Mortgage calculation

Lenders shopping for a new enterprise lending system that is capable of handling any type of mortgage loan – from the point of sale through to the secondary market – are torn between choosing a system based on new services-oriented architectures (SOA) that combines best-of-breed, third-party functionalities into a single platform and systems that come complete with a full suite of lending functionality already built in.

All-inclusive or best-of-breed, that’s the way the battle lines have been drawn when it comes to investing in new loan origination technology.

“This is an age-old argument we’ve been having in IT and mortgage banking for about the last 10 years,” says Dave Williamson, chief executive officer at Lending Logix, a mortgage technology consulting firm. “Many IT executives working for mortgage lenders will immediately jump to the issue of best-of-breed versus an all-encompassing platform. This should not be the primary focus.”

Williamson suggests that lenders must first consider their strategic objectives and what key problems they are hoping to solve. I agree; however, after lenders do so, they will still need to come around to a decision regarding what type of technology will best fill that void, and the above argument will resurface.

After some careful consideration, I’m not sure one is better than the other, at least not in today’s lending environment. In this article, I’ll examine each side of this argument in search of a conclusion that best fits the lender’s technological needs.

For much of the late 1990s, mortgage technologies raced to complete end-to-end systems that could handle every aspect of the mortgage transaction, from cradle to grave. It turned out to be an elusive goal. When a few companies finally announced that they had solutions that could take the lender from application to closing and beyond, there was no rush to invest in them.

The best of everything
While technology vendors were busy trying to be everything to every one, lenders were learning that no single vendor had all the right answers.

At the same time, certain third-party software providers had advanced impressive tools as point solutions for various processes.

Today, new systems built on SOAs are capable of reaching out to third-party developers for functionality, creating loosely coupled systems out of whatever tools the lender wants to use.

Craig Focardi has been working in the mortgage industry for 21 years, and for the last six years, he’s been a consumer lending analyst at TowerGroup. He says, “There are much better technology options available to lenders today that will make it easier for them to upgrade or replace their existing loan originating system (LOS) with an enterprise lending system and integrate the different components that they may need that are not already included.”

With SOA, lenders have access to the best software available, regardless of who produces it or where. This access has been defined by the industry at large as the best-of-breed solution.

It’s all in the box
But SOA isn’t some programming super glue that you can use to stick any applications together. It takes work and a certain amount of finesse.

In many cases, large budgets are required to take full advantage of the best-of-breed approach.

Some technology vendors argue that just because a third-party developer has developed some functionality doesn’t guarantee that it will work well with the lender’s core system or the other systems the lender relies on as point solutions. These vendors claim that while SOA makes it easier to combine disparate systems, lenders shouldn’t have to be combining systems from different vendors, especially if the core system developer has a good understanding of the mortgage lending business.

It takes effort to seek out, connect, test and ultimately change the software components that make up these loosely coupled systems. Most lenders need to get up to speed quickly. They want a system that comes preconfigured and ready to use. That means, these vendors claim, that lenders need to choose a vendor that can offer everything they need in one system.

The case for multiple vendors
Anyone who has ever played poker, or operated a mortgage company, knows that it’s good to hedge your bets. When it comes to mission-critical software, more experts providing options is better than fewer.

It’s almost impossible to find a vendor that is an expert at every aspect of the lending business, or any business, for that matter. Depending upon one company for all of your needs usually means that you’ll settle for some components that are not as good as a competing product.

The right core system can reach out to the very best software available, seamlessly integrating the functionality into the platform and then efficiently routing the data through the process and back into the database. In fact, having access to such a system can force a lender to think through its overall strategy.

“SOA helps lenders more easily define and implement an IT roadmap for replacing all or part of old systems. It reduces the risk of transforming an LOS,” says Focardi. “SOA, regardless of whether you replace or upgrade, makes it cheaper and easier to do, without having to do as much reintegration and reprogramming work.”

In addition, Williamson points out that SOAs can make it easier to handle complex outsourcing projects by treating offshore work as just another loosely coupled process. If you’ve spent any time playing with the new Google widgets, you’ve no doubt experienced the joy of comparing various content options, adding and deleting them from your customized Web page. If you’re not satisfied with the way one news source handles current events, click the little “x” to remove one news source and then the little “+” to add another.

Extending this concept to the mortgage business, how great would it be to simply click the mouse a few times and add another automated underwriting system or product and pricing engine? Adding a new product line? Find out who makes the best tool for sourcing those loans and add that to your system.

In practice, it’s nowhere near that easy to make changes to today’s systems, and that’s one of the drawbacks that opponents of the best-of-breed approach use to dismiss it. Integrations tend to be difficult, expensive and time-consuming, even with SOA.

But a more serious problem occurs when nearly all your lending functionality is provided by third-party Web services. When you make a change to one system, it can adversely affect many other loosely coupled systems, rendering your platform inefficient, or worse, unusable.

Finally, getting to the responsible party when something goes wrong becomes exponentially more difficult the more parties there are involved in the initial solution.

A complete solution
While the ability to combine technological systems through SOA is great for firms that have the wherewithal to create these loosely coupled systems, the majority of lenders don’t like to spend time building loan origination systems; they like to close loans. These lenders tend to prefer a solution that can be used for the purpose right out of the box.

However, given the nature of new software implementations in the mortgage business, few vendors are claiming that the all-inclusive nature of their software allows lenders to get into production faster. What they do claim is that it makes it easier to identify and deal with problems when they do arise.

Have one go-to source when there’s a problem, or the lender needs a change, is one of the strongest arguments in favor of the single-vendor approach. When there’s a problem, lenders want to know that one call solves it all.

