/ a concentrated look at industry issues
technology
inside:
e-origination
cloud computing & SaaS
plus more
focus special edition of housingwire magazine / 2010
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contents
focus Volume 1, Issue 2
18
26
30
The path to e-origination
Lawsuits abound in tech world
Will the road to digitalization ultimately travel through HUD?
Recaps and updates on several lawsuits pending in the mortgage technology space
Tech companies reap windfall from respa The new HUD-1 is all about the consumer
plus 2 Editor’s note 5 Browsing the Technology: An issue guide 8 The best and worst from the MBA’s
34 Getting Technical:
Highlights from NAR technology survey
36 Putting borrowers in control
tech and fraud shows
of the home finance transaction
25 Looking to the financing future: FICO 8 gets an add-on
perspectives 12 Sue Allon
15 Adam Calvery
33 Barbara Miller
11 Sundeep Amrute
23 Brad Eaton
12 Ben Noyce
10 Larry Barnett
14 Steve Meirink
17 Guy Taylor
IFC L ender Processing Services, Inc. IBC Mortech
33 Corvisa
3 Nationwide
6 -7 DocMagic
23 Offer Submission
4 Dorado
15 Street Solutions
11 Harland Financial Solutions
24 Veros
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BC a la mode 29 BlackBox Logic
Technolog y
ad index
1
editor’s note
Filtering the white noise
I
recently visited the “campus” of CoreLogic in Westlake, Texas. During a tour, quality control officer Bill Stewart, mentioned that roll tape machines only recently went the way of the Dodo. To be sure, the only roll tape at CoreLogic is inoperable and on-display as a curiosity on the way to the “command center” — to serve as a reminder of the way things were long ago at the firm.
volume 1, issue 2 JULY 2010
Further, his colleague Paul Armstrong mentioned that some community banks and county clerk offices still communicate by fax (CoreLogic enters the info into computers for them).
ASSOCIATE PUBLISHER Richard Bitner
One word: WOW. Thankfully, the role of technology in the greater mortgage finance space is less about keeping such relics and more about one floor of a building containing hundreds of servers, or processors buzzing away 24-7. Of course, it requires another building just to power and cool that floor, but the point is that information can now be singularly located, easily organized and highly accessible. There is power in data management, great power. On this point, fax machines and roll tape are not going to be missed in our world. But that doesn’t mean we still can’t get passed up. And in the race, so far, we remain one step ahead. Google Maps, for instance, would salivate at the mapping technology at CoreLogic. And that same mapping technology is being studied by other Web-based mappers (think Yahoo!, Microsoft) for either purchase, strategic alliances, or perhaps as a model to copy. Consider it a message in flattery, for it is only when your identity is stolen that you realize you are worth stealing from. In most cases, the mortgage finance industry is aligned for the purpose of greater transparency: scorecards, due diligence, open underwriting files, etc. But there is still too much white noise out there. Sure there is someone willing to sell you the latest this and that… but is that a product worth buying? In this issue of HW Focus, we bring together the experts who answer that question.
After all, in today’s world of mortgage finance, dollars and cents is measured in zeros and ones.
PUBLISHER & editor in chief Paul Jackson
EDITOR Jacob Gaffney associate editor Austin Kilgore
Creative executive creative director Greg Lakloufi ART DIRECTOR Polly d’Avignon Brand Manager Kelly Yorek interactive project manager Jason Clemens WEB producer Rizwan Javaid Digital developer Ron Ferguson designers Rosangel de Moreira, Jessica Fung
the ltv group ADVERTISING Christi Lingard clingard@theLTVgroup.com
Lauren Border lborder@ theLTVgroup.com SUBSCRIPTIONS & REPRINTS Matthew Hardisty mhardisty@theLTVgroup.com
about HW Focus is published by The LTV Group, 2701 Dallas Parkway, Suite 200, Plano, TX 75093; 469.893.1497 The information contained within should not be construed as a recommendation for any course of action regarding legal, financial or accounting matters. All written materials are disseminated with the understanding that the publisher is not engaged in rendering legal advice or other professional services. The LTV Group does not guarantee the accuracy of information provided, and is not liable for any damages, losses, or other detriment that may result from the use of these materials.
Jacob Gaffney, Editor
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We received the usual barrage of vendors flattering themselves, which we appreciate. But it is our role to provide a filter to the white noise.
editorial
© 2010 by The LTV Group • All rights reserved
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You have the Vision, but not the means to reach your goals. Your harried staff, those ever-changing regulations and, slow legacy origination solutions that don’t meet your needs… Something’s got to change. Today more than ever, those who are flexible thrive. But an agile enterprise can’t be built on a broken foundation. Ask us how to reengineer your lending process with minimal capital investment for maximum return. For success in a Mortgage 2.0 world, visit www.Dorado.com.
Why Dorado? Just ask our customers. They range from top ten lenders to leading regional and state banks throughout North America — and their numbers are growing.
To schedule a customized demo tailored to your institution’s needs, contact CompetitiveAdvantage@dorado.com.
Vision without action is only a dream.
Browsing the technology In the process of creating a supplement entirely on the mortgage technology industry, we knew there would be a lot to cover. We've broken it down into categories to help readers follow the transitions throughout the publication.
smartphones & mobile computing
e-origination
credit scores
valuations
secondary markets
legal
loan data
loan origination software
rick grant (HW tech contributor)
What’s that? Throughout the issue you’ll find QR codes (a type of barcode encoded with a URL) that will direct your mobile device to HousingWire.com for the latest industry news related to the story you’re reading. Just download a barcode scanner app (we like the “i-nigma” app) and turn your reading experience into a digital one. Go ahead — give it a try.
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Cloud computing & software as a service
Technolog y
Use the icons below to navigate your way through HW Focus.
