U.S. Lending Industry Meets Mortgage Process as a Service

7/31/2019 U.S. Lending Industry Meets Mortgage Process as a Service

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Cognizant Reports

cognizant reports | september 2011

U.S. Lending Industry Meets

Mortgage Process as a ServiceExecutive Summary

The U.S. subprime mortgage crisis ended a

prolonged period of growth and prosperity within

the housing industry. Rapidly increasing home

prices and residential mortgage backed securi-

ties (RMBS) increased home lending. The housing

bubble burst, and with it, many private investors

and originators exited the housing nance market.

Government-sponsored enterprises (GSEs), oper-

ating as government conservatorships, increased

their position within the housing nance market

in an effort to stabilize the housing industry.

The GSEs have become the dominant players

in the mortgage market in the absence of pri-

vate investment. Investors have been waiting for

direction from the U.S. Department of the Trea-

sury regarding the future of the GSEs. In Febru-

ary 2011, a report to Congress from the Treasury

Department was released, which discussed a plan

to responsibly reduce the role of the Federal

National Mortgage Association (Fannie Mae)

and the Federal Home Loan Mortgage Corpora-

tion (Freddie Mac) in the mortgage market and,

ultimately, wind down both institutions.1

Industry players speculate that the gradualand measured reduction of the GSEs mar-

ket dominance will provide opportunities for

private investors to re-enter the housing nance

market. Although the Treasurys plan lacks the

specic details that would draw a clear incen-

tive for private investors to re-enter the market

during ongoing challenging economic times, the

plan to wind down the GSEs and support the private

sectors efforts to become the dominant provider

of mortgage credit is a positive sign.

In addition to the governments proposed role,

it is clear that private investment will rely

heavily upon improved risk management and

clearer visibility and understanding of the risks

within an investment pool prior to ramping up

private investment efforts.

The shift to a primarily private investor-driven

market with clearer management and under-

standing of risk is one of three primary factors

affecting the revitalization of the housing nance

market. The role of government regulation in the

housing market is the second factor affecting the

revitalization of the housing nance market. The

February Treasury report provided insights into

the gradual change within the GSEs. Moreover,

The Dodd-Frank Wall Street Reform and Con-

sumer Protection Act has given broad directives

regarding what constitutes a qualied residential

mortgage, reasonable lending practices and risk

retention requirements for loan originators and

mortgage securitizers. A lenders and/or inves-

tors ability to effectively and efciently addressand manage regulatory change is a critical

component to successful growth within the new

RMBS space.

The stabilization of the housing market is the

nal factor. There are emerging signs that the

housing market is beginning to stabilize, including


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cognizant reports 2

a decline in foreclosures, increasing household

formations, increasing corporate prots, increas-

ing consumer condence and home affordability.

These factors point to a gradual positive turn in

the mortgage industry. Mortgage banks will need

to gear up proactively in order to capitalize on

market opportunities as they begin to emerge.

The emerging suite of services referred to as

mortgage process as a service (MPaaS) offers

several solutions to revitalize the housing nance

market. Ensuring loan quality and providing data

transparency will help reduce risk and increase

private investment. Loan origination data will be

collected, veried and presented in a standard-

ized manner, which will improve credit under-

writing decisions for the originator and deliver

improved due diligence services to private inves-

tors. Enhanced loan information quality will

result in fewer mortgage repurchases and poten-

tially reduce early loan default rates by provid-ing deeper, more accurate and more meaningful

information during the loan origination process.

By removing the cost of ownership of technol-

ogy infrastructure, applications, platforms and

people, as well as adopting a pay-per-use model,

MPaaS enables banks to save money. They can

then focus on increasing market share, while rely-

ing on their MPaaS partners to streamline pro-

cesses, manage and extend systems capabilities

and provide meaningful loan information to help

them make better business decisions that comply

with government regulations.

How We Got HereThere are many opinions as to whom and what is

responsible for the exit of private investors from

the secondary mortgage and housing nance

markets. Key contributors include the easing of

lending standards (such as Fair Isaac Corporation

(FICO) scores, loan-to-value (LTV) ratios, debt-to-

income (DTI) ratios, etc.); exotic mortgages (such

as adjustable rate mortgages, interest-only loans,

stated income loans, etc.); the governments

desire to increase home ownership; shareholderpressure on companies to stay competitive and

increase revenue; heightened speculation in the

housing market; appraisal fraud; broker fraud;

and borrower fraud.

