In a challenging and changing market, mortgage process as a service, orMPaaS, can provide banks with the talent and systems to handle essen¬tial lending services, enabling them to focus on rebuilding their business through product innovation to capture market share.

1. • Cognizant Reports
U.S. Lending Industry Meets
Mortgage Process as a Service
Executive Summary plan to wind down the GSEs and support the private
The U.S. subprime mortgage crisis ended a sector’s efforts to become the dominant provider
prolonged period of growth and prosperity within of mortgage credit is a positive sign.
the housing industry. Rapidly increasing home
prices and residential mortgage backed securi- In addition to the government’s proposed role,
ties (RMBS) increased home lending. The housing it is clear that private investment will rely
bubble burst, and with it, many private investors heavily upon improved risk management and
and originators exited the housing finance market. clearer visibility and understanding of the risks
Government-sponsored enterprises (GSEs), oper- within an investment pool prior to ramping up
ating as government conservatorships, increased private investment efforts.
their position within the housing finance market
in an effort to stabilize the housing industry. The shift to a primarily private investor-driven
market with clearer management and under-
The GSEs have become the dominant players standing of risk is one of three primary factors
in the mortgage market in the absence of pri- affecting the revitalization of the housing finance
vate investment. Investors have been waiting for market. The role of government regulation in the
direction from the U.S. Department of the Trea- housing market is the second factor affecting the
sury regarding the future of the GSEs. In Febru- revitalization of the housing finance market. The
ary 2011, a report to Congress from the Treasury February Treasury report provided insights into
Department was released, which discussed a plan the gradual change within the GSEs. Moreover,
to “responsibly reduce the role of the Federal The Dodd-Frank Wall Street Reform and Con-
National Mortgage Association (“Fannie Mae”) sumer Protection Act has given broad directives
and the Federal Home Loan Mortgage Corpora- regarding what constitutes a qualified residential
tion (“Freddie Mac”) in the mortgage market and, mortgage, reasonable lending practices and risk
ultimately, wind down both institutions.”1 retention requirements for loan originators and
mortgage securitizers. A lender’s and/or inves-
Industry players speculate that the gradual tor’s ability to effectively and efficiently address
and measured reduction of the GSEs’ mar- and manage regulatory change is a critical
ket dominance will provide opportunities for component to successful growth within the new
private investors to re-enter the housing finance RMBS space.
market. Although the Treasury’s plan lacks the
specific details that would draw a clear incen- The stabilization of the housing market is the
tive for private investors to re-enter the market final factor. There are emerging signs that the
during ongoing challenging economic times, the housing market is beginning to stabilize, including
cognizant reports | september 2011

