Rick Grant & Associates

Last week a couple of readers pinged me via the Skribit widget on this blog to ask what impact Sovereign Wealth Funds might have on the mortgage technology space. Recently, Mark Dangelo and I completed work on a second industry sector report for the mortgage business where we focused a bit of our attention on SWFs and their anticipated impacts on the US financial services industry. You can find out more about that here and here. But will those impacts filter down to the technology suppliers that serve lenders?

I am currently working on a feature story that I hope will appear in an upcoming issue of Mortgage Banking about tech firms in this space that may be for sale or in play. I’ll be poking around at the Mortgage Banker’s Association’s Technology in Mortgage Banking conference next week for that and welcome any tips or information you care to share with me (on or off the record). While I expect to find a number of players that wouldn’t mind being adopted, I’ll be surprised to find SWFs filling too many tables at the mixers.

My feeling is that most tech players, with the possible exception of some brands held by the F companies (Fidelity, First American and Fiserv) are probably not big enough fish to attract the attention of these buyers. I doubt these investors know or understand much about that part of our business and if they take only a precursory look they’ll see maturing technologies (in that much of our software hasn’t been fully Web-enabled for long and we’re not even doing electronic documents on a production scale yet) in a rapidly shrinking market (hundreds of lenders out of business in the past 18 months, and now lenders with extremely low delinquency and default numbers like Thornburg are under the gun) with little capacity to expand into other lines of business. I don’t see a lot of foreign funds making that kind of an investment.

The exception, of course, would be China, who would love to have access to technology that would stream US financial data across its dashboards like a heads-up display on its World Domination Machine. But don’t get me started.

I expect any parties interested in acquiring these assets will probably come from a competing firm or from a domestic bank. Mortgage lenders are not likely to be buying much these days.

But I don’t think it will be the biggest institutions. That group learned a lot from BofA’s acquisition of Framework, Tarrytown, NY. Probably mid-tier banks or other tech companies funded by domestic venture capital (of which there is plenty right now). I’ll continue to work on the story and let you know what I find.

National Mortgage News reported in its Daily Briefing today that Fannie May will begin buying Jumbo loans on April Fool’s day (I ascribe no particular significance to that, other than realizing that the only reason the GSE is being permitted to move beyond its charter and into these products is because the market doesn’t understand them and punishes good lenders who offer them, which isn’t foolish so much as ignorant, I guess).

The problem for Fannie is that all of the new business will have to be underwritten by hand since its automated underwriting system doesn’t understand nonconforming product.

Now the industry will see why all of our new technology is being built on Services Oriented Architectures (SOA) and to capitalize on Business Rules Management (BRM). If Desktop Underwriter was a newer tool, Fannie could just plug in any number of third-party AU systems and bounce the deals out for fast, cheap underwriting before making a decision. Instead, the GSE will probably have to hire a staff of outsourced underwriters who will add additional layers of process to the transactions at that same time it piles on the risk of human error, lost paperwork and lots of extra time.

In Fannie’s defense, DU (and Freddie’s Loan Prospector, for that matter) were developed long before the new technologies were available and helped drive technology development for the entire industry. That’s the bleeding edge. Why the GSE didn’t plow some of the profits it has realized over the past 5 years into upgrading the technology isn’t clear.

I only bring it up to point out that while we may be tired of hearing all the tech acronyms, they really are important.

Paul Jackson of Housingwire alerted me today to his story about Freddie Mac entering the Jumbo market, which should give Fannie a bit of competition here. As Paul points out, with some help from Tanta at Calculated Risk, Freddie has the potential to add some market share here since it will be able to use its LoanProspector AU system to underwrite Jumbo deals.

There can be no comparison between an investor underwriting deals via an automated system and one doing it by hand, especially when the investors have little previous experience buying Jumbo loans.

Freddie will also be looking to buy some additional products, including cash-out refis. That could be a one-two punch that allows the smaller GSE to gain some ground on its larger competitor.

Thanks for the tip, Paul.