5
Technolog y focus
8
One of the best indicators of the mortgage industry’s aggregate mental state is the industry trade show and conference. With metrics on total sponsorship, number of attendees, exhibitors and quality of speakers, you can get a pretty good idea of the attitude in the market. This year’s jointly held Mortgage Bankers Association Technology in Mortgage Banking and National Fraud Issues conferences make up one case in point. Going into the show, the buzz moving through the industry was that the events were not likely to attract very big audiences. In fact, the MBA itself had considered taking down its technology conference last year and likely would have done so if Carmelo Bramante hadn’t come on as a consultant to push the event. In the end, the turnout was quite good, even surprising the folks working the registration booth, they told me. That was the first best thing about the conference: there were enough people there to actually get some work done. In fact, this was one of the first industry
shows I’ve attended where I didn’t get to listen to hours’ worth of complaining by exhibit hall vendors regarding the lack of attendees. In general, the people who paid to attend the show in order to sell something to attendees seemed fairly satisfied. The second best thing about these shows was in evidence on the fraud issues side of the house. While lenders abhor conversations about fraudulent loans, for the first time in my experience, a group of industry lenders and vendors sat down are really worked through some of the issues related to sharing information that might stop fraud in the mortgage space. One of the best examples of this was the “Think Like a Criminal” panel where lenders came together to try to outsmart each other and the experts with schemes that might actually result in funded fraudulent loans. According to one expert I spoke with, some of the ideas were horrifyingly clever, which she took as a very good sign that lenders were starting to understand what it would really take to beat fraudsters.
The best and worst from the MBA’s tech and fraud shows By rick grant
on the web
mixers and alcohol was only served during the opening reception. One highly anticipated break-time treat, ice cream bars, were nowhere to be seen. Okay, so maybe this isn’t a worst but rather more of a sign of the times. The good news is that if we are really coming out of the down market, as many of the attendees of these shows seemed to believe, there will be more treats available at upcoming industry events.
°
Technolog y
Check out more of Rick Grant’s take on the technology of the mortgage finance industry at HousingWire.com.
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The final best thing about this conference was the relaxation station, hosted just outside the exhibit hall entry by Ryan Leonard and the team at QuestSoft. What’s better than having someone beat the tension out of you after a hard day on the exhibit hall floor? No conference is all good and these were not exceptions. The worst thing about the show was the venue. Hyatt is a fine brand and the Chicago Hyatt in question is a beautiful hotel in a great location, but the conference space it offers is not. Two stories underground, the meeting space is a dungeon, attractively festooned to be sure, but a dungeon nonetheless. Only the bravest cell phone signal can reach those depths and more than one vendor complained that the Internet service provided to the booths was sketchy at best. This was one show where the panel moderators didn’t really need to tell folks to silence their phones. The other worst had to do with the refreshments in the exhibit hall. While the luncheons, sponsored by Interthinx and Motivity, were fine affairs, there were fewer
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Advances in loan-level RMBS data
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by Larry Barnett
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New developments in the way loan-level data is collected, cleansed and distributed are providing investors, brokers and researchers better tools to assess risk and gain clarity across the residential mortgage-backed security (RMBS) landscape, both at the macroeconomic and individual deal level. These advances are being driven by increased demand among market participants who recognize the pitfalls of relying too heavily on summary data. Three main areas of advancement include third-party data integration for a more complete, up-to-date view of borrower and property characteristics; advanced cleansing and walk-forward routines that provide a more accurate, complete view of loan history; and more flexible data delivery allowing broader access among market participants and improved integration with predictive models. Loan-level data companies have made great strides in recent years marrying loan data with third-party data from credit bureaus such as Equifax and Experian and property and title databases such as DataQuick. The result is a more comprehensive and up-to-date view of loan characteristics, leading to more reliable future cash-flow predictions. Current credit scores help analysts assess a borrower’s likelihood to repay a loan and offer updated insights into the borrower’s debt-to-income ratio. Prop-
erty and title data allows for more accurate loan-to-value ratios and junior liens, key indicators in loss severity and default projections. Advancements in integrating trustee remittance reports with the loan-level data is also enabling more complex summary reporting. New technology and algorithms also are allowing more accurate and complete views of borrower payment history, a critical element to evaluating a security’s risk and future performance. These developments help correct timing issues related to loss reporting, identify previously undisclosed modifications and generate more detailed payoff reason codes. For example, BlackBox Logic algorithms have been used to identify 45 percent more loan modifications than were reported by trustees starting in 1999 and correct a myriad of reporting issues related to current period and cumulative losses. In addition to being more accurate and comprehensive, loan-level data is also more readily available to market participants than ever before. Users now can choose among a series of alternative methods for selecting the data they want and the way they want it delivered, including Web-based solutions. Newly developed trading front ends also provide flexibility for bond surveillance on the entire RMBS market or limited to specific deals. Partnerships with companies such as 1010Data also allow for easier integration with downstream default, prepayment and waterfall models. Advancements in the collection, cleansing and delivery of loan-level data will continue to drive market innovation and help bring the RMBS market back to life with improved clarity and more reliable risk management. Larry Barnett is CEO of BlackBox Logic.
