The last few times I’ve talked to a reporter, one of the first questions they ask is what I think of Treasury Secretary Timothy Geithner’s TARP II plan. My first instinct after listening to his speech is that we might be a little early in having an opinion on a program that seems well, still a little conceptual. So I went to the Treasury website and looked at the actual text of the proposal. It’s clear from reading it that the banks and lenders are ill prepared.
It’s hard to be prepared for something you didn’t think was going to happen. Reading Geithner’s plan, many banks simply don’t have the systems and the turnkey processes in place to adequately respond, and none of them have the capital or time to put those systems in place – at least not before the specific guidelines for loan modification and other TARP restrictions come due.
Three things stand out.
First, the proposal addresses the inability of lenders to package and sell their loans as securities. Without this secondary market, lenders can’t get the capital to lend new mortgages. Instead, lenders can use those loans as collateral to borrow money from the Fed, presumably to make more loans to consumers. Using the loans as collateral obviously puts even more pressure on banks to get the underlying value of the loans correct and the standardized systems for ensuring conformity and quality have not been there.
Second, the Fed will continue to purchase mortgage-backed securities themselves to help drive down rates. In addition, they are requiring all lender participants in TARP to participate in foreclosure-mitigation plans, i.e. loan modifications to keep people in their home before they default. The large number of modifications puts even more pressure on the systems and processes for underwriting than there were before. The same challenge in underwriting these loans now gets magnified. I read that 53% of modifications in the first quarter of 2008 were overdue by the third quarter. Most lenders are not digitized nor organized to provide the level of transparency needed.
Third, the Fed will also try to help lenders to clean up their balance sheets by creating a fund for banks to put their bad loans and orchestrate the sale of those bad loans to private buyers. This one hit a skeptical market that sunk some 380 points on the idea probably because of the wide gap between the price a bank would sell its bad loans vs. the price a private buyer would purchase the loans. This puts more pressure on digitizing and storing the origination information as part of the loan information. The parameters and decisions that went into the origination of the loan in the first place offer invaluable information to filter the good from the bad.
The challenge for lenders is that in the time it takes to deploy these solutions, the problem that they were initially addressing is no longer relevant. SaaS provides an answer because the system is already there. Several top lenders have already made the move to SaaS. SaaS requires relatively little capital or time – banks buy a lending system that is already built. The system is already working, already networked, and already available on a business outcome basis – meaning there’s no capital expenditures. A SaaS system that is agile and can immediately provide value to lenders is a white knight in TARP II.
The market is rebuilding itself. Old paradigms are either irrelevant or regulated away. The biggest challenge to the industry has nothing to do with technology. The biggest challenge is change itself. Time, culture, and capital all stand in the way. New technologies such as SaaS that engender the cultural change can solve for time and capital as well. The new paradigm is about transparency, automation, and collaboration across the mortgage organization. It will be interesting to see how fast we can get there.