While there have been a number of industry players that have been announcing they have an end-to-end solution for years, there actually are only a few companies that can offer it today. These firms have spent years creating their components and testing them, often a few at a time, with different lenders. There are now proven systems that can do it all right out of the box.

One of the advantages to investigating in such a solution is that you can get it into production quickly. This was the dream of lenders in the past, who often spent years getting a new lending platform in place, configured, integrated with legacy systems, tested and then into production.

In short, putting in new enterprise lending systems was a very painful process in the past. Experience has helped to reduce the pain somewhat, although many lenders are still dealing with it today.

Today, modern technology providers can get lenders up to speed in a few months, using preconfigured software guaranteed to meet the majority of their lending needs. While additional system tweaks could take many additional months, lenders can be profiting form their investment in short order.

The problem, of course, is that while “good enough” is great when you need to get out of the starting gate quickly, the glow fades when the lender begins to learn about additional products that might make the operation run more smoothly, but are not accessible.

Proponents of the best-of-breed approach have found it easy to target lenders who have begun to identify shortcomings in their new systems. Buyer’s remorse is a powerful emotion.

No one likes to be told that the expensive platform that they’ve just worked months to install doesn’t actually meet all of their needs. Even if the original vendor explains the difficulties involved in hitting such a moving target or promises that future releases will be driven by users to include required functionality, the lender is still likely to be left feeling shortchanged.

And the winner is…
Neither type of system…or both, depending on how you look at it. At the end of the day, lenders need to be able to take full advantage of the software architectures that allow them to reach out for whatever tool they want.

But they also need to have a company behind their core system that knows enough about their business and is dedicated enough to their industry to provide a fully functional, preconfigured application right out of the box.

Why should lenders have to choose between these two options? And yet, on a daily basis we see evidence that they debate is still raging over best-of-breed or all-in-one.

The technology exists today to give lenders a complete solution right out of the box that also uses SOA to connect to other best-of-breed functionality. Lenders know they need a fully-configured product in order to achieve a fast implementation. They also know they don’t ever want to limit their future options. So why would they ever settle for one or the other?

Perhaps it’s because very few vendors feel confident enough to sell a complete system and then open it up to allow other developers to share in the client business. What if this opens the door for a new relationship that eventually erodes the lender’s commitment to the core system? It could result in the loss of an important client.

Even so, it’s in lenders’ best interests to seek out vendors that are confident enough in their capabilities, their expert employees and the software they have developed to provide the best of both worlds.

By opting for a complete solution that is built on SOA, lenders can have a fully configured lending automation product that also has the ability to connect and adapt to other systems more easily as their needs change in the future.

Finding the perfect system
All right, so what would it take to create such a system? What should a lender be looking for? There are certain requirements that a core operating system must meet if the lender who uses it hopes to benefit from both best-of-breed third-party providers and a robustly configured system right out of the box.

Open Architecture. It’s the shift from hard-coded integrations to loosely coupled systems made possible by today’s new open architectures that created this debate in the first place. So, having a system based on services-oriented architecture is a basic requirement of a system that can provide both end-to-end functionality and access to best-of-breed components.

Data Access. Without a good way for the loosely coupled systems to access the central data depository, bottlenecks will result and the efficiency of the system will be compromised. In addition, the platform will not scale. An enterprise lending solution should be relied upon for a single data source throughout the loan process.

Customization Options. In the past, it has been difficult for a technology developer to develop a fully functional, pre-configured system that is also easily customizable. It’s more common today, which is good because without the ability to easily change the system, a lender will not be capable of taking advantage of third-party offerings.

Software Development Kit (SDK). It’s one thing to say the developer will let you play with the software, but it’s another to actually support the lender’s internal team in making changes. The first step here is the delivery of a solid SDK that exposes its functionality through Application Programming Interfaces (APIs). Using these APIs and SDKs, a client can develop customizations and extensions to the system to integrate with other systems and businesses.

Tiered or SOA. We put a lot of emphasis on SOA because it’s so prevalent in the industry right now (just about all industries, in fact). But that’s not to say that it’s the only way to engineer good software that can accomplish the same ends. The bottom line is that the program has to be n-tiered, meaning that the application must be broken into multiple tiers – usually three or more, such as a presentation tier, a services tier and a database tier – to provide flexibility in application deployment, enhanced usability in presentation and accessibility to external business functionality. Not easy to accomplish, perhaps, but vital if the lender hopes to have a full range of options when deploying the software.

Data and Messaging Standards. In order for disparate systems to truly work together, the core system and the Web services must be based on the same industry-wide standards for both data and messaging. The vendor should be able to tell you what standards have been employed in its system and the resulting compatibility issues with existing legacy systems.

Easy Service Integration. SOA makes it possible to add additional services to your system, but only good programming makes it easy. If it takes a team of developers to add a new component, most lenders will never be in a position to take advantage of it. Offering a system that claims to provide access to the industry’s best-of-breed solution, but makes it difficult or impossible to actually do so, is basically lying.

Business Rule Management System (BRMS). Any lender knows that every product requires different processing and every borrower is a unique case. Business rules allow lenders to use their technology to deal with these differences without breaking the workflow or losing the benefits of automation. A good BRMS is essential for any core system or enterprise lending solution that hopes to offer both a good out-of-the-box lending experience and access to third-party services.

Having access to best-of-breed functionality, regardless of what third-party supplier creates it, should be just as important as having all the lending tools pre-configured and ready to run out of the box. The most successful lenders will demand buy a system that provides both.