2. a decline in foreclosures, increasing household increased. In most cases, subprime originators
formations, increasing corporate profits, increas- provided a guarantee to investors (private-label
ing consumer confidence and home affordability. mortgage securitizers) to repurchase a loan if
These factors point to a gradual positive turn in it went into early default or if there was a mis-
the mortgage industry. Mortgage banks will need representation in the terms of the loan when it
to gear up proactively in order to capitalize on was purchased.
market opportunities as they begin to emerge.
Subprime mortgage originators became insolvent
The emerging suite of services referred to as due to improper forecasting of defaults and were
“mortgage process as a service” (MPaaS) offers unable to repurchase their mortgage loans. Many
several solutions to revitalize the housing finance of the subprime lenders went bankrupt or closed
market. Ensuring loan quality and providing data lending operations. Heavily leveraged private-
transparency will help reduce risk and increase label mortgage securitizing companies suffered
private investment. Loan origination data will be large losses and exited the secondary mortgage
collected, verified and presented in a standard- market, defaulted on RMBS payments to their
ized manner, which will improve credit under- investors or filed for bankruptcy. This led to a dra-
writing decisions for the originator and deliver matic decline of private investment in the housing
improved due diligence services to private inves- finance market.
tors. Enhanced loan information quality will
result in fewer mortgage repurchases and poten- The decline of the housing finance market caused
tially reduce early loan default rates by provid- many to question existing regulatory oversight.
ing deeper, more accurate and more meaningful Banking regulators reassessed the secondary
information during the loan origination process. mortgage market and housing finance to deter-
mine what oversight and rules could be imple-
By removing the cost of ownership of technol- mented to avoid the mistakes of the past. Con-
ogy infrastructure, applications, platforms and gress and other regulators (Federal Housing
people, as well as adopting a pay-per-use model, Finance Agency, Office of the Comptroller of the
MPaaS enables banks to save money. They can Currency, etc.) have provided guidance and regula-
then focus on increasing market share, while rely- tory requirements to banks and private investors.
ing on their MPaaS partners to streamline pro-
cesses, manage and extend systems capabilities A major directive came from the Dodd-Frank Act,
and provide meaningful loan information to help whose extensive consumer banking provisions
them make better business decisions that comply added stringency to existing lending requirements
with government regulations. (e.g., defining a qualified residential mortgage),
detailed acceptable lending practices and man-
How We Got Here dated 5% credit risk retention requirements for
There are many opinions as to whom and what is originators and mortgage securitizers. The intent
responsible for the exit of private investors from of the legislation is to promote a safer housing
the secondary mortgage and housing finance finance market by spreading the share of risk in
markets. Key contributors include the easing of securities for originators and mortgage securitiz-
lending standards (such as Fair Isaac Corporation ers and improving lending standards and practices.
(FICO) scores, loan-to-value (LTV) ratios, debt-to-
income (DTI) ratios, etc.); exotic mortgages (such As banks and private investors work to implement
as adjustable rate mortgages, interest-only loans, and comply with these new regulations, change is
stated income loans, etc.); the government’s occurring within another department of the U.S.
desire to increase home ownership; shareholder government. The exit of many private investors in
pressure on companies to stay competitive and the RMBS issuance business resulted in the GSEs
increase revenue; heightened speculation in the emerging as dominant players in the secondary
housing market; appraisal fraud; broker fraud; mortgage market. The U.S. Treasury directed the
and borrower fraud. GSEs to stabilize the housing market by provid-
ing liquidity. Private investment has remained
As delinquencies spiked due to borrower defaults, on the sidelines, waiting for business conditions
demands for mortgage repurchases from to improve.
investors (mortgage securitizers) to originators
cognizant reports 2

3. The February Treasury report to Congress pro- Private investors anticipating a return to the sec-
vides the Treasury’s plans to significantly reduce ondary mortgage market are interpreting this
the GSE’s presence in the mortgage market. It is release as a positive signal for developing plans
evident that the reduction in the GSEs’ market to re-enter the market. As the conditions of the
share will be gradual and measured. The report housing market begin to improve, private invest-
states, “Our plan presents several proposals for ment will increase (see Figure 1).
structuring the government’s long-term role in a
housing finance system in which the private sec-
tor is the dominant provider of mortgage credit.”
Forces Driving the U.S. Mortgage Industry
Area Drivers Impact Implication
Unemployment rate estimated Increased demand for housing
to stabilize at 5% after 2013
Household formation to Increased demand for housing
average 1.2 million/year over
the next decade
Early signs of
Improving credit scores, deleveraging, Improving credit quality of gradual revival
Economic declining delinquencies borrowers for housing
Environment
Declining price-to-income ratio Increased affordability and mortgage
borrowing
Low mortgage interest rate scenario Increased affordability
Rising rental incomes Improved attactiveness of
ownership
Slow rise in consumer confidence Improved willingness to borrow
Industry Lower net interest margins Lower profitability levels
Drivers scenario
Declining foreclosure filings Demand and prices for homes
will stabilize Revival of
Increase in all-cash deals lending and
Traction in housing market
RMBS
Jumbo deals activity in Revival of investor risk appetite business
RMBS market
Uptick in ABX index Improving prospects of secondary
RMBS market
Regulations Prospect of significant reduction of Revival of private players' interest
the role of GSEs
Heightened regulatory oversight Increased compliance and
reporting Increase in cost
Risk retention norm Capital adequacy implications and of compliance
enhanced safety for RMBS investors
Enhanced consumer protection Creation of a safer market
measures
Technology Siloed structure of banking Challenges on the compliance front
IT systems
Regulation-induced need to reinvent Increase in IT spending
IT systems and processes IT challenges and
opportunities
Competition-induced need to build Opportunity to marry competitive-
new competencies ness goals with compliance-driven
investments into systems
Source: Cognizant Research Center
Figure 1
cognizant reports 3