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Versatility is key to mortgage software by Sundeep Amrute
The GSEs have announced new eligibility criteria for purchase and securitization of adjustable-rate mortgages. Redwood Trust launched a securitized product based on newly issued jumbo home mortgage loans. Other investors are also showing interest in issuing mortgagebacked securities — a business that’s been almost dead for three years. Fannie Mae announced a Loan Quality Initiative (LQI) intended to reduce repurchase requests; lender partners will now have to capture and validate critical loan data before loan delivery. This is a new requirement for lenders, who will now have to perform some QC prior to funding. Not long ago, mortgage companies tended to develop software in-house. It was solid, specialized product, built to last. But it usually lacked versatility. It couldn’t easily be altered to meet the needs of a changing business model, or to deal with new areas of specialization. Today, the lending and investor communities rely more on third-party software developers. Always stress test your potential technology partner’s products to ensure that they’ll accommodate major changes to your business model. There’s no such thing as the perfect software system, no matter what business you’re in. What you want is a product that will stay relevant, that will adjust to change for as long as you’re in the business.
If the current uncertainty in the mortgage industry has taught us anything, it’s that mortgage companies need to react faster to changes in market conditions. Those changes might force a company to offer new services, change its approach to the market, or re-think its entire business model. If you’re smart and adaptable, you can ride out almost any storm — but sometimes you’ll have to reinvent yourself along the way. Your software solutions have to be tactically as well as strategically designed: versatile and agile, not just powerful. Our clients say, “We want solutions we can understand and operate easily. We also want you to anticipate changes in the industry and be ready with products that address those changes.” All vendors say their systems are powerful, flexible, and user-friendly. But they should be flexible enough that if a major change occurs in the industry, the system can react and adapt immediately. Consider some of the changes we’ve seen in just the past few days, in the real estate mortgage industry — all HW E3 HPH 0510.qxd:Layout 1 5/17/10 4:12 PM Page 1 of which will result in some software-tweaking: Sundeep Amrute is a principal at Street Solutions.
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The role of mobile computing in the mortgage space by Ben Noyce Today, many Americans are considering mobile technology as a replacement for many things that used to be considered concrete and irreplaceable — the home telephone, paying bills, and closing a mortgage loan. Mobile technology has supplanted itself in everyday life as not only an acceptable, but often required, form of productivity, despite the inherent usability and security challenges it presents. As the mobile technology landscape prepares itself for yet another paradigm shift to incorporate a new “super mobile” surface area, one that has the presentation capabilities of a laptop and the usability constraints of a mobile device, institutions are finding themselves at a crossroads of “cents and sensibility,” having to ask the question of not “can we,” but “should we?” Successful mobile industry solutions today exist largely in the form of Web-based monitoring and data entry solutions that are many times summarized or
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Advances in due diligence
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by Sue Allon
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The technology that drives due diligence in the residential mortgage-backed securities (RMBS) space has advanced at an impressive pace in the past decade. Loans once confined to boxes in a processing room are now accessible over secure networks to whole teams of people, including clients and supervisors responsible for quality assurance. Results of file review are available in real time, while algorithms auto-check parameters of entered information to reduce human error and trend portfolio performance. Improved third-party vendor integration provides analysts with easy access to property valuations, credit reports, compliance records, income verification
simplified to be capable of consumption by traditional mobile interfaces, such as business intelligence dashboards, limited customer relationship management, and isolated silos of the loan manufacturing process such as rate locking. These solutions all share the same characteristics that currently limit mobile technology’s exposure to the data intensive and highly user-interactive mortgage process: light on the data, heavy on the information, and require very little interaction from the user. Although future super mobile applications will arguably share some of these characteristics, aspects of the mortgage process that are currently not eligible for consideration in mobile solutions, such as processing and underwriting, suddenly become possible. As this new paradigm evolves, demonstrated by Apple’s iPad, the mortgage industry is going to be ever challenged with responsibly exposing elements of the loan manufacturing process to keep all parties more informed and make the process more efficient, while protecting the integrity of the information required for successful transactions. It won’t be long before every institution in the mortgage industry will need to blend traditional, mobile, and super mobile components in order to stay competitive and be successful. Ben Noyce is CTO of Motivity Solutions
and other information offering a broader picture of loan performance and risk. New systems allow firms to customize reporting and analytics to specific clients needs. Technology also has advanced to meet growing complexities of securities markets, allowing firms to adapt in a shifting regulatory and compliance environment. While these technology improvements help deliver more thorough, reliable results to clients faster, our people remain the most crucial element to any serious change in our industry. Third-party due diligence firms are recognizing this by improving training programs to meet new complexities, and working to engage and retain industry talent as markets re-emerge. Technological improvements aside, our people remain our most critical asset. Sue Allon is founder and CEO of Allonhill, a Denver-based thirdparty review firm specializing in mortgage due diligence and credit risk management for institutional investors, private hedge funds, broker/dealers, government agencies, servicers and other mortgage service providers.
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Transparency matters: restoring confidence in the mortgage loan origination process By Steve Meirink
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When it comes to underwriting, today’s mortgage market has a growing challenge on its hands. In fact, undisclosed debt represents one of the most costly expenses linked to mortgage loan origination. According to Equifax, in 2009 borrowers acquired new auto loans during the quiet period in over two percent of mortgages originated. The impact? More than $100 billion in new mortgage loans may have had an undisclosed auto loan not accounted for during the underwriting process. But financial risk is only part of the story. Investors are analyzing every aspect of closed loans to ensure that they conform to new and existing industry requirements. As part of Fannie Mae’s updated Loan Quality Initiative guidelines, lenders must verify at pre-funding that borrowers have not incurred new debts or liabilities that may affect their ability to afford the mortgage payment. With these pressures, lenders are laser-focused on finding new ways to address emerging industry requirements while underwriting quality loans with greater transparency into borrower financial health.
