"Paperless processing... it's the holy grail, it's utopia. It's where everybody would like to be."

So says Murray Cowan, managing director at Better Mortgage Management. And probably a large number of other mortgage managers and non-banks.

Getting there, though, is another thing. Mortgage managers MPA Lender spoke to for this article commonly said STP was a long-term objective, with many hurdles yet to be overcome.

According to Mark Forsyth, managing director of ASX-listed Firstfolio, there is plenty of heat around STP but little evidence of a roaring fire just yet.

"There has been much talk about this, but in reality no one is really doing it successfully," he says. Firstfolio, a diversified mortgage and broker aggregation company, operates its own mortgage funding arm, Firstfolio Wholesale.

Alexandra Tsavasilis, business development manager at Melbourne-based Loan Closer Operations, says while most in the mortgage industry have a good understanding of what STP is, the majority "are unsure how it can be implemented, if at all".

Information technology professional Andrew Duerden, national sales and business development manager at LoanWorks Technologies, says the view on STP depends on which part of the mortgage industry you are looking from. If you're a primary lender, that is, a bank or securitiser, you are likely to have a greater degree of integration with their new business channels and third party service providers.

"As drivers of industry, they have leveraged their muscle to ensure that their core channels are submitting applications electronically, credit decisions and approval processes are effectively automated, where possible valuations are submitted to their panel electronically and that mortgage insurers and solicitors are instructed electronically," he says.

This is not necessarily the picture, though, at the mortgage manager end of the market. Duerden says while mortgage managers handle much of the application process, due to their relationships with more than one funder and the need to support separate valuers, mortgage insurers, solicitors and credit decision rules, STP becomes "a problematic goal".

He continues: "This is emphasised by their lack of real control over many aspects of STP, and the initial and ongoing costs."

Defining STP

What is STP, though? Simon Bednar, COO at IT specialist Stargate Group, says that, at a basic level, "STP is simply the effective use of IT to streamline the transaction process". He adds that STP is sometimes hailed as the 'key' to operational and processing issues experienced in the current environment.

He continues: "STP can be applied to the entire mortgage transaction, from application initiation to settlement and post-settlement responsibilities or it can be applied piecemeal to the individual transactions that make up the overall mortgage transaction. Complete STP dedicates that the entire mortgage transaction is automated from application initiation to settlement."

He says the aim of STP is to cut processing time, improve the flow of information between internal and external parties, and reduce the opportunity of error traditionally associated with manual processes.

So what is stopping this utopia being achieved? MPA Lender spoke to a wide range of IT experts and mortgage managers for their take on the impediments.

Key hurdles

Bednar believes the main impediments to implementing STP within the mortgage industry is the very nature of the transaction itself and the mandatory manual processes which, at this point, are unable to be automated.

Australia's negative credit reporting setup is one sticking point, Bednar says.

"Unlike in the US market where positive credit reporting is readily available and provides information on an application's repayment history or default information, Australia relies on negative reporting which requires organisations to manually verify and validate this information," he says. This may change, at least to some degree, if the findings of an Australian Law Reform Commission (ALRC) inquiry into Australia's Privacy Act are implemented.

Steve Stefanowicz, executive director at Pioneer Mortgage Services, agrees. He says the verification of borrower income and identity is a key sticking point, one made harder by Australia's privacy laws and the lack of access to online information regarding income, employment and identity verification. "This, then, becomes a point of manual intervention as well as increasing the risk of fraudulent documentation," he says. "Positive reporting is available online to lenders in the US, where a borrower's income profile and personal details can be verified immediately. This would allow STP to operate efficiently without the current need for manual intervention."

The actual receipt of credit assessments, though, is "relatively easy" says Duerden. Veda Advantage, the country's main credit reporting agency, allows mortgage managers to request and receive electronically various credit reports required by their credit teams.

Another thorn in the side of complete STP is the initial collection of application information. "Brokers and mortgage managers are either unable or unwilling to gather all this information as they do not see it is mandatory for achieving a conditional approval," Bednar says.

Ironically, perhaps, Duerden believes this should be easiest part of the process for mortgage managers, as it is where they have the most control. "Strategies can be either website or broker submission tool, with the main influence being budget and type of channel." He admits, though, that encouraging uptake by brokers can involve offers of increased commission or faster turnaround.

The receipt of supporting documents can be another problem, Duerden says. "There are numerous logistical difficulties with accurately identifying document type and related application without human intervention," he says. "The associating of documents with the right application is paramount to streamlining the ongoing movement of supporting documents to other parties involved in the loan transaction, such as funder, mortgage insurer and solicitor. In fact, most of these third parties do not support integrated submission of supporting documents and still require them to be faxed or e-mailed."