4. Market Conditions in 2010 (see Figure 2). Loan originations peaked at
The U.S. mortgage market is navigating its way $3.8 trillion in originations in 2003. This year, the
out of the subprime crisis. Home sales fell from U.S. mortgage industry forecasts approximately
7.53 million units in 2006 to 5.23 million units $1 trillion in originations (see Figure 3).
Home Sales in Units
9
8.36
7.98
8 7.53
7.26
7
6.43
Millions
6
5.40 5.33 5.36
5.23 5.10
5
4
3
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
* Forecasts for 2011 and 2012 are from National Association of Realtors, July 2011
Figure 2
Mortgage Origination Estimates
One- to four-family homes
4,000
2,532 Purchase Refinance
3,500
3,000
1,514
1,757
1,463 1,326
2,500
$ Billions
1,283 1,166
2,000
1,331
1,500 1,099
1,512 777
1,399
1,280 1,309
1,000 234 1,140 697
1,097
905 960 400
731 664
500 531
473 412
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012*
Source: Mortgage Bankers Association
* Estimates
Figure 3
RMBS issuance, which rose to around $724 billion 2005, to their peak in 2010 of over 3.82 million (see
in 2005–2006, has dropped to $39 million in 2010 Figure 5, next page). As a result of the downturn
(see Figure 4, next page). The steep fall in home in the economy, studies indicate that consumers
prices and rising job losses pushed foreclosures became more averse to debt and began saving
higher. Foreclosures went from less than 1 million in more (see Figure 6, next page).
cognizant reports 4

5. RMBS Issuance
800
700
600
500
$ Billions
400
300
200
100
0
2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Federal Reserve
Figure 4
Foreclosure Trends
4.5
4.0 3.75 3.83
3.5 3.16
3.0
2.5 2.20
Millions
2.0
1.5 1.26 1.17
1.0 0.89
0.5
0.0
2005 2006 2007 2008 2009 2010 2011*
Source: Realty Trac
* Foreclosure filings for 2011 are for the first six months only.
Figure 5
Post Crisis: Higher Savings, Lower Debt
14% 140%
130%
12%
120%
10%
110%
8% 100%
6% 90%
80%
4%
70%
2%
60%
0% 50%
60 65 70 75 80 85 90 95 00 05 10
Personal saving rate (left scale) Household debt/disposable income (right scale)
Source: Federal Reserve Bank of San Francisco
Figure 6
cognizant reports 5

6. There are emerging signs of a market revival. Corporate profits, a key determinant of business
Mortgage servicers are working through their growth prospects, point to the likelihood of job
defaulting loan portfolios, and housing prices are creation. The St. Louis Federal Reserve’s research
nearing a bottom. Low interest rates, reduced indicates that corporate profits as a percentage
home prices, increasing credit availability, improv- of GDP hit a low of 5% in 2008 and rose to 8%
ing job prospects, rising consumer confidence and in 2010 (see Figure 7). The industry considers this
the opportunity for buyers to rent out properties favorable employment scenario as a strong influ-
at profitable rates are among the key factors that encer that increases borrower confidence in buy-
could stimulate the demand for mortgage loans ing homes. The Wall Street Journal reports that
and, in turn, increase the supply of loans to RMBS household formations, which declined to 578,000
investors. The historical data representing these in 2008, rose to 950,000 in 2010.2 This figure is
factors and their estimated trends point to a slow expected to rise gradually, which is expected to
and steady revival. increase housing demand.
Corporate Profits
Percent of GDP
14
12
10
8
6
4
2
0
‘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
Source: Federal Reserve Bank of St. Louis
Figure 7
The unemployment rate, presently around A slow but steady drop in the unemployment
9%, is expected to gradually decline and rate should improve upon already increasing
settle at around 5% after 2013 (see Figure 8). consumer confidence numbers. Additionally,
Unemployment Rate (Q4)
Percent
11
9
7
5
3
2005 2006 2007 2008 2009 2010 2011* 2012* 2013* Long Run*
Source: Federal Reserve Bank of St. Loius
* Projections
Figure 8
cognizant reports 6

