The growing push for paperless lending is adding fuel to the misconception that imaged loan documents and electronic loan documents are one in the same.  This is due in part to attempts by document imaging vendors to muddy the waters.  However, the most prominent reason is simply a lack of industry education, even among the most tech-savvy lenders.

There are some big differences between imaged documents and electronic documents.  First, electronic documents are documents that never existed on paper.  They were created, populated and signed electronically.  There are no paper stacks to store.

A scanned image of a paper loan file is not an electronic loan file.  It’s a picture of a paper loan file. The data stored within the scanned loan file are hardly easier for a computer to read than the data within the actual paper file, despite strides in optical character recognition (OCR).

Sure, imaging has its benefits.  Imaged documents can be accessed from anywhere, easily audited and drastically reduce the number of human beings who actually have to touch the paper loan file –- all good things.  However, imaging’s potential is limited.

There is no purer form of data than electronically-originated financial documents.  While imaged documents can include indexed data, the indexing processing requires wasteful data re-entry.  Also, typically only a handful of available data points are indexed.

Purely electronic loan data can be accessed from anywhere and easily analyzed, both individually and in aggregate.  It is the ability to fully manipulate all of a loan’s electronic data that enables banks, ratings agencies, investors, regulators and others to determine the true risk –- and thus, the true value — of an asset.

Fortunately, the recent recession has brought light to the fact that paper-based lending is an expensive, inefficient and risky way to make loans.  As financial institutions look for better solutions, they will likely consider several new processes and technologies.  However, comparing imaging to electronic only adds confusion.

Avoiding another financial crisis will boil down to transparency.  Transparency can only be achieved by providing investors with the data they need to understand the full picture of a loan’s risk.  The breadth of available data in a loan document can only be easily made available if the documents are fully electronic, from end-to-end.

For years, there hasn’t been a technologist in the room who didn’t see the value of electronic assets, another name for a loan that is originated and stored electronically, and the additional data that these assets would provide.  Recently, the carnage of the Great Recession has enlightened bankers that they too could benefit from having more data available on the securitized assets they trade.  Now, we are beginning to see signs that the call for electronic assets may be on its way to the mainstream.

In an earlier post, we wrote about how two Stanford professors, Kenneth Scott and John Taylor, took their case for electronic assets to the Wall Street Journal.  Less than a week later, the Journal ran four letters to the editor, including one from Encomia CEO Andrew Dubinskyme.

Recently, author and TIME magazine correspondent Justin Fox also posted an article about the a conversation we had about the growing cry for electronic assets on his Curious Capitalist blog.

Our discussions with lawmakers, academics and the media reveal an increased understanding and desire to see the financial industry move towards a model where loans are created electronically and paper is completely removed from the process.  As we continue to work towards a more transparent, efficient industry, it is the growing call among the mainstream that will bring this movement over the tipping point. I’d like to thank journalists like Justin Fox for continuing this conversation.

Stanford professors Kenneth E. Scott and John B. Taylor in “Why Toxic Assets Are So Hard to Clean Up” (Wall Street Journal, July 21, 2009) wrote about the complexity of mortgage backed securities, and proposed that mandatory transparency is the only solution.  But they stopped short of identifying the root cause of the financial meltdown: paper assets.  Paper mortgage, commercial, auto and other loans make it impossible to share loan data on all of the assets that underlie MBS.  This renders the authors’ proposal of a central database based on the data from current, paper mortgages and the resultant securities impossible.

In today’s world, loans are printed and signed on paper, then scanned into computer systems for storage. The thousands of data points of interest to investors are not rendered accessible to computers. The paper is then stored permanently in a warehouse somewhere far away from Wall Street.  As a result, the investor gets little or no data about the borrowers behind each loan in the MBS.

Electronically created loans make it easy to share all available data, no matter how the assets are pooled, securitized, and recombined.  It enables investors to make their own decisions about risk and reduces their reliance on ratings agencies, preventing a build-up of impossible to price assets in the future.

I have worked for ten years to advance the cause of 100% paperless, 100% transparent electronic assets.  While many of the nation’s largest banks are beginning to implement some form of electronic lending, it is Congress who must set the date for adoption.

Has anyone here thought about what a Morgan Stanley retail branch would look like?  Do bank tellers really fit the Morgan Stanley mold?  Does Morgan Stanley even have the IT infrastructure to begin building a retail operation?  Should Morgan Stanley just buy a retail bank?  Is Morgan Stanley really going to go through with this?

No doubt, these were all questions asked by Morgan Stanley executives after the bank made public its decision to become a depository financial institution.  After all, why would a Wall Street icon want to get into branch banking?  For that matter, why would a Wall Street icon want to get into internet banking either (e.g., the e*Trade model).