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Static Snapshots Are Not the Answer Undisclosed debt is defined as new borrower liabilities incurred during the quiet period, which spans from the application date to the mortgage closing. A historical blind spot, the quiet period is a critical time window in the mortgage underwriting process during which there
has been limited visibility into borrower activity, such as account inquiries or undisclosed debt. While traditional risk management tools, such as a tri-bureau report, can provide a static snapshot of a borrower’s financial health, this is not enough to mitigate underwriting risk in today’s lending environment. An Industry Solution That is “Always On” Fortunately, the call for greater transparency has been answered. Working with our customers, we developed the industry’s first platform to monitor for and alert financial institutions to borrower activity reported during the quiet period. Undisclosed Debt Monitoring is the only solution that is “always on” — continuously monitoring consumer credit files and providing daily alerts on the activity of borrowers in a lender’s loan pipeline. “This type of solution represents a valuable risk management tool for lenders focused on addressing a growing industry need,” said Tom Fiddler, chief operating officer, Prospect Mortgage. “With this information, we are better prepared to help our clients make more informed financial decisions throughout the underwriting process instead of waiting until the 11th hour.” More than a competitive offering, Undisclosed Debt Monitoring bridges an important gap in the mortgage space. Never before has there been a monitoring service that gives lenders a complete picture of borrower financial health right up until the loan closes. With this insight, lenders can improve the quality of new loan vintages, measure their performance and minimize buyback risk. Faced with rising mortgage defaults and declining home prices, this ability to see into blind spots will be critical to restoring confidence in the mortgage loan origination process. Steve Meirink is the mortgage leader in the Equifax Product Management Center of Excellence. In this role, he leads product strategy and management as well as new product development initiatives for the company’s U.S. mortgage business.
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Is your appraisal process violating GLB? by Adam Calvery Lenders are under more regulatory compliance scrutiny than ever, especially as consumers engage lawyers nationwide in foreclosure, valuation, and predatory lending lawsuits — many of which are turned into class actions. Unfortunately, some lenders are discovering to their chagrin that the way they order and receive appraisals is in danger of breaking federal law, specifically the GLB (Gramm-Leach-Bliley) Act. If appraisals are ordered or received using regular unencrypted e-mail, or even via fax machines in an open unsecured area, then GLB is being violated, since those contain consumer data that GLB mandates as protected. If sales contracts are attached to appraisal orders and reports, then it’s even worse. And storing printouts of those documents in cardboard boxes or unlocked file cabinets is strictly forbidden. Nevertheless, every day, many lenders are subjected to every one of those risks. A consumer privacy breach can be exceptionally expensive, and everyone in the transaction can get mired
in the ensuing legal liability mess. With consumers more militant and better armed than ever, most lenders are one non-shredded trash bin or accidentally forwarded e-mail away from a privacy lawsuit. Using an appraisal management company (AMC) doesn’t automatically solve the problem. Far too many AMCs use non-secure processes either internally or with the appraiser, mortgage broker, or real estate agent. And under the GLB’s “Safeguards Rule,” the lender is responsible for the actions of suppliers to whom the consumer’s private information is entrusted. If they aren’t 100 percent GLB compliant, then the lender isn’t either, and GLB holds the lender legally liable for not auditing the practices of business partners. As more and more AMCs are hatched to capitalize on the undue influence regulations, they’re loudly braying “HVCC and FHA compliance.” But ask about GLB, and you’ll hear crickets. Lenders must demand technological solutions that ensure consumer privacy with end-to-end encryption, secure storage for sales contracts and other sensitive documents, and an abrupt end to simply attaching PDFs in unencrypted e-mail. So ask your vendor if they’re GLB compliant and if they say yes, make sure to ask them how. There’s too much scrutiny and the penalties are too severe to ignore this gaping liability. Adam Calvery is president of a la mode’s mortgage solutions division.
See what happens when our techies run 0ar1e2n34 !e’re &treet &olu+ons. !hat we’re trying to say is we’ve created the industry’s most adaptable, flexible loan management pla>orm. To learn more, including how we power up some of the world’s biggest lenders, visit streetsolu+ons.com A assuming this diagram didn’t tell you everything you need to know.
CDE.FGH.IJDD K www.streetsolu+ons.com
most popular smartphone among respondants to a recent survey of realtors: blackberry
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techtalk
source: center for realtor technology smartphone survey
41.2%
by Guy Taylor All of us are aware of the scenario that confronts our industry: Housing values have plunged, while modifications, defaults, and foreclosures have sky-rocketed. None of us would disagree with that analysis, and not that they’re needed, but statistics prove the point. According to some reports, there have been 6 million foreclosures, and another 7.5 million borrowers look likely to suffer the same fate. With numbers like that, it’s no wonder that many lender-servicers are scrambling. They know all too well they have a problem; they don’t always know the best, much less the quickest path, to a solution. But preferred strategies are emerging. For instance, lenders are beginning to recognize the importance of an accurate home valuation, if they are going to be able to get out from under all the distressed debt that they hold. In fact, when regulations require servicers to use the most accurate valuation technologies, transactions are more likely to take place. That’s because the stakeholders are more likely to agree on the property value, either for a modification, or for a short sale.
Technolog y
Hybrid valuations as a short sale driver
Under HAFA, before a short sale can be executed, the homeowner is required to have the assistance of a real estate professional. That advice more often than not will determine if the short sale goes through — which is why careful analysis and well-crafted technology are critical to completing these deals. One effective approach to valuations that has paid dividends for servicers is to rely on a hybrid valuation, such as our Value Plus BPO. It combines a broker price opinion with real-time reconciliation, provided by a licensed, certified appraiser. This approach is cheaper and faster than an appraisal. A full appraisal costs $375 to $400, while a hybrid valuation costs $150, generating a 40 percent savings. In addition, an appraisal takes seven to 10 business days on average; a Value Plus takes just three to five business days on average. Technology supports the valuations from the field and desktop. For instance, it performs quality checks of 400 data fields to ensure that the numbers are accurate, so that banks can gauge how much the collateral is worth and act from a confident, informed position. Also, we rate the performance of every vendor that offers services on our platform. Lenders realize the benefits of two experts for the price of one. More importantly, it ensures that the valuations are more accurate than relying only on a broker price opinion.