7. the Conference Board notes that the Con- February 2009, the lowest since its inception
sumer Confidence Index has risen from 25 in in 1967, to 45.4 in September 2011 (see Figure 9).
Consumer Confidence Index
75
70
65
60
55
50
45
40
35
30
25
20
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
Source: Conference Board
Figure 9
Delinquencies and foreclosures that surged in article provides some insight into what the next
the aftermath of the subprime crisis peaked in five years might look like: “Once the foreclosure
Q2 2010 at 11.59% and are now on a declining mess begins to clear up, say housing economists,
path (see Figure 10). Estimates of foreclosure the traditional drivers of the housing market
filings for 2011 are one-fourth of the filings of — demographics, affordability, loan availability,
2010. All these factors signal a positive turn for employment and psychology — should take over.”
the mortgage industry. The Wall Street Journal
Delinquency Rate On Loans Secured By Real Estate
Top 100 Banks Ranked By Assets
12
11
10
9
8
7
Percent
6
5
4
3
2
1
0
March '05 March '06 March '07 March '08 March '09 March '10 March '11
Source: Federal Reserve Bank of St. Louis
Figure 10
The Economist concurs that “the best news of all stingy with credit, but households are better
may be the ongoing improvement in credit con- positioned than they were to take advantage of
ditions. Delinquencies have trended downward cheaper homes.”3 There has also been a marked
since late 2009. Consumer-debt payments rela- shift in originations, from a low LTV scenario,
tive to incomes are at a 17-year low, and house- to rapidly rising LTV since 2007 (see Figure 11,
hold credit scores are rising. Banks are still being next page).
cognizant reports 7

8. Shift in Originations From Low LTV to High LTV
50%
Percentage of Total Owner Occupied Originations
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
75% to 80% Originations 95% to 100% LTV Originations
Source: CoreLogic
Figure 11
The present conditions in the U.S. housing market buying property. The scenario has already led
have significantly improved home affordability. to considerable growth in all-cash deals, with
The price-to-income ratio (an indicator of afford- bargain-seeking investors attempting to cash
ability) fell from 2.7 in 2007 to 1.8 in 2010 (see in on low property values. The Mortgage Bank-
Figure 12). The Freddie Mac 30-year fixed-rate ers Association (MBA) estimates that purchase
mortgage at 4.27% in August 2011 is the lowest originations for one- to four-family homes may
in the last 50 years. Additionally, the oversupply decrease by 12.71% in 2011, to $412 billion, and rise
of homes and rising rental incomes (see Figure 13, by 29% in 2012, to $531 billion.
next page) should increase the attractiveness of
Homes are More Affordable Now
Price-to-income ratio, national average
3.0
2.5
2.0
1.5
1.0
'90 '95 '00 '05 '10
15-year average 15-year average
4Q 1995 – 4Q 2010 1Q 1989 – 4Q 2003
Source: Fiserve Inc.; Federal Housing Finance Agency; Moody's Analytics
Figure 12
cognizant reports 8

9. Rent Changes in Realtors' Local Area, Year-Over-Year
50% 48%
46%
45% 44%
42%
40% 39%
35%
30%
25%
20%
15%
10%
5%
0%
Dec 2010 Jan 2011 Feb 2011 March 2011 April 2011
Increase Constant Decrease
Source: National Association of Realtors
Figure 13
The market for RMBS, which nearly evaporated, is The Wall Street Journal reports that “subprime
beginning to show signs of a likely revival. There and other residential mortgage bonds are back
have been two private-label RMBSs offered in in vogue with long-term investors, in the latest
the last two years: Redwood Trust 2010 and Red- sign that American credit markets are healing
wood Trust 2011 ($290 million issue). The securi- after the worst downturn in a generation.”4 This
ties comprise loans with high unpaid principal is reflected in the substantial improvement in the
balances (average under $1 million), high credit ABX index from 30 in 2009, to around 60 in 2011
scores (average 775) and low LTVs (average 63%). (see Figure 14).
Private market players are taking proactive steps
to set up conduits in anticipation of the reduction
in GSE loan-buying limits in October 2011.
Growing Attraction
The ABX index, which tracks prices of subprime mortgage bonds,
has recovered since the crisis.
100
80
60
Price
40
20
0
2008 2009 2010 2011
Source: The Wall Street Journal
Note: ABX.HE.AAA.06-2 sub-index
Figure 14
cognizant reports 9

