THE ERA OF NEW TECHNOLOGIES: Excerpt from Lebowitz: Technology Past, Present, and Future

The following is an excerpt from Chapter 7, Volume II of The Mortgage Professional's Handbook.


by Jeff Lebowitz

The mortgage industry is about to exit its Victorian era of technology use. Regulators have corseted the industry into making small-ball, prudish technology decisions. A quick assessment of the condition of technology use signals the need for a new, antithetical regime of business investment. The current technology use is uninspiring.

The very near-term future is no better than desultory. In a tormented business and regulatory environment, new investments in the mortgage value chain have been made halfheartedly. The major themes enveloping the industry are

  •        Lenders display a diminished appetite for technology risk
  •        Investment commitments are remedial and not particularly innovative
  •        Technology supplier mergers sap energy from leading-edgestart-up ventures
  •        Regulators and not strategy are dictating technology priorities
  •        Technology-based outsiders are being permitted to attack industry borders

Inv estment capital generally has been immobilized. Risk-averse lenders are operating with legacy technology. Using traditional management practices, they cannot foresee the impending industry transformation by a new operational paradigm.

Temporarily inaccessible to most mortgage lenders is a revolution in decision-making, in process engineering, and in management techniques. The financial crisis of 2007-2008, and rules promulgated by vigilante regulators have obscured lenders’ vision into and participation in the imperative to change.  As the Chinese proverb instructs, “If you want to know the theory and methods of revolution, you must take part in revolution.”

The revolution is spear-headed by data scientists. The new paradigm of business is being constructed on a foundation of fact-based decisions that in turn are grounded on bounteous data. Traditional decision-making formed primary by personal experience will be supplemented by and then replaced by management-by-model algorithms. A very new way of organizing mortgage operations is around the next corner.

In 2012, the highly-regarded French management consultants Capgemini released an important study of how businesses are changing. The study found that nine out of ten business leaders “believe data is now the fourth factor of production, as fundamental to business as land, labor, and capital.” That report concludes “Big Data represents a fundamental shift in business decision making.” Facile users of data-based decisioning, the “Digirati”, have significantly higher financial performance than their less digitally-mature competitors.

While it is unlikely that a mortgage banking company will make the Boston Consulting Group’s list of most innovative companies, innovative change has become a management imperative.  A good start would be to plan for implementation of digital and data-based technologies. Technology is moving from departmental operations to becoming a foundation for business model renovation.

Using detailed survey data on the business practices and information technology investments of 179 large publicly traded firms, researchers from the Massachusetts Institute of Technology found that firms using data-driven decision making (DDD) have productivity that is five to six percent higher than what would be expected given their other investments and information technology usage.[1] Few lenders have integrated DDD into their businesses.  Rather, for the past five years, lenders have been focusing on compliance with regulator mandates.

The financial meltdown and now a pervasive regulatory regime suggest the industry operating model was seriously flawed.  Assuming that is a true assessment, there is little evidence that regulators are tinkering around the edges of revolutionary change that could be needed.  Regulators (i.e., CFPB) are preoccupied with an historic problem: the financial crisis of 2007–08. Keeping Fannie Mae in conservatorship limbo and promulgating MISMO 3.4 data standards are indications that plus ça change, plus c’est la même chose -- the more things change the more they stay the same.

“At the direction of our (Fannie Mae’s) regulator, the Federal Housing Finance Agency (FHFA), Freddie Mac and Fannie Mae (the GSEs) are working together on the Uniform Mortgage Data Program® (UMDP). The UMDP is a multifaceted, ongoing program in which the GSEs develop and implement mortgage data standards for the single-family loans we purchase and/or securitize. . . .” [2]

Fungible, high quality data undoubtedly are important. Without credible scenarios for the technology platform of the future, where in the industry construct does data quality fit? Of all the industry technology requirements, what priority should be assigned to data management? How much of the industry’s technology funding should be invested in projects such as UMPD?

Ultimately, the industry will be reformed not by enforcement, but by adapting to a new operating paradigm.  The new paradigm will be defined by investments in both knowledge systems and integrated transaction flows.

Read the rest of this chapter in The Mortgage Professional's Handbook!

[1] Strength in Numbers: How Does Data-Driven Decision-making Affect Firm Performance? Erik Brynjolfsson, MIT and NBER, Lorin Hitt, University of Pennsylvania Heekyung Kim, MIT. April 22, 2011

[2] FHFA Announces New Timeline for Fannie Mae and Freddie Mac Mortgage Data Implementation,