Technology in the nonconforming marketW. Lance Andersontechnology, non-conforming, Internet
In 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 nonconforming 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
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 tradeoff 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 can be reached at (913) 514-3522.