FINANCIAL SERVICES UPDATE

INDUSTRIES
Is the Bubble About to Burst in the Overheated Mortgage Market?
When lending institutions rely too heavily on so-called nontraditional mortgages, it's enough to keep a Fed chairman awake at night.
Alan Greenspan recently outlined his concerns to Congress, saying the dramatic increase in the prevalence of interest-only loans and exotic forms of adjustable-rate mortgages "are developments of particular concern. For individual cases, [nontraditional mortgages] could be disastrous," Greenspan said.

Nontraditional mortgages: financial quicksand?
The latest quarterly survey of senior loan managers by the Fed puts some numbers to the trend and shows how entrenched these practices are becoming. Twenty percent of the U.S. firms surveyed by the Fed said mortgage demand strengthened in the first quarter, while more than 50 percent of the banks indicated the percentage of business represented by nontraditional residential mortgages in the past 12 months rose over the previous year. Twelve percent of respondents said the rise was substantial.

Time will tell if nontraditional mortgages remain a reliable revenue stream for banks or if they're financial quicksand. Either way, they illustrate how economically prudent banks need to focus on management and efficiency even as they consider new ways of doing business. Technology plays a key in future business endeavors, but only if it's reliable and flexible enough to adapt to changing business conditions.

The solution: integrated information
Fortunately, banks have comprehensive tools to meet these challenges. As a result of its agreement to purchase a 41 percent equity interest in i-flex, Reveleus' parent company, Oracle will work with i-flex to offer Reveleus Mortgage Analytics, which provides analytics for each stage of the mortgage life cycle. Banks can use the technology to analyze originations, perform portfolio analytics for servicing accounts, control and manage delinquencies, monitor collections, and evaluate write-offs and recoveries.

Especially important is Reveleus Mortgage Analytics' ability to break down traditional information silos by enabling financial analysts to use common data, metrics, categories and definitions that create a single version of the truth. For example, the technology can combine originations information, such as FICO scores with such servicing data as delinquency status to create an accurate picture of portfolio performance.

The capabilities of Reveleus Mortgage Analytics span multiple departments to provide a
wide range of analysis tools for risk managers, credit officers, marketing managers, underwriters, and collection managers.

In today's superheated mortgage market, just understanding an applicant's credit position may not be enough to project a bank from losses. Instead, institutions need insights into any systemic risks. Reveleus Mortgage Analytics helps analysts identify underlying risk causes by classifying accounts according to customer demographics and historical credit behavior, which allows banks to redefine credit risk management from routine report generation to the identification and understanding of trends.

In the end, Reveleus Mortgage Analytics can help lenders better manage their risk, focus
their marketing and sales efforts, and measure the performance of their business.

BPEL: tying your business processes together
Also gaining importance is a maturing business process management (BPM) software offers help. BPM won't reduce the potential risk of nontraditional mortgages, but it can keep banks nimble enough to capitalize on new opportunities.

Used correctly, BPM can help banks more fully integrate now-disparate processes and applications, particularly in areas like mortgage analyses, which require interaction among underwriters, insurers, banks, and credit reference agencies. What's more, business process integration and optimization that extends to third-party financial partners offers the potential of saving costs and increasing competitive advantages.

But a functional chasm often exists at many financial organizations between the business needs (and the processes to satisfy them) as modeled by the business analyst and the application development resources needed to deliver a solution. The key is to create a bridge between business managers and applications developers to support new ventures.

An emerging standard called BPEL (Business Process Execution Language) is helping build this bridge. BPEL allows an organization to treat processes and the applications that underpin them as Web services utilities.

Oracle BPEL Process Manager 10g runs in conjunction with Oracle Application Server 10g or any other J2EE application server. Using BPEL, consumers may access a bank's mortgage application through a Web portal. The application itself leverages several trading partners that provide the actual financing as well as existing information systems and legacy applications for customer information, credit ratings, and other loan components. In addition, the application must support interactions with customer service representatives. Standards emerging around Web service orchestration, such as SOAP, WSDL, XML Schema, and BPEL, help the bank integrate and manage the business processes among all the various parties.

The bank may also build the system with a "loosely coupled" service-oriented architecture (SOA). Coupling determines how closely different services are bound together, ranging from tightly coupled, where individual services are highly dependent on each other to work properly, to loosely coupled, where services show a high degree of independence. This minimizes the cost, time, and resources required by the bank to build and maintain the services.

BPEL lets the bank quickly model its business process by connecting together the
applications and partners that support it. BPEL can also monitor the effectiveness of this process to help IT managers fine tune process performance.

Taking BPEL to the next level is Oracle Business Activity Monitoring (Oracle BAM), a key technology component of Oracle Fusion Middleware and Service-Oriented Architecture (SOA). Oracle BAM helps improve decision-making by giving managers a real-time view of business events and then applying the derived intelligence to daily operations. For example, mortgage managers can use Oracle BAM to compare the number of loan applications to approvals, rejections, incidents of processing errors and other key factors to analyze performance and improve business process efficiencies.