As delinquencies spiked due to borrower defaults,

demands for mortgage repurchases from

investors (mortgage securitizers) to originators

increased. In most cases, subprime originators

provided a guarantee to investors (private-label

mortgage securitizers) to repurchase a loan if

it went into early default or if there was a mis-

representation in the terms of the loan when it

was purchased.

Subprime mortgage originators became insolventdue to improper forecasting of defaults and were

unable to repurchase their mortgage loans. Many

of the subprime lenders went bankrupt or closed

lending operations. Heavily leveraged private-

label mortgage securitizing companies suffered

large losses and exited the secondary mortgage

market, defaulted on RMBS payments to their

investors or led for bankruptcy. This led to a dra-

matic decline of private investment in the housing

nance market.

The decline of the housing nance market caused

many to question existing regulatory oversight.Banking regulators reassessed the secondary

mortgage market and housing nance to deter-

mine what oversight and rules could be imple-

mented to avoid the mistakes of the past. Con-

gress and other regulators (Federal Housing

Finance Agency, Ofce of the Comptroller of the

Currency, etc.) have provided guidance and regula-

tory requirements to banks and private investors.

A major directive came from the Dodd-Frank Act,

whose extensive consumer banking provisions

added stringency to existing lending requirements

(e.g., dening a qualied residential mortgage),

detailed acceptable lending practices and man-

dated 5% credit risk retention requirements for

originators and mortgage securitizers. The intent

of the legislation is to promote a safer housing

nance market by spreading the share of risk in

securities for originators and mortgage securitiz-

ers and improving lending standards and practices.

As banks and private investors work to implement

and comply with these new regulations, change is

occurring within another department of the U.S.

government. The exit of many private investors inthe RMBS issuance business resulted in the GSEs

emerging as dominant players in the secondary

mortgage market. The U.S. Treasury directed the

GSEs to stabilize the housing market by provid-

ing liquidity. Private investment has remained

on the sidelines, waiting for business conditions

to improve.


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cognizant reports 3

The February Treasury report to Congress pro-

vides the Treasurys plans to signicantly reduce

the GSEs presence in the mortgage market. It is

evident that the reduction in the GSEs market

share will be gradual and measured. The report

states, Our plan presents several proposals for

structuring the governments long-term role in a

housing nance system in which the private sec-tor is the dominant provider of mortgage credit.

Private investors anticipating a return to the sec-

ondary mortgage market are interpreting this

release as a positive signal for developing plans

to re-enter the market. As the conditions of the

housing market begin to improve, private invest-

ment will increase (see Figure 1).

Area Drivers Impact Implication

EconomicEnvironment

Unemployment rate estimatedto stabilize at 5% after 2013

Increased demand for housing

Early signs ofgradual revival

for housingand mortgage

borrowing

Household formation toaverage 1.2 million/year overthe next decade

Increased demand for housing

Improving credit scores, deleveraging,

declining delinquencies

Improving credit quality of

borrowers

Declining price-to-income ratio Increased affordability

Low mortgage interest rate scenario Increased affordability

Rising rental incomes Improved attactiveness ofownership

Slow rise in consumer condence Improved willingness to borrow

Industry

Drivers

Lower net interest marginsscenario

Lower protability levels

Revival oflending and

RMBS

business

Declining foreclosure lings Demand and prices for homeswill stabilize

Increase in all-cash deals Traction in housing market

Jumbo deals activity inRMBS market

Revival of investor risk appetite

Uptick in ABX index Improving prospects of secondaryRMBS market

Regulations Prospect of signicant reduction ofthe role of GSEs

Revival of private players' interest

Increase in costof compliance

Heightened regulatory oversight Increased compliance andreporting

Risk retention norm Capital adequacy implications andenhanced safety for RMBS investors

Enhanced consumer protectionmeasures

Creation of a safer market

Technology Siloed structure of banking

IT systemsChallenges on the compliance front

IT challenges andopportunities

Regulation-induced need to reinventIT systems and processes

Increase in IT spending

Competition-induced need to buildnew competencies

Opportunity to marry competitive-ness goals with compliance-driveninvestments into systems

Source: Cognizant Research Center

Figure 1

Forces Driving the U.S. Mortgage Industry


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cognizant reports 4

Market ConditionsThe U.S. mortgage market is navigating its way

out of the subprime crisis. Home sales fell from

7.53 million units in 2006 to 5.23 million units

in 2010 (see Figure 2). Loan originations peaked at

$3.8 trillion in originations in 2003. This year, the

U.S. mortgage industry forecasts approximately

$1 trillion in originations (see Figure 3).