10. Gearing up for a New Mortgage Industry Given the present state of the banking landscape
The prospect of increasing regulatory oversight and the prospect of a gradual recovery for the
makes compliance key to the survival of mort- mortgage banking industry, originators would be
gage banks and securitizers. There are many wise to take proactive steps to position their busi-
signs pointing to the emergence of a different nesses for success in the new mortgage industry.
mortgage industry, including the increased focus
on customer protection, the creation of credit The banking industry’s business processes and IT
risk retention requirements for mortgage origi- systems need to undergo considerable change in
nators and securitizers, the curbing of predatory order to meet the unfolding regulatory require-
lending practices, the rise of the spend-thrift and ments, as well as build new competencies to be
debt-averse customer, and the increased capital successful. These investment decisions pose sig-
adequacy demands. nificant challenges to banks that are presently
operating in a business environment of weaken-
ing demand, declining spreads (see Figure 15) and
intensifying competition.
U.S. Banks: Falling Net Interest Margins
4.10 4.08
4.00
3.90 3.84
3.80 3.77
3.77 3.69
3.70
Ratio
3.60 3.54
3.57
3.50 3.46
3.40 3.34
3.31
3.30 3.25
3.20
3.10
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Federal Reserve Bank of St. Louis
Figure 15
Increasing regulatory focus on banking is driving of originating a loan rose approximately 375%
up the cost of compliance (see Figure 16), while in 2011 from 2003, 53% in 2011 from 2008, and
spreads are falling. The net interest margin of going forward it is likely to increase significantly
U.S. banks began falling at the end of the first (see Figure 17, next page).
quarter of 2010. MBA research indicates the cost
Rising Cost of Compliance
IT spending by financial services firms on governance, operational risk and compliance
1.8
1.72
1.7 1.68
1.60
1.6
1.5
$ Billions
1.41 1.40
1.4 1.35
1.3
1.2
1.1
1.0
2006 2007 2008 2009 2010 2011*
Source: Celent
* Estimate
Figure 16
cognizant reports 10

11. Increasing Net Cost to Originate
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
2003 2004 2005 2006 2007 2008 2009 4Q 2010 2Q 2011
Source: Mortgage Bankers Association
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.
Figure 17
The profitability of the industry is driven by vol- The conditions and challenges that lenders face
umes, spread and efficiency of operations. Indus- require a significant end-to-end process overhaul.
try origination volumes and interest margins are With unfolding regulatory changes, investor scru-
generally driven by the market. Mortgage banks tiny and a heightened focus on loan quality, lend-
will need to leverage their operational efficiencies ers will be required to move quickly and deploy
to increase profits and differentiate themselves more flexible business and technology solutions.
from the competition.
MPaaS providers can be a critical ally during sig-
Many banks are challenged by the existence of nificant times of change. Their pointed emphasis
silos within their organizational structure. Tra- on mortgage services and ability to readily adapt
ditionally, compliance and business needs are to changing business needs can help banks get
separately addressed, a gulf that has widened more bang from limited IT budgets — by shift-
over time as systems have evolved. Legacy sys- ing Cap-Ex to Op-Ex, through pay-per-use or
tems are traditionally inflexible and incapable of outcomes-based models — while accessing new
adjusting to rapid changes within the banking and more automated service capabilities. Cou-
industry. These older, hard-coded systems rely on pled with a lender’s ability to manage business
manual intervention to provide workarounds and processes via MPaaS, banks have a tremendous
overcome process limitations. opportunity to manage the challenges in the new
landscape more effectively.
Enter Mortgage Process as a Service Traditional mortgage business process outsourc-
The emerging business processes as a service ing (BPO) services providers already provide skilled
(BPaaS) delivery model offers a viable option to domain resources and a scalable organization
mortgage banks in need of a technology refresh with appropriate infrastructure to manage criti-
and process makeover. This approach enables cal mortgage functions, such as loan processing.
banks to rely on service providers with expertise in In this existing model, lenders essentially leverage
mortgage processing services to shoulder the cost a service provider’s resources and infrastructure
of ownership of technologies, infrastructure and capabilities, while retaining their own technology
people. One flavor of BPaaS — mortgage process and defined processes. The perceived value of this
as a service (MPaaS) — provides banks with the arrangement is cost, timeliness and quality.
talent and systems wherewithal to handle essen-
tial lending services, enabling them to solely focus Today’s mortgage market requires significant
on rebuilding their businesses to the needs of the change in this value proposition. As such, BPO
changing industry and capture market share. services companies must transform into MPaaS
providers. Beyond cost, timeliness and quality,
cognizant reports 11

