The competition our athletes face in the 20th Olympics this coming February in Turin, Italy, will be nothing compared to the competition that will hit lenders within the next 12 months. Streamlined first mortgage settlements, increased industry regulation and the evolution of e-lending are three trends that will be part of the winds of change shaping our industry in 2006.
Here’s what my executives foresee for our industry next year:
Streamlining first mortgage settlement services: Until now, the first mortgage settlement industry hasn’t experienced the efficiencies of a centralized purchasing environment like home-equity lending has. That’s primarily because consumers still pay for everything at the table and no one’s been negotiating on their behalf. But that will change next year because lenders will significantly begin to use bundled, streamlined services on first mortgages as a way to differentiate themselves in the marketplace.
As a result, we expect the highly inefficient traditional settlement process to accelerate its erosion in 2006. These changes will be driven by the acknowledgment that true bundled services can deliver tangible consumer value in the first mortgage market, thus increasing the challenges to the status quo on exorbitant title premiums and the traditional way first mortgages are closed. First mortgage lenders will realize that they need to respond directly to consumers’ insistence that they offer lower cost first mortgages.
Regulators to become more restrictive: Look for the FDIC to become more diligent in its oversight of home-equity lending and flexible payment first mortgage practices. We saw the beginnings of this more restrictive approach in the Office of the Comptroller of the Currency guidelines lenders received this past year. In those guidelines, regulators expressed concern that some lenders weren’t being as diligent as they should be in monitoring the origination risk and performance of their loan portfolios.
We expect to see an increased use of automated property valuation to help mitigate the overall risks with home equity loans plus a greater use of value insurance products to help lenders offset the risks associated with alternative products.
Secondary markets to scrutinize their portfolios: Expect lenders to increase scrutiny of their portfolios with an eye to the concerns of Wall Street. The secondary mortgage market will expect lenders to do more thorough due diligence on their loan portfolios with respect to the values and underwriting practices. Because of the perceived real estate bubble, we believe the secondary market will demand increased “auditing” of values. They will be attempting to aggressively identify risks within their portfolios, provide solutions to help mitigate those risks and more quickly eliminate problem loans.
The new face of vendor consolidation: Vendors will be expected to have both the ownership of their technology platforms and the ability to provide fulfillment services. Lenders in 2006 will demand that their vendors present them with end-to-end strategies, including bundled services. We expect top tier lenders especially to realize the value of that strategy, putting pressure to change on vendors that do not deliver this array of products and services integrated to a robust and efficient technology platform.
A move towards automated matrix processing: The technology behind product ordering, placement and delivery is rapidly moving into a next generation automated matrix process. This will allow lenders to ask borrowers more detailed questions in a more efficient manner, enabling them to dynamically order collateral and credit products that match the loan’s individual risk profile.
There will be three outcomes for lenders: faster and less costly decisioning, the ability to focus on the relationship because the details will be taken care of by the technology, and the ability to remain in compliance because the technology will remove all subjectivity in evaluating a loan.
The continued polarization of two distinct models for banks: We expect two very different models of banking success to come to the forefront in 2006. One is what we call “value banking” and the other we term “personal banking.” Both models will find their places in the coming year.
Value banking will be more characteristic of the larger banks. Facilitated by a strong emphasis on technology, these banks will be able to develop a 360-degree view of their entire relationship with each customer. They will give existing customers incentives to have their entire banking relationship with them. “You can do it all here,” will be the theme of this approach to banking and it will be aimed at those who don’t want or need a personal “branch banking” interaction. In fact, these are customers who’ll do a lot of their banking online.
Contrast that with the personal banking model. Here, these banks (usually the smaller ones) will see their competitive advantage to be their ability to develop customer intimacy. These customers will value things like knowing the teller’s name in their branch and having a personal history with the institution. While some might term this approach “old fashioned,” we believe that these institutions will thrive in 2006 with a certain segment of the banking customer base. And, while we predict this segment will be healthy, we want to caution these institutions that they can’t ignore the need for their core products to be competitive. They will use technology to enhance their personal relationships with their customers, while the value bankers will use it to interlock information about all of a customer’s accounts.
Both models will find their place in 2006, fueled by the needs of different consumers.
The real estate bubble to develop a slow leak: The real estate bubble will not burst, but we do forecast that it will develop a slow leak. In other words, we don’t expect any dramatic real estate downturn, primarily because the economy’s still growing. In addition, gas prices seem to be leveling off. Plus, we expect children of the baby boomers to be buying their first homes. We also foresee that property value appreciations will soften, increasing in a more normalized 3-5 percent pace for 2006.
E-lending to be an evolution not a revolution: For years no prediction list was complete without a forecast that e-lending was right around the corner and that it would revolutionize the industry within the next 12 months. That is not our prediction. Because e-lending is a whole spectrum of electronic migration of the mortgage process, we believe it will evolve every year.
Within three to five years, we expect all the components that facilitate the experience to be in place. It will happen in little bites and one day we will wake up to the fact that e-closing is part of our services. Think of it – e-lending actually started in the 1990s with the first electronic document delivery. More recently, electronic Good Faith Estimates have become common. And e-signing and e-vaulting are close to becoming realities for industry pioneers. E-recording is happening slowly as more and more registries and courts begin to accept electronic documents for recording.
When all of these efforts finally converge with sufficient volume, that is when e-lending can declare victory. E-lending will happen and smart lenders are laying the groundwork for it today by providing their customers with electronic digital signatures as a precursor. Doing that will allow lenders to own that trusted relationship with their customers which will drive these transactions with the next generation of homeowners.
Expect 2006 to be a year that combines technology and people with an ability to anticipate customer needs. Next year will not be one in which lenders can afford to watch the competition from the sidelines or even take a breather. The environment will be fast, changeable and will require the ability to sense the shifting needs of the market place. Like the winter 2006 Olympic athletes, there will be those who work hard, but fall short for one reason or another, and others will take the gold medal and define the new standard for excellence and achievement.
Lee Howlett is president and chief operating officer of Fiserv Lending Solutions – Fulfillment Services Division.
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