering and analyzing data specific to risk analysis at a loan and portfolio level, property information and valuations, loan to value (LTV) ratios, etc. The analysis and reporting capability and level of transparency and control provided by a BI solution can be one of the qualitative factors in support of a higher rating. Typical metrics which can be tracked by a BI solution include:
- Non-performing assets as a percentage of receivable
- Net charge-offs as a percentage of average receivables
- Reserves as a percentage of receivables
- Provisions and net charge-offs
- Aging of advances
- Financial quantification of default pipeline
- Reserve level analysis based on historical loss data and comparisons to risk pipeline
- Occupancy status
A recent press release by Moody’s states: “Risk concentration in commercial real estate is becoming more evident in loan portfolios and may carry increasingly negative rating implications for U.S. banks.” Thus, a key benefit of a BI solution is early warning indicators pointing to potential losses based on an analysis of external market and economic data, thereby eliminating the surprise factor and enabling mortgage bankers to be proactive.
Another successful implementation of BI is exemplified by a leading global commercial mortgage firm. A major problem was the amount of time it took Customer Relationship Managers (CRMs) to gather the data required for investor, rating agency and management reporting. In most cases, it took days (sometimes even weeks) to gather the data from the different databases. This made it very difficult to make informed decisions on new loans or perform portfolio analysis and trend analysis that identify areas of potential opportunity and risk. The company invested in a BI solution that delivered immediate benefits:
- Loan Monitoring
- Servicing Accounting
- Dealer Loans Analysis
- Escrow Administration
- Client Relations
- Collateral Administration
The BI solution had the highest impact in operational efficiency, cost savings, and new business opportunities. CRMs can now get to the critical business information in a matter of minutes versus days.
In the case of large financial institutions and banks with multiple LOBs, BI can provide strategic benefits to better manage customer relationships. In most cases, each LOB maintains a unique view of the customer that is not accessible by the other LOBs. In addition, there is no enterprisewide quantification of customer value, resulting in a standard approach to managing all customer relationships. In this case, BI can be used to build the single view of the customer across all LOBs and make it available for sharing with all the LOBs. This method increases customer retention and brand loyalty and enables the company to sell personalized financial solutions, not just home mortgages.
In summary, while an investment in technology arte needed to handle increasing transaction load and to take advantage of current market conditions, long-term growth is in servicing. Sophisticated information management is essential to driving performance, ratings, cost management and revenue in the mortgage banking industry. BI can provide the make-or-break capability for companies in this sector.