AMBA Education Report
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AMBA Education Report

February 25, 2001

Technology in the Non-Conforming MarketW. Lance AndersonNovaStar, Loan Prospector, Desktop Underwritter, automated underwriting , InternetUnderwriterIn the conforming loan market, technology is playing a prominent role in both the marketing and
processing of mortgage loans. The GSEs with Loan Prospector and Desktop Underwriter have
been leading this charge with their automated underwriting systems. In addition, there are several
lenders that specialize in originating loans over the Internet through specialized Web pages.
While it is still uncertain how successful the Internet channel will be for originations, lenders
cannot afford to ignore its presence. The commodity-type nature of the conforming market
makes it a likely target for Internet originations.
We are just now beginning to see technology play a bigger role in the non-conforming loan
market. For example, at NovaStar we recently introduced an automated underwriting system
which we call the InternetUnderwriter. This system is available 24 hours a day, seven days a
week, by simply dialing into our Web page. Brokers can have their loan approvals in minutes, as
opposed to days, under the more traditional underwriting process.
In addition, some lenders are starting to focus on Internet originations in the non-conforming
market, both with prime and subprime products. The ability to utilize technology to streamline
the credit decision process, and the ability to have a local presence without brick and mortar via
the Internet, are two important developments that are bound to have a big impact on the structure
and profitability of the non-conforming market.
Of course, the question at the forefront of everyone's mind is, "How will the Internet effect my
current business and how should I be positioning my company to take advantage of the changes
the Internet will bring?" One thing is for certain, loans will be originated over the Internet. The
question in everyone's mind should be, "What is the best strategy for using the Internet to
maximize profitability?"
Some firms have decided to use the Internet as their branch system and attempt to perform all of
the processing functions, underwriting, closing and funding via the Internet; while other firms
have structured their business to use the Internet as a source of leads which they then send out to
their local offices. The first strategy of performing all the functions over the Internet looks great
on paper from a cost standpoint, but the key variable is whether or not the company can get a
high enough closing ratio to make it a profitable business. Under the second strategy of sourcing
the leads out to a local branch, the company does not enjoy any cost-savings from using the
Internet. They still have to spend money on marketing to get people to visit their Web site and
still have the cost of a local branch system.
For the Internet to have a significant impact on the business, I think companies will have to
develop a strategy for operating without a branch network, while maintaining a high enough
closing ratio to make the business work. Consumers will continue to demand a trade-off for the
lack of high service provided by a local presence which must come in the form of lower rates to
the consumer. Of course, if their costs to originate a loan are significantly lower than those
companies operating the traditional branch structure, they will be able to offer the lower rates and
still have a profitable business, while capturing market share from other more traditional lenders.
The true answer as to which strategy is better is probably somewhere in the middle. Both
strategies will work. Consumers who demand the "high touch" service that a local branch can
offer will choose that route. Those consumers who are comfortable with the "high tech" channel
of doing everything over the Internet will choose that route. And the company that can take
advantage of the cost savings of the "high tech" operation and still provide the "high touch"
service will be the eventual winner.
W. Lance Anderson is president and co-founder of NovaStar Financial Inc. He may be reached at
(913) 514-3522.

Originations