Home Sales in Units

Figure 2

* Forecasts for 2011 and 2012 are from National Association of Realtors, July 2011

7.26

7.98

8.36

7.53

6.43

5.40 5.33 5.23 5.105.36

3

4

5

6

7

8

9

2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012*

Sources: Fannie Mae Annual Reports, Federal Reserve Board, Bureau of Census, HUD, National Association of Realtors,Mortgage Bankers Association and FHFA

Millions

Mortgage Origination EstimatesOne- to four-family homes

Figure 3

* Estimates

Source: Mortgage Bankers Association

905 9601,097

1,280 1,3091,512 1,399

1,140

731 664473 531

234

1,283

1,757

2,532

1,463

1,514

1,326

1,166

777

1,331

1,099

400

412

697

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012*

$B

illions

Purchase Refinance

RMBS issuance, which rose to around $724 billion

in 20052006, has dropped to $39 million in 2010

(see Figure 4, next page). The steep fall in home

prices and rising job losses pushed foreclosures

higher. Foreclosures went from less than 1 million in

2005, to their peak in 2010 of over 3.82 million (see

Figure 5, next page). As a result of the downturn

in the economy, studies indicate that consumers

became more averse to debt and began saving

more (see Figure 6, next page).


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cognizant reports 5

RMBS Issuance

Source: Federal Reserve

$B

illions

0

100

200

300

400

500

600

700

800

2002 2003 2004 2005 2006 2007 2008 2009 2010

Figure 4

Foreclosure Trends

Source: Realty Trac

Millions

* Foreclosure filings for 2011 are for the first six months only.

0.89

1.26

2.20

3.16

3.75 3.83

1.17

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2005 2006 2007 2008 2009 2010 2011*

Figure 5

Post Crisis: Higher Savings, Lower Debt

Source: Federal Reserve Bank of San Francisco

Figure 6

0%

2%

4%

6%

8%

10%

12%

14%

50%

60%

70%

80%90%

100%

110%

120%

130%

140%

60 65 70 75 80 85 90 95 00 05 10

Personal saving rate (left scale) Household debt/disposable income (right scale)


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cognizant reports 6

There are emerging signs of a market revival.

Mortgage servicers are working through their

defaulting loan portfolios, and housing prices are

nearing a bottom. Low interest rates, reduced

home prices, increasing credit availability, improv-

ing job prospects, rising consumer condence and

the opportunity for buyers to rent out properties

at protable rates are among the key factors thatcould stimulate the demand for mortgage loans

and, in turn, increase the supply of loans to RMBS

investors. The historical data representing these

factors and their estimated trends point to a slow

and steady revival.

Corporate prots, a key determinant of business

growth prospects, point to the likelihood of job

creation. The St. Louis Federal Reserves research

indicates that corporate prots as a percentage

of GDP hit a low of 5% in 2008 and rose to 8%

in 2010 (see Figure 7). The industry considers this

favorable employment scenario as a strong inu-

encer that increases borrower condence in buy-ing homes. The Wall Street Journal reports that

household formations, which declined to 578,000

in 2008, rose to 950,000 in 2010.2 This gure is

expected to rise gradually, which is expected to

increase housing demand.

The unemployment rate, presently around

9%, is expected to gradually decline and

settle at around 5% after 2013 (see Figure 8).