Tsavasilis agrees. She says the document preparation and settlement area, which is generally outsourced, is what is often referred to as "the Black Hole" by mortgage managers "because no one really knows what is transpiring".

"For those who do try and complete this part of the process 'in-house' there are few, if any, systems available to mortgage managers to choose from and those that are available provide a solution to only part of the process," she continues. "This seems to be because firms want to protect their competitive advantage. Some law firms offer web-based tracking systems to provide updates on the developing process but that still relies on those firms accurately reporting movements."

Additional jumps

Duerden says credit decisioning is another area of concern for some. This area, which comprises the application of underwriting rules relating to a funder's and mortgage insurer's product guidelines and serviceability, is complicated as mortgage managers commonly originate loans on behalf of multiple securitised funders.

"The ability to perform detailed and accurate credit decisions becomes complex," he says. "Even so, this is achievable for those mortgage managers with strong funder relationships, the capacity to dedicate resources to implementation, and channels that predominately target simply structured mortgage applications."

He adds securitised funders are at various stages of interoperability with mortgage managers, complicating matters further. One major mortgage manager told MPA Lender this was a major concern for them in determining how to proceed with their internal IT setup.

"The ability for the mortgage manager to include the funder in their STP goal therefore very much depends on which funders they deal with and the benefit of integration," says Duerden. "Even though a funder provides a detailed application submission interface, if it does not deliver formal approval in real time then the advantages may be negated. It is worth noting that most only offer conditional approvals as sighting of supporting documents is a prerequisite to formal approval."

On the various service providers critical to the mortgage application process, Duerden says there has been some advancement in the integration of valuers over the past six months or so.

However, Stefanowicz says, while valuations are currently available online, as LVRs increase so too does the lender's risk, and the need for comprehensive and manual valuations. "The variance between property prices in the same area and again the limited data available online does not currently allow a reasonable market valuation of a property without a physical inspection," he says. "Therefore, once again a manual touch point is generated not so much in ordering the valuation ... but the time required to physically inspect the property."

Duerden says mortgage insurers, though, remain a potential stumbling block "as the view taken by most mortgage insurers is that their relationship is with the funder and not mortgage manager. This obviously limits the ability for a mortgage manager to integrate the LMI policy request and approval stage."

Socrates Vasiliadis, the Lending Industry XML Initiative (LIXI) CEO, says mortgage managers face specific hurdles with implementing STP. "In particular, if the parties they do business with do not use LIXI standards they add overheads and complexity," he says. Built upon XML (eXtensible Markup Language), LIXI's e-commerce standards aim to allow banks, brokers, borrowers and all other parties in the lending chain to communicate electronically.

"Also, older internal systems not designed for new processes and, geared to use gateways for exchanging LIXI data, are seen as impediments to STP," he continues. "Many lenders are in the process of changing their situation."

Forsyth also points to the current legal framework which requires the physical exchange of security documents and loan funds. "Digital signature is enacted into law but we have not taken the next step to accept this when it comes to mortgage transactions," he says.

Reasons for optimism

Despite the limitations, getting STP in play is a highly attractive proposition for mortgage managers and lenders alike. For one, Bednar says, it means customers can be signed up more quickly. And, secondly, shorter application processing times can speed up commission payments.

And it is not all negative - things are happening in the STP space.

Resi's head of operations Piers Ramsay says he is not having too many problems when it comes to loan processing. "We're finding all our partners, the mortgage insurers, the funders, and even solicitors are really looking to work with us to make it all happen," he says. "I think the industry is in that place of, 'yes, this is good for everybody, let's make it work'. It's getting all those parties to the same table."

One key initiative underpinning the move to STP involves LIXI, something Resi is working towards.

Mortgage managers are a key part of this evolution, says Vasiliadis. "Over the past five years, mortgage managers have had significant input into the development of e-commerce standards in the Australian lending industry," he says. "They were responsible for developing the settlement standard with the LIXI."

Recent changes to its membership structure has LIXI confident that more of the smaller mortgage industry firms will now take up the technology. "A new change to the LIXI membership model means that LIXI members can now buy licence portions of intellectual property, where it affects their side of the loan process," the organisation said. LIXI has standards published for application, commissions, backchannel, valuations and settlements with progress continuing on other areas of the value chain.

"The new LIXI membership model has opened barriers to entry for more and more of the industry which means mortgage managers will see a better awareness, and more importantly acceptance of LIXI standards from their business partners," says Vasiliadis. "The new LIXI membership changes mean that participants can now join LIXI as a member or licensee, or both. Companies can buy specific packages such as valuations, settlements, insurance, origination or the comprehensive pack."

