US residential mortgage lenders need to look at outsourcing mortgage process as a service end-to-end in a utilities-like model.

1. U.S. Lending Industry Meets
Mortgage Process as a Service
Cognizant Research Center | October 2011
©2011, Cognizant

2. 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 of
the U.S. Mortgage industry.
• Plan to wind down government-sponsored enterprises (GSEs) is a
big positive factor for revival of private investments.
• Improved risk management will be the key to win the trust of
residential mortgage backed securities (RMBS) investors and
mitigate the repurchase risk.
1 | ©2011, Cognizant

3. The U.S. Mortgage Industry remained dormant since
the meltdown…
Post financial meltdown home sales declined significantly and with it
the volume of originations. RMBS issuance bore most of the brunt.
Home sales have remained flat and are
forecasted to increase marginally in 2012
2 | ©2011, Cognizant

4. The U.S. Mortgage Industry remained dormant since
the meltdown…
Steady decline in mortgage originations from 2003. Forecasted to touch $1 trillion in 2011
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5. The U.S. Mortgage Industry remained dormant since
the meltdown…
RMBS issuance reduced drastically from $700+ billion in 2005-2006 to $39 million in 2010
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6. Economic indicators point to a gradual recovery
Corporate profits, a key determinant of employment are rising.
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7. Economic Indicators point to a gradual recovery
Research by Federal Reserve Bank
of St. Louis points to lower long-
term unemployment rate.
Household formations, a traditional
Household formations, which declined to
578,000 in 2008, rose to 950,000 in
lead indicator of demand for
2010. And this figure is expected to rise housing is also on the rise.
gradually, aiding recovery of housing
demand.
- The Wall Street Journal
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8. Industry indicators too, point to a gradual recovery
Improvement in credit conditions, declining foreclosures, improved
affordability and rising rentals, point to gradual recovery.
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9. Industry indicators too, point to a gradual recovery
Delinquencies on a
declining path
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10. Industry indicators too, point to a gradual recovery
Loan-to-value (LTV)
ratios are rapidly
rising since 2007
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11. Industry indicators too, point to a gradual recovery
Consumers have became more
averse to debt and begun saving
more
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12. Industry indicators too, point to a gradual recovery
The price-to-income
ratio (an indicator of
affordability) is at
the lowest levels
seen 90’s
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13. Industry indicators too, point to a gradual recovery
The oversupply of
homes and rising rental
incomes should increase
the attractiveness of
buying property
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14. But the Banking Industry is challenged to gear up….
• Compliance which is a key to survival is pushing banks to significantly
improve/alter their business models, processes and systems.
• Compliance costs are expected to rise and so are the costs of origination
while the banking spreads are on the decline.
| ©2011, Cognizant

15. But the Banking Industry is challenged to gear up….
| ©2011, Cognizant

16. But the Banking Industry is challenged to gear up….
Going forward, cost of
originating a loan is likely to
increase significantly
| ©2011, Cognizant

17. Gearing up for a New Mortgage Industry
• After the Dodd-Frank Act, banks need to enhance their business
processes 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 the
concerns of RMBS investors through improved lending practices and
processes.
16 | ©2011, Cognizant

18. 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 provider
through 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 how
well it executes a lender’s process, MPaaS also addresses more strategic
aspects, such as repurchase risk and compliance.
• Banks can seek improved risk management enabled by enhanced data
quality and by requiring the MPaaS provider to play the role of an
independent infomediary.
• Coupled with a lender’s ability to manage business processes via MPaaS,
banks have a significant opportunity to manage challenges in the new
landscape more effectively.
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19. Risk Management Imperative for Revival of the
Mortgage Market
• The Uniform Mortgage Data Program (UMDP) establishes for lenders’
uniform requirements and file formats for appraisal and loan delivery
data.
• Ensuring data quality during the loan application and credit
underwriting process will remove some of the risk associated with
purchasing mortgages.
• MPaaS solutions provide loan transparency to enhance the quality of
loan originations and reduce repurchase risk.
• This will result in increased mortgage performance, and will gradually
produce a stronger mortgage market and increase borrower and
investor confidence in the housing finance market.
| ©2011, Cognizant

20. What to Look for in Your MPaaS Partner
• Can offer services in a utility-like model, providing variabilization of
fixed 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 application
documentation and critical underwriting data that empowers the
originator and loan purchaser to make better investment decisions.
• A partner with the resources and capacity to assist in navigating
regulatory hurdles can make perceived barriers to market re-entry less
challenging.
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21. 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
Analyst
Svetlana 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
20 | ©2011, Cognizant