A slow but steady drop in the unemployment

rate should improve upon already increasing

consumer condence numbers. Additionally,

Corporate Profits

Source:Federal Reserve Bank of St. Louis

Figure 7

Percent of GDP

0

2

4

6

8

10

12

14

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Profits (before tax) Profits (after tax) U.S. recessions

Unemployment Rate (Q4)

Source: Federal Reserve Bank of St. Loius

* Projections

Figure 8

Percent

3

5

7

9

11

2005 2006 2007 2008 2009 2010 2011* 2012* 2013* Long Run*


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cognizant reports 7

Delinquencies and foreclosures that surged in

the aftermath of the subprime crisis peaked in

Q2 2010 at 11.59% and are now on a declining

path (see Figure 10). Estimates of foreclosure

lings for 2011 are one-fourth of the lings of

2010. All these factors signal a positive turn for

the mortgage industry. The Wall Street Journal

article provides some insight into what the next

ve years might look like: Once the foreclosure

mess begins to clear up, say housing economists,

the traditional drivers of the housing market

demographics, affordability, loan availability,

employment and psychology should take over.

The Economistconcurs that the best news of all

may be the ongoing improvement in credit con-

ditions. Delinquencies have trended downward

since late 2009. Consumer-debt payments rela-

tive to incomes are at a 17-year low, and house-

hold credit scores are rising. Banks are still being

stingy with credit, but households are better

positioned than they were to take advantage of

cheaper homes.3 There has also been a marked

shift in originations, from a low LTV scenario,

to rapidly rising LTV since 2007 (see Figure 11,

next page).

the Conference Board notes that the Con-

sumer Condence Index has risen from 25 in

February 2009, the lowest since its inception

in 1967, to 45.4 in September 2011 (see Figure 9).

Source: Conference Board

Fi ure 9

Consumer Confidence Index

20

25

30

35

40

45

50

55

60

65

70

75

Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11

Delinquency Rate On Loans Secured By Real EstateTop 100 Banks Ranked By Assets

Source: Federal Reserve Bank of St. Louis

Figure 10

Percent

0

1

2

3

4

5

6

7

8

9

10

11

12

March '05 March '06 March '07 March '08 March '09 March '10 March '11


8/17

cognizant reports 8

The present conditions in the U.S. housing market

have signicantly improved home affordability.

The price-to-income ratio (an indicator of afford-

ability) fell from 2.7 in 2007 to 1.8 in 2010 (see

Figure 12). The Freddie Mac 30-year xed-rate

mortgage at 4.27% in August 2011 is the lowest

in the last 50 years. Additionally, the oversupply

of homes and rising rental incomes (see Figure 13,

next page) should increase the attractiveness of

buying property. The scenario has already led

to considerable growth in all-cash deals, with

bargain-seeking investors attempting to cash

in on low property values. The Mortgage Bank-

ers Association (MBA) estimates that purchase

originations for one- to four-family homes may

decrease by 12.71% in 2011, to $412 billion, and rise

by 29% in 2012, to $531 billion.

Shift in Originations From Low LTV to High LTV

Source: CoreLogic

Figure 11

PercentageofTotalOwne

rOccupiedOriginations

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

75% to 80% Originations 95% to 100% LTV Originations

Homes are More Affordable NowPrice-to-income ratio, national average

Source: Fiserve Inc.; Federal Housing Finance Agency; Moody's Analytics

Figure 12

15-year average

4Q 1995 4Q 2010

1.0

1.5

2.0

2.5

3.0

'90 '95 '00 '10'05

15-year average

1Q 1989 4Q 2003


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cognizant reports 9

The market for RMBS, which nearly evaporated, is

beginning to show signs of a likely revival. There

have been two private-label RMBSs offered in

the last two years: Redwood Trust 2010 and Red-

wood Trust 2011 ($290 million issue). The securi-

ties comprise loans with high unpaid principal

balances (average under $1 million), high credit

scores (average 775) and low LTVs (average 63%).

Private market players are taking proactive steps

to set up conduits in anticipation of the reduction

in GSE loan-buying limits in October 2011.

The Wall Street Journal reports that subprime

and other residential mortgage bonds are back

in vogue with long-term investors, in the latest

sign that American credit markets are healing

after the worst downturn in a generation.4 This

is reected in the substantial improvement in the

ABX index from 30 in 2009, to around 60 in 2011

(see Figure 14).

