The Hall Partnership is a management consultancy specialising in competitive advantage technologies and operations and it has just completed a review of leading non-conforming lender websites, with the support of a range of mortgage clubs, networks, packagers and brokers. The findings highlight a number of commercial and technological trends that will have a direct effect on mortgage distributors leading up to mortgage regulation.
Non-conforming lenders are expected to come under increasing pressure from prime lenders entering the credit-impaired sector and from erosion of their packager channels as a result of regulation and automation. Many high street lenders have the systems and operations to bypass packagers and deal directly with brokers. One key feature to emerge from the research was that brokers prefer to participate actively in the new business process, for example by completing an online application form, if this eliminates delays and uncertainty.
The advantage of high street lenders is further enhanced by e-trading platforms such as Mortgage Brain’s Manager and Trading Exchange. These platforms enable data to be re-used through a compliant mortgage and general insurance sales process that includes completion of application forms. Halifax, Alliance & Leicester and Nationwide all trade in this way, as does Abbey National through Trigold, and more prime lenders will undoubtedly follow.
By comparison the traditional packager-based process is slower, more complicated and error-prone, and non-conforming lenders constrained by this process are severely disadvantaged. Complex credit-impaired products are difficult to encode in Mortgage Brain or Trigold. Attempts to do so can result in inaccuracies that lead to lenders having to request further information or offer an alternative product.
While packagers are more adept at selecting the correct product and defining what must be done to ensure the application is acceptable, their paper-based methods are no match for the straight through processes used in the prime sector. By introducing data standards, Mortgage Brain and Trigold allow prime lenders to use automated underwriting solutions that improve accuracy and response times. No such decision-making automation is possible in the credit-impaired sector so long as packagers use non-standard, generic application forms.
The segmentation of the market by prime and credit-impaired sectors will end when the Financial Services Authority (FSA) introduces a ‘lifetime mortgage’ and other mortgages split. This will bring the prime and credit-impaired sectors into direct conflict, as brokers seek a single source of supply for all their products. Most intermediaries agree that the only way to comply is to use technology, but where this technology will originate is still under discussion. For non-conforming lenders, that find it difficult to distribute through Mortgage Brain or Trigold because of the complexity of their products, or because they lack the technology and operations to receive un-packaged business, the answer is not straightforward.
Looking ahead, the large mortgage clubs and networks, such as Zurich with its Eti solution, Legal & General with Launchpad, and Sesame, which is backed by Misys, will wish to be more than Mortgage Brain or Trigold resellers. They will probably want to exploit their substantial investments in multi-lines of business technology to provide unique services to promote the expansion of their networks during regulation.
For brokers, competition encourages innovation. They can afford to wait until the major players have developed systems, and then select the one that best satisfies their need to anticipate these requirements so they can focus their development effort in the areas of greatest return.
It is with these technological and operational trends that the review of leading non-conforming lender websites was conducted. The functions provided by each lender were defined and a questionnaire used to confirm the views of mortgage clubs, networks, packagers and brokers as to the value of each. The results were scored and the following rankings established:
The research confirmed that each of the four highest scoring lenders had different strategies toward distribution via the internet. However, igroup’s latest izone is the most sophisticated website for packager-based distribution in terms of its sales support, packaging services and case tracking functionality, although it contains no facilities for application data capture and there was some criticism of igroup’s manual underwriting process. Future and GMAC RFC both provide application data capture and GMAC RFC is automating the underwriting process. The BM Solutions website provides a straight through process, including application data capture, to enable fast decision-making although it is clearly focused on brokers rather than packaging distributors.
Technically, GMAC RFC and BM Solutions seem best equipped to connect to third party distribution solutions such as those provided by Mortgage Brain and Trigold or the large mortgage clubs and networks. However, because of its direct lender-to-broker approach, BM Solutions may lack support from packagers transforming into mortgage networks. A great deal of thought has gone into Future’s website and it is now well placed to exploit this moving forward. However, the individuals responsible for this technology have now left the company and it is not yet clear how much emphasis the new Citifinancial management team will place on non-conforming mortgage website distribution.
Although igroup operates the current ‘state of the art’ website for packager-base distribution, GMAC RFC’s ability to link to large, third party distributors and BM Solution’s ability to distribute directly to brokers represent two alternative technology-led solutions that will undoubtedly become increasingly relevant in the post-regulated electronic marketplace. igroup’s underlying technology is advanced and no doubt it will provide application data capture and automated underwriting in due course.
Of the remaining lenders research indicates that SPML is best placed to upgrade its technology to become a real player. SPML, together with Preferred and Mortgages plc occupies the middle ground and scored around half the points of igroup. The Kensington, TMB and Platform websites were basic, offering little to facilitate the sales process. Platform scored only a quarter of the points of igroup.
In the final analysis, the non-conforming lenders that seem most likely to offer innovative, technology-based solutions during the lead up to regulation are probably igroup and GMAC.
So what are the implications of this for the market? The research confirmed that the internet is an invaluable way of engaging with channels and providing them with the competitive advantage solutions they require. Currently most non-conforming lenders use the internet simply to distribute through packagers. However as this channel contracts, with larger packagers becoming networks and the smaller packagers becoming brokers, these lenders may provide direct, lender-to-broker solutions. At the same time they may also link their underlying technology with large mortgage clubs and networks so that these distributors can offer innovative products and services that are not available through applications like Mortgage Brain and Trigold.
Straight through processing
During the review some mortgage clubs and networks expressed the view that the technology used by the leading non-conforming lenders was more sophisticated than the legacy systems used by many prime lenders and that this would enabled them to offer a wider range of flexible deployment options. One option would be for large mortgage clubs and networks to operate a ‘bid model’. With this form of distribution the mortgage club or network would process a case into a fully packaged electronic application. This would then be offered via an internet portal to participating lenders. Using automated underwriting each lender would respond instantly with a firm, risk-priced offer. The broker would then select the best offer and the application would be forwarded electronically to a conveyancer for processing through to completion.
The research highlighted that this approach would be preferred by many brokers as it allows them to retain control throughout and it allows them to keep their options open, rather than having to commit prematurely to a specific lender. However, such an approach can only be developed via collaboration between the large mortgage clubs and networks, and technologically adept lenders. Collaboration would allow the mortgage clubs and networks to concentrate their development effort in the areas of network management, customer engagement and sales processing, while the lenders focus on functions to support these and enable the delivery of innovative products and compliant services at the point of sale.
Looking forward to the Basel II directive, which will encourage a greater emphasis of managing risk, large prime lenders may favour a bid model approach because it will enable them to make risk-based priced decisions on a full set of data rather than the small subset currently used by Mortgage Brain and Trigold.
The technical framework for implementing a bid model already exists in the regulated marketplace and the largest mortgage clubs such as Zurich, Legal & General and Sesame are familiar with such operations and their benefits. igroup, GMAC, Future and SPML (and a number of technologically advanced prime lenders) could support this form of distribution if there was an interest from large distributors in exploring the option.
These distributors and lenders have collectively spent many millions in developing their respective systems. All they have to do to bring such a revolutionary solution to market is to connect them together. As Alan Kay, one of the fathers of modern computing, once said ‘the best way to predict the future is to invent it’.
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