With the certainty of sunrise, mortgage automation is on its way, a common system of electrons and software that -- says the industry -- will speed the application process and save lenders money. Savings, one can hope, that will then be passed along to consumers.
A "time and motion" study just completed for MISMO -- the Mortgage Industry Standards Maintenance Organization -- says that automation can slash loan costs by nearly $700 per application.
Costs can be reduced directly for credit reports ($4.82), appraisal expenses ($42.07), title searches ($16.73) and flood certificates ($7.75) -- a total of $71.36 per transaction for expenses often paid by borrowers. Additionally, lenders can save $16.15 on closing costs and $161.88 on the mortgage application process -- a total of $178.04. Combine $71.36 and $178.04 and direct savings amount to $249.40.
In addition, the report says that "execution costs can be improved by as much as 15.38 basis points, a 25-50 percent pickup in retail lending margins or $450 for the average loan." (A "basis point" is equal to 1/100th of a percent. With a $200,000 loan, a basis point would be $20.)
Combine $450 with $249.40 and you get transaction savings of $699.40.
Is automation a good idea? In principle, sure. Competition will mean that lower application and processing costs can be passed through to borrowers in the form of cheaper closings and reduced interest rates.
The savings envisioned by the MISMO study require more than word processors and software. There must also be a common set of standards so that data can easily flow from applicants to lenders, closing agents, title companies and the secondary market. And there must also be something else: data security.
The Federal Trade Commission reports that identity theft is a new and growing problem. According to one FTC study, "nearly 10 million people -- or 4.6 percent of the adult population -- discovered that they were victims of some form of identity theft. These numbers translate to nearly $48 billion in losses to businesses, nearly $5 billion in losses to individual victims, and almost 300 million hours spent by victims trying to resolve their problems."
Given the magnitude of the identity theft problem, any plan to place massive amounts of financial information into a system with thousands of access points should be greeted with restrained enthusiasm.
Is it possible for confidential financial information to be stolen? You bet.
- November 2004 -- Four computers were reported stolen from a company that prints Wells Fargo loan statements. The Associated Press says that as a result "mortgage and student-loan customers may be at risk for identity theft." (See: Stolen Computers Have Wells Fargo Data, Forbes, November 2, 2004)
- November, 2003 -- Burglars steal computer records from a Wells Fargo consultant. Personal information for customers with credit lines is stolen, including Social Security and account numbers. (See: Wells Fargo Computer Records Stolen, The IowaChannel.com, November 19, 2003)
- July 2004 -- The Justice Department alleged that "illegal intrusions" were made into a "computer database owned and operated by Acxiom Corporation, one of the world's largest companies that manages personal, financial, and corporate data. Acxiom, which is headquartered in Little Rock and Conway, Arkansas, stores and processes large amounts of customer-provided data on behalf of its clients. The indictment charges 139 counts of illegal access, representing approximately 8.2 gigabytes of data which were downloaded from the Acxiom server from approximately April 2002 to August 2003."
- December 2002 -- "At least 27 New Yorkers had their identities stolen when a former manager of H&R Block's office in White Plains and three of her friends used the names of Block customers from the Bronx, Westchester, Rockland and Putnam counties, to obtain credit cards illegally and steal thousands of dollars in cash and merchandise," according to Senator Chuck Schumer (NY-D). "Between July 2001 and the spring of 2002, the former employee and three friends used the credit cards for shopping sprees and to obtain cash advances at ATMs. The Block employee got all of the information from tax returns the victims had sent in."
Any system which involves millions of credit reports, tax returns and other personal information must be secure. Given rampant ID theft, saving money will not be enough to "sell" automated mortgage processing. The lending community will have to demonstrate that automation is safe before it can gain widespread support from either the industry or the public. In practice this means rolling out automation in phases, perhaps starting in one state or metro area, so that both savings and security can be demonstrated.