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Let’s learn the American lesson on standardisation

As Brits, we tend to resist admitting we can learn much from the Americans, particularly at the moment.

But when it comes to the mortgage world, we have to acknowledge that they are ahead of us in many areas. Realising the important role that greater standardisation can play is one lesson we should learn.

Standardisation could be applied to various aspects of our own mortgage industry, bringing significant gains in efficiency and transparency. These gains would benefit borrowers, lenders, brokers and investors.

In the US, organisations have been set up specifically to agree on recognised standards. Freddie Mac and Fannie Mae, government sponsored organisations that operate in the secondary market, often help to drive standardisation throughout the industry.

But lenders have also realised the benefits. For example, the Mortgage Industry Standards Maintenance Organisation is an outfit that was founded by mortgage lenders to agree on electronic commerce standards, allowing for far greater technological innovation.

The higher degree of standardisation in the US allows its primary and secondary mortgage markets to run more efficiently. This standardisation has resulted in recognised definitions of mortgage terms, standard mortgage documentation and underwriting procedures, and an accepted set of information requirements on borrowers and properties.

Also, technological elements such as file-format structures have become accepted by most. This has improved information gathering and eased the way for market players to interact.

For example, dealings between brokers and lenders would become far more efficient in this country if a recognised set of documentation and information requirements could be agreed upon. In particular, with the right software, brokers would only have to key in information about the borrower once in order to make electronic applications to a range of lenders.

Crucially, standardisation in the US has allowed for the greater automation of mortgage processes and a more widespread use of technology.

Through the extensive use of specialist software, automated underwriting has enabled lenders to cut the time and cost needed to approve and close loans. And the servicing of loans has benefited too. The improvements in efficiency from such innovations over here would be considerable.

A higher degree of standardisation could also have advantages in the secondary market. The setting of recognised norms in terms of portfolio definitions and information requirements would make risk assessment quicker and easier.

And the trading of portfolios between companies could be made significantly easier. Instead of whole loan transactions taking weeks or even months, they could take place in hours or minutes.

Standardisation has an image problem with some in our market. It can be crudely associated with over-regulation, lack of diversity and product commoditisation.

But a look at the US shows this to be unfair. Standardisation is occurring slowly in some areas of the British mortgage industry, helped by lender and government action, but it should be coming along a lot quicker. This is one American lesson we could all benefit from learning.


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