Yet, that was exactly what Morgan Stanley was planning to do in late 2008 after its precarious cash position left it with few options.  However, the venerable Wall Street landmark finally realized that branch banking just wasn’t its business.  According to a recent article in American Banker, Morgan Stanley announced that it was no longer pursuing a branch strategy and, instead looking at ways to offer retail banking as a personal service to its wealth management clients.

While there is no way to tell whether or not this strategy will pay off.  However, the potential is exciting – both for Morgan Stanley and for the banking industry.  As we all know, most mega-banks are simply a collection of acquired old banks that have been glued together and repainted.  And, the complex maze of IT infrastructure that lives underneath the new paint is one of the most significant obstacles to achieving modernization of the banking industry.

By not getting into branch banking and, instead, trying a new approach, Morgan Stanley could – could – be setting the direction of a new model for the country’s largest banks – one that Goldman Sachs has also announced it intends to follow.  By not gluing together old, failed banks, Morgan and Goldman have the opportunity to create an IT architecture that is fully transparent, fully paperless and fully integrated with its wealth management systems.

Imagine the possibilities:  Credit decisions based on a total picture of an individual’s creditworthiness, where one division of the bank has knowledge of assets held by another division.  Sophisticated cross-sell systems that communicate efficiently with all of the bank’s core systems.  The potential to electronically originate loans and fund them quickly.

True, Morgan Stanley may just walk away from branch banking altogether.  However, it is worth daydreaming about what an institution of its size could accomplish if it decided to see this strategy through.

M&A activity among the largest banks and a prolonged economic crisis will, in the end, result in far fewer retail banking options, compared to only a couple years ago.  At first glance, this sounds like terrible news for the adoption of electronic lending technology.

However, while such a shift may impede innovation on the consumer side (banking products), fewer, bigger and stronger banks have more power to drive the adoption of meaningful technology standards - an important factor in electronic lending.  Fewer, bigger and stronger banks have greater leverage with trading partners (more market power), enabling them to require conversion to the banks’ standards.

It only takes three
When the dust settles, the top five U.S. banks will be exponentially more powerful than ever before.  A few banks converting from paper-based to electronic lending is all that is needed to create a tidal wave of seismic proportions in the banking industry - one that would dwarf the 85,000 electronic mortgages registered with MERS as of March.

Currently, three of the top five – Bank of America, Citigroup (Citimortgage) and Wells Fargo – have already completed the lengthy process of integrating with the MERS eRegistry.  In other words, all three of these banks could implement a top-down eLending initiative tomorrow if they chose to do so.

The question, then, is how do we as an industry, help to push these banks over the top?  Here are two ideas:

1. Prove the benefit to society. Next week, I will meet with several members of Congress to discuss how eLending technology can help to achieve the transparency which both Congress and the Administration desire.  However, my voice alone is not enough.   We as an industry must come together to educate Congress and impress upon its members how eLending is the best solution to a very severe problem, one in which they hope to remedy.
2. Prove the ROI.  Imagine the scale that eLending could bring to a trillion-dollar bank.  Anyone who understands the vision of electronic lending technology can see a cost savings with lots of zeros at the end.  However, we have to do more than sell the technology; we have to educate very busy bank senior executives who, understandably, have a lot on their plates right now.  We must make our business case to everyone who will listen, through every available channel.

The market only needs a few of the top banks to go “e”.  The entire banking industry will benefit if we can accomplish this.

Chances are, you like the rest of us, want instant gratification especially when it comes to IT investments these days; projects aren’t going to get approved without a quick payback period.  So goes it with projects in this new era of banking:  Corporate executives are turning their eyes more than ever to projects that provide efficiency rather than sales, convenience or vanity.

When I started in banking technology in 1991, banks were already looking for opportunities to reduce paper in their organizations.  It started with telephone banking and matured through the genesis of web-based banking services.  Ordering products, receiving statements and making payments were bogged down with inefficiencies of creating, handling, sorting and auditing paper.  Paper was becoming the enemy.

Services rendered in a click rather than a telephone call or a paper form quickly became the darlings of efficiency and even offered more auditable transactions supporting higher degrees of quality assurance.  In financial services, there are still many documents that still require a customer signature for authorization but the US Law like E-SIGN in 2000 and UETA make valid electronic signatures.

In 2003 I was involved in a project at one of the largest banks in the US, to reduce their postage expense.  At that time, this bank was the single largest customer of the US Postal Service in the world.  Paper and shipping reduction has been an impetus for at least two decades.  It is economically and ecologically prudent and offers a better quality experience for the customer and the institution. If paper has become a differentiator and a barrier to entry for the banks’ customers, why is there still so much paper in banking?  What are the barriers for banks that want to replace paper with technology–Regulatory? Cost? Converting Operations?