Another step forward is LIXI's plans to develop a benchmark model which includes industry averages for the time it takes to process mortgage applications, so mortgage managers can measure how they and their partners are performing against an objective mechanism.

When it comes to mortgage managers specifically, Loanbase's Tsavasilis believes their IT system, which has taken 10 years to develop, does effectively deliver STP once a loan has been approved. "Our mortgage manager client has our system on their web server and it is accessed by us to undertake the settlement process," she says. "That way, they control all the data and know where the transaction is at any point in time... In our system manager, solicitor, broker, settlement agent are all part of each file on the single platform to enable STP ... all parties are one and the same just with different permissions and screen shots." Alternatively, clients can acquire the system outright for their own use.

She adds 'front-end' systems can be linked through to their system.

On achieving STP from application through to settlement, Duerden is optimistic. "Most of the stumbling blocks can be overcome today with the appropriate application of human and financial resources," he says. While he acknowledges the largest 20 to 30 mortgage managers are best placed to achieve STP across a majority of processes, he believes smaller mortgage managers can still win, too, by focusing on individual elements and aiming for STP goals over a longer period of time.

Pushing on

There are plenty of ways the smaller mortgage manager can move towards more efficient mortgage processing.

Bednar says that, in lieu of STP, there are numerous IT innovations helping speed up the mortgage process. Areas where IT is making a difference include customer service, risk reduction, adoption of LIXI standards and overall cost reduction, and these will all help in speeding up the mortgage process.

"Solutions such as automated valuation models, third party service provider gateways, broker CRM and submission platforms, and integrated credit decision engines are all innovations currently in the marketplace which are bridging the gap between the current manual world and a utopian state of STP," he says.

As some of its innovations, Stargate has developed various gateways to key participants in the mortgage process, including solicitors, mortgage insurers and valuers. It also provides for online credit processing and decisioning which facilitate online near-instant credit decisions that have integration with the mortgage insurers, credit reporting bureau and valuation providers. Moreover, it provides a broker/mortgage manager CRM space to provide a platform which facilitates improved customer service between both the borrower and the lender.

Duerden emphasises a gradual approach. "The reality is that STP is a series of IT and process innovations that are best taken a step at a time," he says. "Only the largest budgets and companies will accommodate an STP implementation from end to end and even then with considerable risk."

He says the first three or four steps in the mortgage process are where mortgage managers can obtain their greatest STP benefits. "These stages also deliver the greatest return to their business and their channels - quality applications received and assessed efficiently, and conditional approval issued."

"To this end we have been concentrating heavily on an underlying credit decision engine, with integrated Veda Advantage credit assessment supported by receipt of applications electronically through a variety of mediums."

Forsyth says educating brokers to ensure they have the tools to identify the possible credit pitfalls before a loan hits the processing team is something that can be implemented now. Investing in IT is another. "It's impossible to have STP without significant investment in IT," he says.

What next?

For Tsavasilis, one of her major clients is already reaping the benefits of Loanbase's post-approval form of STP. "We have drastically reduced settlement times, and regularly settle the process within days," she says. "Phone calls and e-mails are a thing of the past. This is because all parties communicate in an electronic web-based file for each transaction so everyone knows where the file is at in what is really a mortgage file chat room housed by the mortgage manager."

Others remain more cautious about whether their view of what STP is can be achieved soon. "The paperless office is a great idea and it sounds fantastic but... with the problems with liquidity in the US, it's probably brought a greater focus upon the credit aspect," says Cowan. "The mortgage insurers and funders are likely to become more detailed and sensitive in making sure their loans are fully documented... so that may make it more difficult to move towards a paperless office."

"So, from my way of thinking, the end result may be a part paperless office if I can put it that way, or result in a reduction in the amount of paper without actually being paper-less."

Other problems remain, one of which is "a lack of support by the securitised funders backing mortgage managers, and also through a general lack of understanding of what is involved in STP by mortgage manager decision makers," says Bednar. "We are, however, starting to see an increased level of interest in this area."

He continues: "Some mortgage managers and lenders have adopted electronic application submission as the key to their problem. However, this only achieves limited success. Without mortgage managers understanding and appreciating the change required across the entire business, any benefit gained through electronic submission is usually lost when the application is processed from decision to settlement."

For one thing, though, the US liquidity issue has boosted the incentive to become more efficient, according to Duerden. The boom, fat-margin days when mortgage managers could afford to take a "scattergun approach" to origination, and when sales volumes were king, are gone. "With a contracting customer market and an increased competitiveness amongst mortgage managers there is a change of focus. The major mortgage managers are focusing heavily on efficiency of process and creating cost efficient, high quality channel relationships."