Rent Changes in Realtors' Local Area, Year-Over-Year

Source: National Association of Realtors

Figure 13

39%

42%44%

46%48%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Dec 2010 Jan 2011 Feb 2011 March 2011 April 2011

Increase Constant Decrease

Growing AttractionThe ABX index, which tracks prices of subprime mortgage bonds,

has recovered since the crisis.

Source: The Wall Street Journal

Note: ABX.HE.AAA.06-2 sub-index

Figure 14

Price

0

20

40

60

80

100

2008 2009 2010 2011


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cognizant reports 10

Gearing up for a New Mortgage IndustryThe prospect of increasing regulatory oversight

makes compliance key to the survival of mort-

gage banks and securitizers. There are many

signs pointing to the emergence of a different

mortgage industry, including the increased focus

on customer protection, the creation of credit

risk retention requirements for mortgage origi-nators and securitizers, the curbing of predatory

lending practices, the rise of the spend-thrift and

debt-averse customer, and the increased capital

adequacy demands.

Given the present state of the banking landscape

and the prospect of a gradual recovery for the

mortgage banking industry, originators would be

wise to take proactive steps to position their busi-

nesses for success in the new mortgage industry.

The banking industrys business processes and IT

systems need to undergo considerable change inorder to meet the unfolding regulatory require-

ments, as well as build new competencies to be

successful. These investment decisions pose sig-

nicant challenges to banks that are presently

operating in a business environment of weaken-

ing demand, declining spreads (see Figure 15) and

intensifying competition.

Increasing regulatory focus on banking is driving

up the cost of compliance (see Figure 16), while

spreads are falling. The net interest margin of

U.S. banks began falling at the end of the rst

quarter of 2010. MBA research indicates the cost

of originating a loan rose approximately 375%

in 2011 from 2003, 53% in 2011 from 2008, and

going forward it is likely to increase signicantly

(see Figure 17, next page).

U.S. Banks: Falling Net Interest Margins

Source: Federal Reserve Bank of St. Louis

Figure 15

Ratio

4.08

3.77

3.69

3.54

3.46

3.343.31

3.25

3.84

3.57

3.77

3.10

3.20

3.30

3.40

3.50

3.60

3.70

3.80

3.90

4.00

4.10

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Rising Cost of ComplianceIT spending by financial services firms on governance, operational risk and compliance

Source: Celent

* Estimate

Figure 16

$B

illion

s

1.351.41 1.40

1.60

1.681.72

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

2006 2007 2008 2009 2010 2011*


11/17


The protability of the industry is driven by vol-

umes, spread and efciency of operations. Indus-

try origination volumes and interest margins are

generally driven by the market. Mortgage banks

will need to leverage their operational efciencies

to increase prots and differentiate themselves

from the competition.

Many banks are challenged by the existence of

silos within their organizational structure. Tra-

ditionally, compliance and business needs are

separately addressed, a gulf that has widened

over time as systems have evolved. Legacy sys-

tems are traditionally inexible and incapable of

adjusting to rapid changes within the banking

industry. These older, hard-coded systems rely on

manual intervention to provide workarounds and

overcome process limitations.

Enter Mortgage Process as a ServiceThe emerging business processes as a service

(BPaaS) delivery model offers a viable option to

mortgage banks in need of a technology refresh

and process makeover. This approach enables

banks to rely on service providers with expertise inmortgage processing services to shoulder the cost

of ownership of technologies, infrastructure and

people. One avor of BPaaS mortgage process

as a service (MPaaS) provides banks with the

talent and systems wherewithal to handle essen-

tial lending services, enabling them to solely focus

on rebuilding their businesses to the needs of the

changing industry and capture market share.

The conditions and challenges that lenders face

require a signicant end-to-end process overhaul.

With unfolding regulatory changes, investor scru-

tiny and a heightened focus on loan quality, lend-

ers will be required to move quickly and deploy

more exible business and technology solutions.

MPaaS providers can be a critical ally during sig-

nicant times of change. Their pointed emphasis

on mortgage services and ability to readily adapt

to changing business needs can help banks get

more bang from limited IT budgets by shift-

ing Cap-Ex to Op-Ex, through pay-per-use or

outcomes-based models while accessing new

and more automated service capabilities. Cou-

pled with a lenders ability to manage business

processes via MPaaS, banks have a tremendous

opportunity to manage the challenges in the new

landscape more effectively.