We are about to have the first ever US Chief Technology Officer (CTO) appointed in the US government.  Apparently technology is actually an important part of our country now.  Not to be cynical, I admire the move and hope it is precedent setting for future administrations.

As of this past weekend, most rumors point to Vivek Kundra, the CTO for the District of Columbia.  Your guess is as good as mine whether some of the initial names that surfaced may still be in the running.  This list included the CEO’s of Microsoft, Amazon and Google as likely candidates.   The identity of the appointee may also drive to whom they report; it is still uncertain whether they will report directly to the president or some other office.  Do you suppose the new CTO could get FHA to go paperless finally?   Hey, maybe that is what we needed take to make socialized medicine work—a US CTO to ensure there is supporting federal technology rich enough to shoulder claims management.

While it seems the role of this office will include things like ensuring network security and making cross-governmental agencies’ CIO’s play nicely together, I wonder if we could concoct over time a “socialized technology” practice. Perhaps all bodies which define standards in technology, such as the MISMO standards body for mortgages, would eventually report to the US CTO.  But on the other hand, this new role in our government will be bogged down for several lifetimes trying to “. . . ensure that (all government agencies) use best-in-class technologies and share best practices” – this must sound like fun for someone.

From our nation’s CTO, I am looking forward to some new technology like: Live Chat with the President or how about a Whitehouse Texas Hold ‘Em site?   The on-line gamblers in our country could fund the TARP burden for those taxpayers who do not gamble.

As for us mere mortal technology executives, I hope we all continue enjoying the satisfaction one feels when an elegant software, hardware or communications solution improves the experience of our consumers.  It is really great to solve problems that are tricky, yet reasonably contained; these solutions tend to be launched more frequently and make it to the user community well before they are outdated.  Tackling the government’s technology issues will be broad, far from trivial and may require a TARP-sized training budget for government employees.

Thanks to one of our favorite columns, “Tech Niches” at Mortgage Technology magazine for the mention in a recent post on mortgage-related blogging.

The article also brought a new blog from Cyberhomes to our attention.  This site for real estate agents and brokers is attractively designed and has ideas for adding technology such as social media to your marketing efforts.  Mortgage originators can surely benefit from knowing what their important ally, the real estate agent, is up to. We’ll be keeping an eye on it!

It is a new year and with it has come some very dramatic change in banking and our economy.  I am writing this post to provide a market perspective from the point of view of a technology vendor, selling lending solutions to large enterprise banks.  Things recently have been chaotic in our business, to say the least.

In 2008 the mortgage business more or less collapsed.  The list of the top ten depository banks by mortgage originations from 2006 has since consolidated down to just six names.  Much of this seemed to come out of the blue.  We had a meeting last year with executives at one of these banks, at what appeared to be the end of a successful four month sales process.  They emphasized over and over how positive their business outlook was.  At the airport on the way home, CNN broke the news that the same bank we had just met with was in a forced sale to another large bank.

On a more positive note, all of the chaos in the market has also created an environment where banks are looking at offerings from technology companies like ours because of the efficiency and immediate ROI we can deliver.  This year, we have already had several very promising meetings and February travel is almost totally booked.   It is a little early to tell, but we hope the silver lining in all this turmoil will be greater adoption of technology and more data transparency in lending.

More about the market and our experiences in it to follow…

Being a technology partner to the lending and mortgage industries, I get a number of questions regarding the housing market.  Here are a few topics I’ve been asked about lately, with my answers:

How much have home prices fallen?

Some homes in places like California and Florida have lost as much as 50-60% of their value. Here in Houston, properties have not seen a noticeable downturn in values yet. That highlights the importance of local factors such as the job market, population growth, the level of real estate speculation in a given area, and land available for development.   A widely used barometer, the S&P/Case-Shiller (S&P/CS) National Home Price Index said that house prices in the United States were 14.1% lower in the first quarter of 2008 than they were a year earlier.

What will it take to get the housing market to stabilize?

For much of the country to stabilize, it will take getting banks and private investors comfortable with lending money for mortgages. Some borrowers took advantage of generous ‘cash out’ offers, becoming overburdened with debt and some lenders knowingly ignored good lending practices. Taken as a whole, the marketplace needs transparency, so banks know what is in their loan portfolios and borrowers know what it will take to get a loan and at what terms. Electronic lending technology is one way to add that transparency to mortgage loans.

Is it a bad time to buy or sell a home?

It’s not any better or worse than any other year. There is some panic overhanging what you see on TV. Remember that all real estate is local. Unless you are moving to Miami Beach, the prices there don’t impact the prices where you are. Even if you are not buying or selling, it’s a great time to refinance. Rates are low, but will probably not be for much longer.  Check with a local bank or mortgage broker to see if you can
benefit from the low rates.

You’ve probably been asked about the housing market as well.  What do you think is the biggest misconception on the borrower side?