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Guy Taylor is CEO of Equi-Trax Asset Solutions.
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e-origination the path to
By austin kilgore
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By austin kilgore
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and home sales transaction is quite possibly the most common goal among mortgage technologists, in terms of products they hope will see actualization on a large level, sooner than later. Nonetheless, while the technology is currently available to conduct a mortgage transaction from beginning to end without the use of a single sheet of paper, the practice hasn’t caught on in the industry. In fact, there are a number of barriers — both within the industry and its regulators, as well as with borrowers — blocking the advancement of electronic mortgages. But times are changing, and as more and more parts of the mortgage process go digital, these industry players have hope their day will come. And so it is written?
It seems only inevitable that the mortgage process would become an all-electronic transaction. After all, each passing generation becomes more and more ingrained into the computer age, with the Internet and computers influencing nearly every facet of Americans day-to-day lives. And as the mortgage industry grapples with recovering from a recession brought on in large part by a housing crisis, it is learning to evolve in the “new normal.” Part of that evolution has, and will continue to include the digitalization of the mortgage process. “I’ve always felt you should be able to close anywhere, anytime,” said Barbara Miller, president and chief operating officer of Annapolis, Md.-based TSS Software Corp., a title and settlement software developer. “Mobile technology is huge and you need to be able to do it.” The most likely candidate for electronic mortgages will be refinance loans, experts predict. While still an important transaction, borrowers that have already completed a traditional purchase mortgage transaction will be more comfortable with the process. “If I’m in a house for 15 years, it’s just a refinance,” Miller said. “In the purchase process, that is still such an important transaction and a complex transaction that doing it mobile with electronic signatures is going to take longer for the consumer to adjust to that.” “You feel that you need to go to an office and sit
down and look at someone for such a long purchase to understand it,” she added. Tackling borrower perception of closing is just one challenge facing the adoption of electronic mortgages. While the concept may run more mainstream in the future, when younger generations of tech-savvy Americans become homeowners, lenders may force other segments of borrowers less inclined to engage into an electronic mortgage. “It’s kind of the golden rule with the lenders, he who has the gold makes the rules,” Miller said. “ It’s going to be harder for the purchase community to get the buyers used to it, but it’s going to be driven by lenders and by Wall Street more so than consumer demand.” Regulatory issues about digital mortgages continue to evolve. As the Federal Housing Administration (FHA) continues to increase its share in the mortgage market, the Department of Housing and Urban Development (HUD) is implemented a phased plan for developing e-mortgages. In April 2010, HUD released a mortgagee letter announcing the FHA will begin accepting electronic signatures on third party documents for its mortgage insurance endorsement. The third party documents are those that are originated and signed outside of the mortgagee’s control, such as a sales contract. However, lenders are still required to collect a paper copy for the loan’s physical origination case binder, unless the case binder is in an all-electronic format. In an exclusive interview with HousingWire, HUD deputy assistant secretary for single-family programs Vicki Bott said the move is the first step toward completely digital FHA loans. The technology exists, but it’s going to take time to implement it. “The industry and certain distribution channels of the lending industry have been working to go there for some time,” Bott said. “The mortgage industry is very paper-intense, so it isn’t happening very quickly.” Currently, much of the opening process of a mortgage application can be done electronically. Users can compare rates with online tools like LendingTree and newcomer Google, but it’s a process driven by lenders’ desires to make more of the process digital. The next step in the program will be for FHA to
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Will the road to digitalization ultimately travel through HUD?
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put out policy allowing lenders to have borrowers electronically sign certain lender documents — like loan applications, disclosures and other lender-generated loan underwriting documentation. “We’ve staged it to have some speed of execution and to provide some lift without trying to have the delays that sometimes happen when you put out too much policy at one time,” Bott said. After the lender-initiated, borrower-signed e-signature policy is in place, the next step will be plans to allow e-signatures on the lender’s certification documents. These documents are part of the loan file submitted to the FHA and are non-borrower touching, but things that the lender or its employees sign as they process loans. Those steps are the priorities for the FHA, and the industry, Bott said. She expects regular updates to policy throughout 2010, but it could be some time before the last step, allowing e-signatures on mortgage closing documents will be allowed. It’s just not a priority for lenders, and there are other digital loan initiatives that will help lenders streamline their processes that are more pressing. “As it relates to an e-closing lending piece, we’re not getting significant pressure from the industry to adopt it,” Bott said. “Not to say that the industry doesn’t want to do it, but they’re more interested in getting their loan documentation electronic at this point to have a more streamlined mortgage process.” “It tends to be your higher-technology companies that have really adapted to the some of the e-closing processes. It’s certainly something we’re looking at we want to strive for it, but it’s not a priority for this year to get that piece out,” she added. Further complicating the e-closing documents is working with municipal and other regulatory bodies that also use closing documents. The growing presence of FHA-backed mortgages in the market makes the new policies of even greater concern for lenders. Bott said the industry “absolutely” cares more about FHA document policy now than in previous years. “Our growth in the recent years requires us to think more about providing capabilities to the industry, that’s the major change for us as it relates to policy development,” she said. “When we were 3
percent of the market, it just didn’t matter as much from a lender perspective.” But the FHA, along with the Veterans Administration (VA) and the United States Department of Agriculture (USDA) all manage their own mortgage insurance programs and each entity has to set its own policy. HUD’s authority when it puts out FHA policy doesn’t span across to the VA or the USDA programs. They may put out separate policies or have different comfort levels, either more or less aggressive as it relates to electronic signatures, Bott said. Add to that the policies of the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, and lenders could face difficulty implementing an electronic mortgage protocol. To combat that, Bott said all the players monitor each other’s practices and try to keep things as similar as possible. Fannie and Freddie and leading the charge toward e-signature and eloans. Freddie started its program in 2001, Fannie followed one year later in 2002 and the FHA is building off of that. “We are leveraging their policies they put out to try to see anywhere we can be consistent with policies to not require the industry to implement something differently,” Bott said. “There could be some differences, but we’re doing everything we can to examine everything that’s out there and conform when we can. That spans across all policies, not just those related to electronic signatures.” In addition to trying to keep policies in-line with the rest of the mortgage industry, the FHA decided to keep its standards for accepting e-signatures similar to already establish legal guidelines that span all electronic signature policy, Bott said. But no matter when or how the FHA sets electronic mortgage policy, if the digital mortgage is the water, then the FHA can only lead the horse — aka the lender — to it. It can’t make it drink. “From an FHA perspective, we can enable the capability for lenders to participate in different ways to electronically sign or process or file,” Bott said. “It becomes a lender who actually touches and faces the consumers to decide whether to allow customers to take advantage of as a choice, or maybe they have a business model where they say this is how we do business and the customer has to participate from an electronic standpoint.”