Traditional mortgage business process outsourc-

ing (BPO) services providers already provide skilled

domain resources and a scalable organization

with appropriate infrastructure to manage criti-

cal mortgage functions, such as loan processing.

In this existing model, lenders essentially leveragea service providers resources and infrastructure

capabilities, while retaining their own technology

and dened processes. The perceived value of this

arrangement is cost, timeliness and quality.

Todays mortgage market requires signicant

change in this value proposition. As such, BPO

services companies must transform into MPaaS

providers. Beyond cost, timeliness and quality,

Increasing Net Cost to Originate

Source: Mortgage Bankers Association

Figure 17

Note: The "net cost to originate" includes all production operating expenses and commissions, minus all fee income,but excludes secondary marketing gains, capitalized servicing, servicing released premiums and warehouse interest spread.

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

2003 2004 2005 2006 2007 2008 2009 4Q 2010 2Q 2011


12/17


the MPaaS provider will need to offer pointed solu-

tions to the lenders and investors business objec-

tives, risks and processes. The expectation can no

longer be focused on executing a lenders inter-

nal process while leveraging the lenders tools.

The value proposition and expectations need to

be extended to align the service output with the

goals and objectives of the lender and investor.

Consider loan processing, for example. The admin-

istrative aspects of loan processing have been

outsourced to third-party specialists for many

years. In many cases, the BPO process is a reec-

tion of the process requirements of the lender

rather than the business and risk objectives of the

lender and investor. While some may contend that

there should be no difference between the two

(lender processes should address business and

risk objectives), the ood of repurchase requests

should point to the likelihood that a majority of

loan origination processes do not provide theprocess output that meets or exceeds the risks or

objectives of the business.

In short, many lenders processes lack the needed

depth of analysis, trust, accuracy and credibility

with respect to investor requirements. Thus, the

traditional mortgage BPO provider is measured

on how well it executes a lenders process rather

than more strategic aspects, such as accuracy,

loss severity, repurchase risk, compliance, down-

stream efciencies and customer experience, to

name a few.

To evolve, the mortgage BPO provider must offer

solutions rather than capable bodies. The solutions

must address the critical aspects of the business.Loan processing solutions, for instance, need to

provide outputs that provide clear visibility into

loan data at a document and eld level, in addition

to deeper analysis that will enable effective and

compliant decisions. Critical loan origination values

such as Total Monthly Income need to be encap-

sulated with the specic documents, document

areas, document meta data (values extracted from

the document) and calculations utilized to arrive at

the critical value. The information collected should

be compared with other available information and

analytics to provide a more trusted understanding

of the accuracy of the information.

In the loan processing example, the provider must

move beyond the checklist-prepared le to the

risk-and-objective-prepared le that clearly and

methodically provides trust and transparency,

in addition to analysis that allows downstream

consumers of the service to extract more value

(see Figure 18).

Rising origination costs

Increased regulatory and

investor requirements

Significant repurchase risk

Significant default risk

Labor Cost

Capacity/Timeliness

Domain

Quality

Future Dimensions of Mortgage BPO: Driving The Solution Needs

Source: Cognizant

Figure 18

Future Dimensions of Mortgage BPO

Traditional Dimensions of Mortgage BPO Focused on labor cost savings and staff

augmentation for scale and capacity.

Market Drivers

Increased focus on portfolio and repurchase risk.

Need for greater process transparency, improved

data integrity and increased loan due diligence.

Mortgage Market Needs Need for great scrutiny and due diligence during

loan origination.

Provide increased visibility into potential loan risk.

Reduce overall origination, processing and servicing

costs while increasing process quality.

Increased process control and consistency to increase

loan quality and reduce repurchase risk.

Traditional Dimensions of Mortgage BPO Market Drivers

Mortgage Process

as a Service

(Sourced as

utilities on

pay-per-use basis)

Process

Consistency

and Control

(Process accuracy

& intelligence)

Process/Solution

Benefit

(Cost benefit of

solution vs.

pure labor cost)

Traditional

Dimensions

(Capacity, domain

and quality)

Risk Mitigation

(Data accuracy

& intelligence)


13/17


A New Strategic Services EraThe time for more strategic services has arrived.