12. the MPaaS provider will need to offer pointed solu- than more strategic aspects, such as accuracy,
tions to the lender’s and investor’s business objec- loss severity, repurchase risk, compliance, down-
tives, risks and processes. The expectation can no stream efficiencies and customer experience, to
longer be focused on executing a lender’s inter- name a few.
nal process while leveraging the lender’s tools.
The value proposition and expectations need to To evolve, the mortgage BPO provider must offer
be extended to align the service output with the solutions rather than capable bodies. The solutions
goals and objectives of the lender and investor. must address the critical aspects of the business.
Loan processing solutions, for instance, need to
Consider loan processing, for example. The admin- provide outputs that provide clear visibility into
istrative aspects of loan processing have been loan data at a document and field level, in addition
outsourced to third-party specialists for many to deeper analysis that will enable effective and
years. In many cases, the BPO process is a reflec- compliant decisions. Critical loan origination values
tion of the process requirements of the lender such as “Total Monthly Income” need to be encap-
rather than the business and risk objectives of the sulated with the specific documents, document
lender and investor. While some may contend that areas, document meta data (values extracted from
there should be no difference between the two the document) and calculations utilized to arrive at
(lender processes should address business and the critical value. The information collected should
risk objectives), the flood of repurchase requests be compared with other available information and
should point to the likelihood that a majority of analytics to provide a more trusted understanding
loan origination processes do not provide the of the accuracy of the information.
process output that meets or exceeds the risks or
objectives of the business. In the loan processing example, the provider must
move beyond the checklist-prepared file to the
In short, many lenders’ processes lack the needed risk-and-objective-prepared file that clearly and
depth of analysis, trust, accuracy and credibility methodically provides trust and transparency,
with respect to investor requirements. Thus, the in addition to analysis that allows downstream
traditional mortgage BPO provider is measured consumers of the service to extract more value
on how well it executes a lender’s process rather (see Figure 18).
Future Dimensions of Mortgage BPO: Driving The Solution Needs
Traditional Dimensions of Mortgage BPO Mortgage Market Needs
• Focused on labor cost savings and staff • Need for great scrutiny and due diligence during
augmentation for scale and capacity. loan origination.
• Provide increased visibility into potential loan risk.
Market Drivers
• Reduce overall origination, processing and servicing
• Increased focus on portfolio and repurchase risk.
costs while increasing process quality.
• Need for greater process transparency, improved
• Increased process control and consistency to increase
data integrity and increased loan due diligence.
loan quality and reduce repurchase risk.
Traditional Dimensions of Mortgage BPO Market Drivers
• Labor Cost • Rising origination costs
• Capacity/Timeliness • Increased regulatory and
• Domain investor requirements
• Quality • Significant repurchase risk
• Significant default risk
Future Dimensions of Mortgage BPO
Mortgage Process Process Process/Solution
Traditional
as a Service Risk Mitigation Consistency Benefit
Dimensions
(Sourced as (Data accuracy and Control (Cost benefit of
(Capacity, domain
utilities on & intelligence) (Process accuracy solution vs.
and quality)
pay-per-use basis) & intelligence) pure labor cost)
Source: Cognizant
Figure 18
cognizant reports 12