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If the digital mortgage is the water, then the FHA can only lead the horse
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Xerox goes digital for doc storage As more documents go digital, there is a growing need to store these digital documents in not only with safety and security in mind, but also in a method that’s cost effective. While Xerox Corp. is a company made famous for its paper copiers, the company’s latest venture in mortgages is a move to make the name synonymous with paperless electronic mortgage origination. The company is now focusing efforts on its eVault, an off-site digital storage repository for electronic loan documents, as a way to try to grab more market share in paperless origination. Currently the company holds more than 35,000 mortgages in the vault. The software as a service (SaaS) is offered on a per-loan basis, which the company said makes it more affordable for originators with varying levels of loan volume. The data storage demands of housing mortgage documents are not that great, approximately one megabyte of data per loan file. Xerox said its service integrates with the Mortgage Electronic Registration System (MERS) eRegistry platform as well as provides secure access to mortgage investors and servicers and meets standardized storage and security requirements. That sort of functionality would prove costly and timely for a company to implement on its own, Greg Smith, the vice president of Xerox Mortgage Services, told HousingWire. “It’s not enough to have the technology. It’s about having the technology that maintains compliance but also has the connections to the various parties throughout the transaction. A mortgage banker can come to us and plug into what we’ve already built in a model where they don’t have to spend not only a lot of time but also a lot of money setting it up and maintaining it themselves,” Smith said. The Department of Housing and Urban Development (HUD) recently approved provisions to allow e-signatures for certain mortgage disclosure documents, and it’s expected that e-signatures for closing documents will be approved in the near future. While electronic origination is beginning to take off, it’s still a small percentage of most originators’ overall business. That makes using a third-party electronic storage feature “With enough time and money you can do anything yourself, but the issue is that we’ve built all the infrastructure and all the connections to the parties and that should not be underestimated how big of a deal that is,” Smith said. Currently, the Xerox data center is headquartered in Texas, with a backup facility in Georgia. As younger generations that are more accustomed to working in a digital world begin to become not only mortgage borrowers, but also origination employees, Smith sees the number of electronic mortgage documents increasing. “The Gen-X, Gen-Y population, the post-Baby Boomers, for the vast majority of careers, they’ve been online and more comfortable doing transactions online,” Smith said. “We think the trends are on our side, not against us.”
Read more about mortgage origination at HousingWire.com.
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realtors who REPLACED THEIR BUSINESS LAND LINE WITH A SMARTPHONE
22
techtalk
source: center for realtor technology smartphone survey
46%
PER S PECTI V E
What you should know about eSig acceptance spreads by Brad Eaton On April 8th, HUD approved the use of eSignatures on “third party” documents and have recently announced their intent to soon approve eSignatures on all documents, including loan applications and disclosure documents. This is fantastic news for mortgage loan originators because waiting periods and shipping expenses can be slashed overnight. In recent years, there’s been an enormous swell in demand for eSig solutions because of the time and cost savings they provide. eSigs will make the lives of you and your clients easier too. As you know, when clients are waiting on RESPA docs, they might still be shopping around. With eSigs, you can deliver the GFE instantly and get their signatures online in seconds. So whether you’re talking TILA, RESPA, or other docs, eSigs help keep the client committed, move loan files faster, and lower closing costs. Everyone wins. When looking for an eSig solution, it must maintain full compliance with GLB, ESIGN and UETA laws. Avoid solutions that charge per doc or per envelope, and make
sure it can accommodate individual wholesaler or investor requirements. For a legitimate electronic signature and HERA compliance, you need a solution with audit trails of doc delivery, receipt, viewing, and signing. Many providers have integration with your LOS, but make sure they automatically place signature tags on all your docs so you don’t have to hassle with it yourself. Our SureDocs product was among the first in the mortgage and lending space to offer identity-verified, secure eSignatures, complete with end-to-end audit trails. To date, it’s applied over 3.4 million secure signatures, saved lending professionals millions in shipping, and eliminated waiting periods. It can also be used immediately without any set up or installation, so SureDocs is a perfect way to try eSigning before transitioning your entire operation. The cost savings are immediate as well. Assuming an average of $30 in shipping per loan, at 10,000 loans per month, you could save $3.6 million annually. Even at 150 loans per month you could save over $50,000. And with the new HUD rules, how many copies of the GFE have to be resent due to changes? The savings add up. But reduced overhead is just the tip of the iceberg. Borrowers are already used to signing important docs online like tax filings and online bill payments, and they love the faster service and stay committed through shorter waiting periods. Again, with eSignatures, everyone wins. Brad Eaton is chief product officer at a la mode.