Mortgage processes need to be retooled to

address the need for enhanced regulatory scru-

tiny, process transparency and risk mitigation.

The absence of transparency and data integrity

was one of several root causes of the industrys

problems that led to increases in repurchase

claims (see Figure 19).

Several factors undermined the quality of mort-

gage loans, including the origination of exotic

mortgage types, predatory lending practices, eas-

ing of underwriting guidelines, increasing prop-

erty prices and the ability of nancial interme-

diaries to leverage their relationships to bypass

underwriting guidelines. Ensuring data quality

during the loan application and credit underwrit-

ing process would have removed some of the risk

associated with purchasing mortgages.

The importance of data quality is also evident

in Fannie Mae and Freddie Macs joint effort in

the Uniform Mortgage Data Program (UMDP)

as part of their Loan Quality Initiative (LQI).

The UMDP establishes uniform requirements

and le formats for appraisal and loan delivery

data. Improved data quality throughout the loan

application and underwriting process will help

revive the housing nance market. Increased

loan transparency provided by MPaaS solutions

will enhance the quality of loan originations and

reduce repurchase risk. Higher quality loan infor-mation and originations will result in increased

mortgage performance. This will gradually

produce a stronger mortgage market and increase

borrower and investor condence in the housing

nance market.

The rise of software as a service (SaaS), platform

as a service (PaaS), virtualization and cloud-

based sourcing of servers, storage, desktops and

data centers have created an environment that

is conducive for innovations such as MPaaS that

optimize efciencies by reorganizing the industry

services chain. Under MPaaS, vendors provide all

four key elements: people (BPO/KPO), applica-

tions, platforms and cloud-sourced infrastructure,

which can be used like utilities on a pay-per-use

basis, obviating the need for banks to lock in their

capital in these four areas.

By variabilizing xed costs, MPaaS offers a com-

pelling case for signicantly enhancing capabili-

ties at a time when banks are facing signicant

transformational challenges. Banks and nancial

services industry players are already ahead of

other industries in embracing cloud computing(see Figure 20, next page). This places them in an

advantageous position to embrace MPaaS.

Reserves for Repurchase Claims (in millions)

Year BoA JP Morgan Chase Wells Fargo Citigroup Total

2008 2,271 1,093 620 75 4,059

2009 3,507 1,705 1,033 482 6,727

2010 5,438 3,285 1,289 969 10,981

2011 Q1 6,220 3,474 1,207 944 11,845

2011 Q2 17,780 3,631 1,188 1,001 23,600

Total 35,216 13,188 5,337 3,471 57,212

Source: Company Annual Reports and Natoma Partners

Figure 19

Residential Mortgage Loans


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Originators systems need to handle high volumesof originations and defaults. Even during the pro-

longed period of prosperity that preceded the

U.S. nancial downturn, banks did not prioritize

the need to invest in rebuilding their systems and

processes to reap sustainable efciencies.

The case for sustainable efciencies is now stron-

ger, coupled with the need to invest in systems to

gear banks for greater levels of regulatory scru-

tiny. An MPaaS partner can lend consulting ser-

vices that will provide guidance and solutions to

regulatory challenges and opportunities. A part-

ner with the resources and capacity to assist in

navigating regulatory hurdles can make perceived

barriers to market re-entry less challenging.

Moving ForwardThe mortgage BPO industry, which is projected

to reach $3.56 billion in 2013, is embracing

MPaaS because it enables mortgage bankers to

access applications and processes built to serve

the demands of the emerging industry order. By

leveraging an MPaaS partner, mortgage banks

will be better positioned with critical informationto make better loan decisions.

MPaaS providers can act as infomediaries to pro-

vide independent and unbiased information about

the mortgage transaction to enable originators

to make sound lending decisions and underwrite

quality loans. In addition, such information will

also help originators present quality informationabout their loans to mortgage purchasers.

The MPaaS partner will be able to offer and pack-

age information that is specic to the vintage of

the loans, the demographics, the overall credit

quality, etc. The infomediaries will ensure trans-

parency in loan sales by offering exible platforms

that will maintain compliance with underwriting

criteria, as requested by the user. The information

available to the user will foster trust and build

sustainable business foundations. The mortgage

purchasers will have greater knowledge regard-

ing the pools of loans that they are buying, which

will remove the mortgage purchase risk that was

prevalent in the past. Better loan information will

lead to better loan originations, informed loan

purchases, increased loan performance, reduced

risk, reduced repurchases and a stronger housing

nance market.

