A Creative Solution for Financial Services Industry Enterprises Facing a Changed Home Mortgage Market
A recent CEB Tower Group report on Enterprise Content Management (ECM) solutions noted 38% of financial services industry (FSI) companies plan to increase their spending in Enterprise Content Management (ECM) over the next two years, and another 38% are currently unsure (i.e. 76% potential for more spending).
In this blog, I’d like to propose a potential solution to help those companies struggling with how to approach ECM amidst significant change in the U.S. mortgage sector. I believe we can solve the changing demand for new home loans and actually create a better long term ECM infrastructure solution that meets the needs of the entire FSI.
I notice several distinct financial trends and regulatory changes leading to higher demand for new home loans on the U.S. consumer side:
First, according to an August 2013 New York Times article, the U.S. federal government guaranteed about 87% of new loans last year through Government Sponsored Enterprises (GSE’s), which represents almost 9 out of 10 home purchases or refinances. In his public comments, President Obama feels it’s time to “wind down” two GSEs: Fannie Mae and Freddie Mac. Thus a void will need to be filled by other organizations as these two players evolve to a smaller role.
Second, but closely related, is that Public Law (PL) 112.78 will diminish the role of GSEs by raising Guarantee Fees (g-fees). These have been used to protect against credit-related losses in the mortgage portfolio (think of it like Mortgage Backed Security ‘MBS’ insurance). PL 112.78 also eliminates volume discounts to lenders.
Consequently, as g-fees increase each year, this will open up the residential mortgage market to a new breed of Private Secondary Market Investors (PSMIs) that will now be able to effectively compete with the GSEs. This new community is comprised of life and property casualty insurers, mortgage REITs (Real Estate Investment Trusts), public and private pension funds, fixed income money managers and mutual funds. Aggregately, I would estimate this group represents in excess of $25 trillion of assets under management.
Liquidity doesn’t seem to be the issue for PSMIs – success is more about asset execution and delivery; i.e. how can content, process and collaboration be standardized and delivered according to the PSMIs’ policies and guidelines and, at the same time, proactively address compliance, loan purchase recourse and risk mitigation for the lenders?
I believe the creative use of ECM can have an impact.
Exceptional levels of innovation can be achieved by simply understanding the needs of the securitization investors and solving to these needs.
Loosely defined, any pooled group of financial assets can be combined and rated to create a new security, which is then marketed and sold to investors. The value and cash flows of the new security are based on the underlying value and cash flows of the assets used in the securitization process. Companies generally securitize and sell assets in order to increase their overall liquidity so they can create new FSI products.
Generally, an ECM can be used to optimize and automate ANY content and process-centric environment; e.g. insurance claims management, capital markets, residential mortgage, home equity loans, consumer loans and auto loans, to mention a few. Organizations albeit large or small, must be able to grow by adding new ECMs that work in conjunction with current internal systems of record, and that use automation driven by investor rules and process management.
In the residential mortgage area, using an ECM to link the PSMIs to the myriad loan originators and standardizing the creation of the loan asset will help fill the void created by PL 112.78 and the “winding down” of Fannie Mae and Freddie Mac.
If we can agree that regulatory volatility is the new norm, expense management is a key component of any operations model, and customer service is a priority, then business adaptability (empowered by a robust ECM solution) linked to the entire supply chain will be the driving force of success!
What do you think about this idea? What other changes or factors do you see impacting the competitiveness of the financial services sector?