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L a ws u i t s a b o u n d i n t e c h w o r l d
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In the high stakes world of high tech, lawsuits are bound to happen. There are a number of pending cases involving many of the biggest players in the mortgage technology space. Here’s a recap of the cases and the latest updates on the status of each case.
Armed with new lawyers and data from a Securities
and Exchange Commission (SEC) filing, loan document compliance software developer DocMagic submitted an amended complaint in its antitrust and unfair trade practices lawsuit against mortgage software developer Ellie Mae. The 67-page complaint, filed May 10 in U.S. District Court for the Northern District of California in San Francisco, alleges 14 various claims against Ellie Mae ranging from violations of an antitrust law known as the Sherman Act to copyright infringement. The new complaint comes as both parties agreed to dismiss a state-level lawsuit related to this case. Those claims, including a contract dispute between DocMagic and Ellie Mae, are now wrapped into the federal court case. DocMagic also brought on a new law firm to represent it in the case. The new firm, Morrison Foerster, is a San Francisco-based global firm that specializes in technology-related legal matters. A DocMagic spokesperson said as the case progressed, the company decided to hire a law firm that specializes in technology-related law. DocMagic’s previous attorney, Matthew Hinks, did not respond to HousingWire’s request for comment. The amended complaint comes on the heels of news in early May that Ellie Mae is planning an initial public offering (IPO) it hopes will raise $86.25 million. “Ellie Mae’s goal was, and is, the complete elimination of DocMagic and other competitors from the online document preparation services market,” the DocMagic complaint said. “Ellie Mae’s motive was to bolster its sagging balance sheet to position itself to go public,” the complaint continues. “Ellie Mae candidly admitted that its $4.1 million revenue increase from 2008 to 2009 — the only bright spot in Ellie Mae’s financial disclosures — was ‘primarily related to our document preparation services.’” Indeed, in its SEC filing, Ellie Mae acknowledges the revenue increase in its document preparation services, but credits the profit to the surge in mortgage refinancing in the first half of 2009, a shift in our customer base
from mortgage brokerages to mortgage lenders, and its acquisition of Online Documents Inc. (ODI) in Q408. ODI is a mortgage document preparation software Ellie Mae acquired from Stewart Lender Services and rebranded as Ellie Mae Docs. The federal judge presiding on the case set a May 10 deadline for the amended complaints. In addition to DocMagic’s filing, Ellie Mae filed an answer to complaint and an amendment to its original counterclaim on April 26. That filing adds allegations regarding a reseller contract between Ellie Mae and DocMagic and additional claims that DocMagic improperly solicited Ellie Mae’s customers by promoting direct access to DocMagic. The timing of DocMagic’s latest complaint prevents Ellie Mae from addressing the allegations. Ellie Mae is in what’s known as a “quiet period” following its IPO filing and a spokesperson for Ellie Mae declined HousingWire’s request for comment. Federal securities laws limit what information a company and related parties can release to the public during the period, typically 40 days. While not outright prohibited from speaking to the media, it is a common practice for companies to decline media inquiries during quiet periods to avoid any inadvertent violations. DocMagic president Dominic Iannitti said Ellie Mae’s IPO further proves his company’s allegations. “Now that we have had the opportunity to review Ellie Mae’s financial performance in its IPO prospectus filed with the Securities Exchange Commission, it appears that the only financial success Ellie Mae can claim in the last two years is tied directly to the document preparation business, much of which is based on business and intellectual property stolen from DocMagic and others in violation of federal and state laws.” The lawsuit revolves around the relationship between DocMagic’s online document service and three Ellie Mae products, Ellie Mae Docs, ePass and Encompass. Ellie Mae Docs is essentially a private-label document service that was a hybrid of DocMagic’s service and another similar product, DocuTech. Launched in 2006, Ellie Mae entered into reseller agreements with both companies for their software for use in the system. Later, after Ellie Mae acquired ODI, it was integrated into Ellie Mae Docs. [ please turn the page ]
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DocMagic gets new lawyers, amends antitrust complaint against Ellie Mae
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DocMagic cont.
DocMagic alleges Ellie Mae had access to its proprietary information and used it in developing the latest incarnation of Ellie Mae Docs, a claim Ellie Mae officials denied to HousingWire when the suit was originally filed in August 2009. “I’m not sure how we would do it, as far as reverse engineering their back-end system when we don’t really see how it works,” Ellie Mae chief strategy officer Jonathan Corr told HousingWire in September 2009. “It’s just a black box to us and we don’t have access to their systems.” The new complaint alleges that in Ellie Mae Docs, the use of the words “WARNING” and “FATAL” along with using red, yellow and black color scheme on these alerts are in violation of DocMagic copyrights. “Although it could have chosen any style for the audit
reports that it developed for its new document preparation service, Ellie Mae chose to copy the DocMagic trademarks and trade dress so that use of Ellie Mae’s document preparation service would replicate as closely as possible the DocMagic experience,” the complaint alleges. Portions of DocMagic’s amended complaint are redacted from public viewing. A spokesperson for DocMagic said the redacted portions of the complaint include details revealed during the discovery phase that are prohibited from public disclosure to protect certain private trade information of both companies. The next development in the case will come in June, when the judge presiding on the case set a deadline for filing motions to dismiss.