13. A New Strategic Services Era The absence of transparency and data integrity
The time for more strategic services has arrived. was one of several root causes of the industry’s
Mortgage processes need to be retooled to problems that led to increases in repurchase
address the need for enhanced regulatory scru- claims (see Figure 19).
tiny, process transparency and risk mitigation.
Residential Mortgage Loans
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
Several factors undermined the quality of mort- produce a stronger mortgage market and increase
gage loans, including the origination of exotic borrower and investor confidence in the housing
mortgage types, predatory lending practices, eas- finance market.
ing of underwriting guidelines, increasing prop-
erty prices and the ability of financial interme- The rise of software as a service (SaaS), platform
diaries to leverage their relationships to bypass as a service (PaaS), virtualization and cloud-
underwriting guidelines. Ensuring data quality based sourcing of servers, storage, desktops and
during the loan application and credit underwrit- data centers have created an environment that
ing process would have removed some of the risk is conducive for innovations such as MPaaS that
associated with purchasing mortgages. optimize efficiencies by reorganizing the industry
services chain. Under MPaaS, vendors provide all
The importance of data quality is also evident four key elements: people (BPO/KPO), applica-
in Fannie Mae and Freddie Mac’s joint effort in tions, platforms and cloud-sourced infrastructure,
the Uniform Mortgage Data Program (UMDP) which can be used like utilities on a pay-per-use
as part of their Loan Quality Initiative (LQI). basis, obviating the need for banks to lock in their
The UMDP establishes uniform requirements capital in these four areas.
and file formats for appraisal and loan delivery
data. Improved data quality throughout the loan By variabilizing fixed costs, MPaaS offers a com-
application and underwriting process will help pelling case for significantly enhancing capabili-
revive the housing finance market. Increased ties at a time when banks are facing significant
loan transparency provided by MPaaS solutions transformational challenges. Banks and financial
will enhance the quality of loan originations and services industry players are already ahead of
reduce repurchase risk. Higher quality loan infor- other industries in embracing cloud computing
mation and originations will result in increased (see Figure 20, next page). This places them in an
mortgage performance. This will gradually advantageous position to embrace MPaaS.
cognizant reports 13

14. Financial Services a Leader in Cloud Adoption
60
53%
50
41%
40 37%
35%
Percent
32% 32%
30 29%
24%
20 19%
10
0
Technology Financial Legal/ Retail Healthcare Manufac- Education Energy Government
Services Professional turing
Services
Source: Mimecast
Base: 565 respondents
Figure 20
Originators’ systems need to handle high volumes also help originators present quality information
of originations and defaults. Even during the pro- about their loans to mortgage purchasers.
longed period of prosperity that preceded the
U.S. financial downturn, banks did not prioritize The MPaaS partner will be able to offer and pack-
the need to invest in rebuilding their systems and age information that is specific to the vintage of
processes to reap sustainable efficiencies. the loans, the demographics, the overall credit
quality, etc. The infomediaries will ensure trans-
The case for sustainable efficiencies is now stron- parency in loan sales by offering flexible platforms
ger, coupled with the need to invest in systems to that will maintain compliance with underwriting
gear banks for greater levels of regulatory scru- criteria, as requested by the user. The information
tiny. An MPaaS partner can lend consulting ser- available to the user will foster trust and build
vices that will provide guidance and solutions to sustainable business foundations. The mortgage
regulatory challenges and opportunities. A part- purchasers will have greater knowledge regard-
ner with the resources and capacity to assist in ing the pools of loans that they are buying, which
navigating regulatory hurdles can make perceived will remove the mortgage purchase risk that was
barriers to market re-entry less challenging. prevalent in the past. Better loan information will
lead to better loan originations, informed loan
purchases, increased loan performance, reduced
Moving Forward risk, reduced repurchases and a stronger housing
The mortgage BPO industry, which is projected finance market.
to reach $3.56 billion in 2013, is embracing
MPaaS because it enables mortgage bankers to The reformed mortgage market places huge
access applications and processes built to serve demands on employee and IT resources that
the demands of the emerging industry order. By are tied up in attempting to comply with current
leveraging an MPaaS partner, mortgage banks rules and regulations. Lenders are hard-pressed
will be better positioned with critical information to focus on product innovation and future busi-
to make better loan decisions. ness planning. The MPaaS partner can help
banks be more flexible and respond to regulatory
MPaaS providers can act as infomediaries to pro- change. Banks and other lenders can leverage the
vide independent and unbiased information about strength of partnerships with MPaaS providers
the mortgage transaction to enable originators that double as infomediaries. In addition, working
to make sound lending decisions and underwrite with MPaaS solutions providers (see sidebar) can
quality loans. In addition, such information will help them gain market share and reduce risk in
origination and purchase decisions.
cognizant reports 14