The reformed mortgage market places huge

demands on employee and IT resources that

are tied up in attempting to comply with current

rules and regulations. Lenders are hard-pressed

to focus on product innovation and future busi-ness planning. The MPaaS partner can help

banks be more exible and respond to regulatory

change. Banks and other lenders can leverage the

strength of partnerships with MPaaS providers

that double as infomediaries. In addition, working

with MPaaS solutions providers (see sidebar) can

help them gain market share and reduce risk in

origination and purchase decisions.

Financial Services a Leader in Cloud Adoption

Source: Mimecast

Base: 565 respondents

Figure 20

Percent

53%

41%

37%35%

32% 32%

29%24%

19%

0

10

20

30

40

50

60

Technology FinancialServices

Legal/Professional

Services

Retail Healthcare Manufac-turing

Education Energy Government


15/17


What to Look for in Your MPaaS Partner

The emergence of MPaaS is accompanied by the rise of potential partners that can enable loan origina-

tors of all types to better navigate the unfolding industry transformation. We believe they should seek

the following in a partner to ensure they are on the right course:

Capable of rolling out utilities in the MPaaS model, providing variabilization of xed costs.

Offers consulting services and possesses strong domain expertise rather than acting as a pure-

play provider that lacks the ability to offer business advice or consulting in the transition to globalsourcing.

Provides best-of-breed workows, data products, analytics and process controls that are aligned to

the needs of a changing mortgage business.

Delivers a solution that can process mortgage application documentation and critical underwriting

data that empowers the originator and loan purchaser to make better investment decisions.

Footnotes

1 Reforming Americas Housing Finance Market: A Report to Congress, The U.S. Department of the Treasury andU.S. Department of Housing and Urban Development, February 2011, http://portal.hud.gov/hudportal/documents/huddoc?id=housingnmarketreform.pdf

2 Ruth Simon and Jessica Silver-Greenberg, Why It's Time To Buy, The Wall Street Journal, June 4, 2011,http://online.wsj.com/article/SB10001424052702304563104576361522020024248.html#printMode

3 Delinquency Rate On Loans Secured By Real Estate, Top 100 Banks Ranked By Assets, Federal Reserve Bank ofSt. Louis, 2011, http://research.stlouisfed.org/fred2/graph/?id=DRSRET100S

4 Matt Wirz and Serena Ng, Subprime Bonds Are Back, The Wall Street Journal, April 1, 2011, http://online.wsj.com/article/SB10001424052748704530204576235010413833114.html

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About Cognizant

Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-

sourcing services, dedicated to helping the worlds leading companies build stronger businesses. Headquartered

in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep

industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With

over 50 delivery centers worldwide and over 118,000 employees as of June 30, 2011, Cognizant is a member of the

NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top-performingand fastest growing companies in the world.

Visit us online at www.cognizant.com for more information.

World Headquarters

500 Frank W. Burr Blvd.Teaneck, NJ 07666 USAPhone: +1 201 801 0233Fax: +1 201 801 0243Toll Free: +1 888 937 3277Email: [email protected]

European Headquarters

Haymarket House28-29 HaymarketLondon SW1Y 4SP UKPhone: +44 (0) 20 7321 4888Fax: +44 (0) 20 7321 4890Email: [email protected]

India Operations Headquarters

#5/535, Old Mahabalipuram RoadOkkiyam Pettai, ThoraipakkamChennai, 600 096 IndiaPhone: +91 (0) 44 4209 6000Fax: +91 (0) 44 4209 6060Email: [email protected]

Copyright 2011, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any

AuthorsRajeshwer Chigullapalli

Cognizant Research Center

Aala Santhosh Reddy


Nathan Longfellow

Director, Cognizant Banking and

Financial Services Consulting Practice

John Geertsema

Manager, Cognizant Banking and

Financial Services Consulting Practice

AnalystSvetlana Malu


Documents

U.S. Lending Industry Meets Mortgage Process as a Service