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CoreLogic lawsuit claims AVM patent infringement
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First American CoreLogic filed a patent infringement lawsuit against eight of its competitors claiming products developed by the companies violate CoreLogic’s patent for its automated valuation model (AVM) technology. First American CoreLogic was a subsidiary of the First American Corp., but the company recently completed a spin off into its own publicly traded entity, called CoreLogic. The suit, filed on April 16, 2010 alleges Fiserv, Intellireal, Interthinx, Lender Processing Services, Precision Appraisal Services, Real Data, Realec Technologies and Zillow all sell products and services that violate the patent First American has for its property valuation technology. The suit was filed in the US District Court for the Eastern District of Texas in Marshall, Texas, about 150 east of Dallas. The venue is known for handling high-profile technology cases and Judge T. John Ward has developed a reputation as a jurist with a keen knowledge of patent law and runs his courtroom with a tough and stern demeanor. As any patent lawyer will tell you, a tough judge means swift cases. And if this case makes it to trial, the odds are in CoreLogic’s favor. According to LegalMetric, a St. Louis-based data and analytics firm that aggregates various legal statistics, the US District Court for the Eastern District of Texas hears a disproportionately large number of patent infringement cases. According to the firms data, there were 75 patent cases filed in the year 2000. Patent suits peaked at 350 in 2007. In 2008
and 2009, a system-wide procedural ruling allowed parties in a suit to request changes of venue if hearing the case in another district court was more convenient. That led to a decline in patent cases in the Marshall court, nearly 300 cases in 2008 and more than 230 in 2009, but many of those 2007 cases are still pending. The only district court with more patent cases in 2009 was the District Court for the Central District of California, located in Los Angeles. Other courts with similar patent caseloads include the Northern District of California in San Francisco, a close venue for cases between Silicon Valley companies, and the Delaware District court, where many companies file their articles of incorporation, according to LegalMetric data. But what really makes the Eastern District of Texas court stand out is that it has one of the highest plaintiff win percentages for contested cases that make it to trial. In Marshall, patent lawsuit plaintiffs win 43.2 percent of cases that make it to trial. That’s compared to 18.2 percent in the Los Angeles court and 41.8 percent in the Delaware court. “They’re way out of scale,” LegalMetric spokesperson Greg Upchurch said. The filing requests a jury trial and seeks damages for profits lost, and royalty payments for the patent, as well as attorneys fees and costs. The plaintiffs in the case either declined to comment or did not respond to HousingWire’s request for comment.
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— Austin Kilgore
In the war on credit scores, FICO loses a battle By Jacob Gaffney The use of credit scoring is vital to the mortgage underwriting process. However, behind the scenes, a war is raging over who can lay claim to that process, with one party recently losing ground in the courtroom. The Fair Isaac Corp. (FICO) was denied a new trial regarding what it claims is clearly its trademark; that is, the act of rating an individual’s credit on a scale of 300 to 850. However, VantageScore Solutions, the credit rating provider created by America’s three major credit reporting companies — Equifax, Experian and TransUnion — successfully argued that its system that rates credit on a scale between 501 to 990, is not in violation of the FICO trademark. The presiding U.S. district judge in Minnesota, Ann Montgomery, went a step further and called for FICO’s trademark to be invalidated in her verdict. In her decision, Montgomery addressed the jury’s finding stating, “Indeed, the jury’s verdict was a wholesale, unambiguous rejection of Fair Isaac’s central theory of the case — i.e., that one can legitimately claim trademark
protection in the numerical range for credit scores.” VantageScore Solutions CEO Barrett Burns said that the court’s decision confirms its longstanding allegation that FICO’s claims are “meritless,” and “at every step, VantageScore has prevailed against Fair Isaac’s claims.” “Should FICO appeal, we remain confident we will prevail there too,” Burns said. And FICO has the full intention of appealing, according to Craig Watts, a director of public affairs at Fair Issac. As to be expected, he said that FICO strongly disagrees with Montgomery’s verdict. Watts added that the basic tenants of the case surround fairness and consumer protection, not against the numerical methodology for presenting that value, especially as it pertains to the sale of those scores to mortgage lenders, for example. “Nothing has changed as a result of this order,” he said, “the defendants have not been held accountable for copying what it took FICO 20 years to build; and consumers will continue to be victims of big-budget ad campaigns that trick them into buying knock-off scores that they think are the genuine FICO scores lenders use to make decisions.”
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40 e a g s a use t r c o lt ho du s a w re er con nes f o ng to usi e u e b ag yo on te t r a n o h t ce rs rtp es r pe yea ma eal s r
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source: center for realtor technology smartphone survey
9
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Getting technical
RETS standard Survey asked: How satisfied are you with the RETS standard?
64% responded “satisfied” or “very satisfied”
Survey says The National Association of Realtors (NAR) Center for Realtor Technology conducts an annual survey of NAR members to gauge trends and usage in the multiple listing services (MLS) technology that local Realtor associations use for property listings. As the technology that powers MLS software continues to evolve, associations are looking for ways to maximize their efficiency, sometimes going so far as to consolidate multiple MLS programs into one. In addition, MLS technology is expanding beyond its use by real estate agents and often is made available to the public.
MLS data sharing Survey asked: Do you have reciprocal data sharing agreements with other MLSs?
37% No,
and my MLS does not plan on having one soon
5%
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21%
34
No, but my MLS
is considering an agreement for the future
37%
not sure
YES
source: 2009 MLS Technology Report, NAR Center for Realtor Technology
Click here for more NAR CRT surveys
Top MLS listing syndicators 16%
Other
36% 36%
REALTOR.COM
TRULIA
23%
GOOGLE BASE
23% 22%
ZILLOW
21%
YAHOO LOCAL
18%
MLS SITE
16%
LOCAL ASSOCIATION SITE
5%
CRAIGSLIST
DON’T KNOW
2%
Survey asked: Where is your MLS placing listings? Percentages will not add up to 100% as respondents had the opportunity to select multiple responses.
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11%
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