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Cognizant Research Center | October 2011

U.S. Lending Industry MeetsMortgage Process as a Service

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Why the U.S. Lending Industry is ripe for MPaaS(Mortgage Process as a Service)

Economic and industry indicators are pointing to a slow revival ofthe U.S. Mortgage industry.

Plan to wind down government-sponsored enterprises (GSEs) is abig positive factor for revival of private investments.

Improved risk management will be the key to win the trust ofresidential mortgage backed securities (RMBS) investors andmitigate the repurchase risk.

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The U.S. Mortgage Industry remained dormant sincethe meltdown

Post financial meltdown home sales declined significantly and with itthe volume of originations. RMBS issuance bore most of the brunt.

Home sales have remained flat and areforecasted to increase marginally in 2012

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The U.S. Mortgage Industry remained dormant sincethe meltdown

Steady decline in mortgage originations from 2003. Forecasted to touch $1 trillion in 2011

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The U.S. Mortgage Industry remained dormant sincethe meltdown

RMBS issuance reduced drastically from $700+ billion in 2005-2006 to $39 million in 2010

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Economic indicators point to a gradual recovery

Corporate profits, a key determinant of employment are rising.

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Economic Indicators point to a gradual recovery

Household formations, which declined to578,000 in 2008, rose to 950,000 in2010. And this figure is expected to risegradually, aiding recovery of housingdemand.

- The Wall Street Journal

Research by Federal Reserve Bankof St. Louis points to lower long-term unemployment rate.

Household formations, a traditionallead indicator of demand forhousing is also on the rise.

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Industry indicators too, point to a gradual recovery

Improvement in credit conditions, declining foreclosures, improvedaffordability and rising rentals, point to gradual recovery.

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Industry indicators too, point to a gradual recovery

Delinquencies on adeclining path

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Industry indicators too, point to a gradual recovery

Loan-to-value (LTV)ratios are rapidlyrising since 2007

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Industry indicators too, point to a gradual recovery

Consumers have became moreaverse to debt and begun savingmore

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Industry indicators too, point to a gradual recovery

The price-to-incomeratio (an indicator ofaffordability) is atthe lowest levelsseen 90s

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Industry indicators too, point to a gradual recovery

The oversupply ofhomes and rising rentalincomes should increasethe attractiveness ofbuying property

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But the Banking Industry is challenged to gear up.

Compliance which is a key to survival is pushing banks to significantlyimprove/alter their business models, processes and systems.

Compliance costs are expected to rise and so are the costs of originationwhile the banking spreads are on the decline.

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But the Banking Industry is challenged to gear up.

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But the Banking Industry is challenged to gear up.

Going forward, cost oforiginating a loan is likely toincrease significantly

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Gearing up for a New Mortgage Industry

After the Dodd-Frank Act, banks need to enhance their businessprocesses and IT systems.

Many banks need to address the challenge of IT system silos.

To gear up for the revived mortgage business, banks need to embark

on a deep, end-to-end technology and process evaluation.

Crucial to the revival is improving credit quality and assuring theconcerns of RMBS investors through improved lending practices andprocesses.

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Enter Mortgage Process as a Service (MPaaS)

The emerging suite of services mortgage process as a service (MPaaS)provides lenders access with access to people, processes and technology,while transferring the burden and risks of their ownership to the providerthrough offering pay-per-use models.

Enables to switch from Cap-Ex to Op-Ex embracing pay-per-use model.

Unlike the traditional mortgage BPO provider that is measured on howwell it executes a lenders process, MPaaS also addresses more strategicaspects, such as repurchase risk and compliance.

Banks can seek improved risk management enabled by enhanced dataquality and by requiring the MPaaS provider to play the role of an

independent infomediary.

Coupled with a lenders ability to manage business processes via MPaaS,banks have a significant opportunity to manage challenges in the newlandscape more effectively.

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Risk Management Imperative for Revival of theMortgage Market

The Uniform Mortgage Data Program (UMDP) establishes for lendersuniform requirements and file formats for appraisal and loan deliverydata.

Ensuring data quality during the loan application and creditunderwriting process will remove some of the risk associated withpurchasing mortgages.

MPaaS solutions provide loan transparency to enhance the quality ofloan originations and reduce repurchase risk.

This will result in increased mortgage performance, and will gradually

produce a stronger mortgage market and increase borrower andinvestor confidence in the housing finance market.

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What to Look for in Your MPaaS Partner

Can offer services in a utility-like model, providing variabilization offixed costs.

Strong domain expertise and consulting services

Best-of-breed workflows, data products, analytics and process controls

that are aligned to the needs of a changing mortgage business.

Delivers a solution that can process mortgage applicationdocumentation and critical underwriting data that empowers theoriginator and loan purchaser to make better investment decisions.

A partner with the resources and capacity to assist in navigatingregulatory hurdles can make perceived barriers to market re-entry lesschallenging.

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Thank You

Authors

Rajeshwer Chigullapalli, Head, Thought Leadership Practice, Cognizant Research Center

Aala Santhosh Reddy, Senior Research Analyst, Cognizant Research Center

Nathan Longfellow, Director, Cognizant Banking and Financial Services Consulting Practice

John Geertsema, Manager, Cognizant Banking and Financial Services Consulting Practice Research

AnalystSvetlana Malu, Senior Research Analyst, Cognizant Research Center

For more information / downloading the report, read the white paper

U.S. Lending Industry Meets Mortgage Process as a Service (PDF)http://bit.ly/MPaaS

http://j.mp/MPaaShttp://j.mp/MPaaShttp://j.mp/MPaaShttp://j.mp/MPaaS