15. 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 fixed 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 global
sourcing.
• Provides 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 application documentation and critical underwriting
data that empowers the originator and loan purchaser to make better investment decisions.
Footnotes
1
“Reforming America’s Housing Finance Market: A Report to Congress,” The U.S. Department of the Treasury and
U.S. Department of Housing and Urban Development, February 2011, http://portal.hud.gov/hudportal/documents/
huddoc?id=housingfinmarketreform.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 of
St. 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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Cognizant Technology Solutions, May 2011, http://www.cognizant.com/InsightsWhitepapers/Reflections-
May-2011.pdf
“Table 1193, Mortgage Originations and Delinquency and Foreclosure Rates: 1990 to 2009,” U.S. Census
Bureau, 2011, http://www.census.gov/compendia/statab/2011/tables/11s1193.pdf
“MBA Sees Growth in Purchase Originations, Drop in Refinancing, and Weak Overall Economic Growth
in 2011,” Mortgage Bankers Association, October 2010, http://www.mbaa.org/NewsandMedia/Press
Center/74457.htm
“Profiles of GSE Mortgage Purchases,” U.S. Department of Housing and Urban Development, July 2011,
http://www.huduser.org/portal/datasets/gse/profiles.html
“Report to the Congress on Risk Retention,” The Federal Reserve Board, 2010, http://www.federalre-
serve.gov/BoardDocs/RptCongress/securitization/risk_d_links.html
cognizant reports 15

16. “U.S. Foreclosure Activity Increases 7 Percent in August, Defaults Surge 33 Percent,” Realty Trac,
Sept. 13, 2011, http://www.realtytrac.com/content/foreclosure-market-report
“The Gender Wage Gap,” National Economic Trends, Federal Reserve Bank of St. Louis, July 2011,
http://research.stlouisfed.org/publications/net/20110701/net_20110725.pdf
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org/research/research/reportsstatistics
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http://www.reuters.com/article/2011/04/04/us-wealthmanager-ushousing-idUSTRE72U6YW20110404
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Housing_Mortgage_Trends.pdf
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com/united-states/consumer-confidence
John Gittelsohn, “Cash-Paying Vultures Pick Bones of U.S. Housing Market as Mortgages Dry Up,”
Bloomberg, March 29, 2011, http://www.bloomberg.com/news/2011-03-29/cash-paying-vultures-feast-on-
u-s-housing-as-mortgages-dry-up.html
“Redwood Files for Second Jumbo MBS Deal in 10 Months,” American Banker, February 2011, http://www.
americanbanker.com/issues/176_32/redwood-mortgage-backed-security-1033085-1.html
Tim Cave, “Broker-Dealers Count the Cost of Compliance,” Financial News, November 22, 2010,
http://www.efinancialnews.com/story/2010-11-22/broker-dealers-count-cost-of-compliance
“Net Interest Margin for all U.S. Banks,” Federal Reserve Bank of St. Louis, July 2011, http://research.
stlouisfed.org/fred2/series/USNIM
Prashant Gopal and Jody Shenn, “Banks May Soften Blow of Jumbo Loan Limits,” Bloomberg, June 28,
2011, http://www.bloomberg.com/news/2011-06-28/banks-appetite-for-jumbos-may-soften-blow-of-new-
loan-limits.html
“Goldman Sprints Ahead with Conduit Plans,” Asset-Backed Alert, May 20, 2011, http://www.abalert.
com/headlines.php?hid=151643
“Orchestrating Mortgage Lending Using Business Process Management,” PricewaterhouseCoopers LLP,
November 2010, http://www.pwc.com/us/en/financial-services/publications/viewpoints/viewpoint-busi-
ness-process-management.jhtml
Lawrence Yun, “Housing Market and Economic Outlook: July 2011,” National Association of Real-
tors, July 21, 2011, http://www.realtor.org/wps/wcm/connect/2753558047abfcff9436d593a9f011da/
Chicago_Chase_Event_July+2011.ppt?MOD=AJPERES&CACHEID=2753558047abfcff9436d593a9f011da
cognizant reports 16

17. Authors Analyst
Rajeshwer Chigullapalli Svetlana Malu
Cognizant Research Center Cognizant Research Center
Aala Santhosh Reddy
Cognizant Research Center
Nathan Longfellow
Director, Cognizant Banking and
Financial Services Consulting Practice
John Geertsema
Manager, Cognizant Banking and
Financial Services Consulting Practice
About Cognizant
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