SAP Fioneer: How Lenders Can Reimagine Mortgages Using ERPs (Sponsored Content)
by David Bomser, Head of U.S. Core Banking & Mortgage
In technology we often tend to focus on the next trend–AI, quantum computing, augmented reality. However, sometimes the best solutions reveal themselves when you’re reflecting on the classics – and we don’t mean Plato here.
More than fifty years ago, SAP pioneered the concept of Enterprise Resource Planning (ERP) for manufacturing. The concept was simple: a single platform with a single data model to support shared services (HR, Finance, Procurement) and core business functionality (Planning, Operations, Inventory, etc). The concept really took off in the late 90s as organizations looked to modernize their operations and mitigate against ‘the millennium bug’ – i.e. the fear that, come midnight on January 1st 2000, nearly all computers and enterprise software that used year-in-date formats represented in two digits such as 99, would reset to 00 (or 1900), causing system-wide chaos.
A new millennium for ERPs
As the world entered a new millennium, the feared bug never really materialised. Some companies had spent vast sums on rewriting programs, while many had opted to upgrade to a modern ERP system, the more practical choice. Those that opted for the latter were able to benefit from a more complete and consistent view of the organization along with actionable insights to make intelligent business decisions (i.e. “The Intelligent Enterprise”). It was no surprise that the model was adopted in manufacturing-centric sectors and then spread to other industries looking to benefit from frictionless processes and consistent, readily available management information.
With similarly complex business processes and strict time constraints, mortgage lending can also be well served by the same concepts and logics that ERPs provide industries like manufacturing, energy, resources, retail, hospitality, and more. All of which have understood that a common data model across the organization is beneficial. The same is true for mortgage lending. Leveraging one single platform for loan pre-qualification, originations, fulfillment, servicing and default management can break down the organizational silos that exist across most mortgage companies.
Mortgages fit for this millennium
Organizationally, many mortgage lenders – especially large commercial banks that both originate and service loans – run their operations as separate profit and loss centers, with distinct operational hierarchies. Technology decisions are made unilaterally for each business, in part because there is no marketplace software that serves both origination and servicing functions. The commercial terms for licensing software are also different for each segment. Origination software licenses range from 3 to 5-year terms, where servicing subscriptions can be 5 to 10-year commitments. There is considerable value in placing both discrete processes on a common platform to optimize value over the life of loans.
One of the anomalies in mortgage lending is that 78% of borrowers will refinance their primary residences with different lenders than the ones they used to get their initial mortgages. Most loan officers lack real-time consumable customer information to anticipate when their customers are likely to need new mortgages. The top complaint of originators is that they do not have access to borrower data. Many loan officers grow their businesses by acquiring or soliciting leads from external sources; this results in the cannibalization of other loan officers’ existing, profitable books. Lenders lose business every day because of an inability to accurately and efficiently use business insights and data to proactively market new origination products to existing customers.
This is where an ERP-based, common mortgage platform can be so transformative, creating a view into individual and portfolio loan attribute risk modeling. As market dynamics influence borrower incomes, cash flows, property values, insurance rates, taxes and more, the ability to use risk-based modeling to proactively evaluate loan level action (e.g. refinance, modification, program change, asset sale, retention strategies) is a mitigant to default and portfolio value erosion.
A sector ripe for disruption
One of the most beneficial aspects of a single ERP platform is the unification or “containerization” of business process micro-services onto a single UI and data layer. This reduces the scope of individual software solutions that must be deployed, integrated and maintained by trained professional system administrators which has a dramatic impact on total cost of ownership (e.g. licensing, testing, QA, maintenance, release management).
Mortgage companies should consider leveraging better manufacturing technology systems to originate and service mortgages. The benefits of modernizing decades-old, legacy technologies with next-generation manufacturing software are:
streamlining training and employee onboarding
simplifying access to customer and loan data
reducing costs per loan and enhancing customer profitability
improving borrower retention
reduced defects and better communication with investors
Having spent three decades in financial services working with legacy and emerging mortgage technologies on behalf of mortgage banks, servicers and government-sponsored enterprises, I’ve seen these challenges and perceived risks from several perspectives. The underlying platforms that currently support U.S. mortgages are ripe for disruption. With the current market headwinds of rising interest rates and reduced overall transaction volumes, margin compression is the single most critical top-of-mind concern for mortgage industry executives. This type of market stress makes it the right time to evaluate alternatives to aging systems.
(Sponsored content includes material submitted independently of the Mortgage Bankers Association and MBA NewsLink and does not connote an MBA endorsement of a specific company, product or service. For more information about sponsored content opportunities, contact Bill Farmakis at bill@jlfarmakis.com or 203/834-8832.)
