The Federal Home Loan Mortgage Corp., or Freddie Mac, is overhauling its core loan underwriting system with an eye toward automating much of the manual programming required to respond to fluctuating market conditions.
McLean, Va.-based Freddie Mac, which provides funds for residential mortgages, this fall plans to go live with the third generation of its Loan Prospector replatformed software. To fund the mortgages, Freddie Mac buys loans from banks and then turns them into securities that are sold to investors.
The custom-built application, one of four mission-critical systems run at Freddie Mac, is used to evaluate loans before buying them from banks. The updated system will add business process management tools from Pegasystems Inc. in Cambridge, Mass. The company wouldn’t disclose the cost of the upgrade.
The Loan Prospector software links directly to loan-origination systems from home lenders such as Wells Fargo & Co., Countrywide Home Loans Inc. and Bank of America NA to evaluate whether loans Freddie Mac is considering for purchase meet its criteria, said Joe Smialowski, executive vice president of operations and technology.
The current version requires a time-consuming, manual programming effort two to three times a year to account for changes in the rules used to evaluate loans, he said.
“Given the size of these customers and the nature of the contracts we have with them, there are typically complex terms and conditions,” he said. “Our desire was to be able to make a quantum leap in terms of our ability to describe our terms and conditions using rules-based and workflow technology.”
Dynamic Selection
Pegasystems said its PegaRules business rules engine, which powers its BPM suite, can dynamically select the right process or business rule depending on various factors.
The BPM updates will allow for the software to be easily updated whenever terms and conditions need to be changed, Smialowski said.
He noted that as more lenders seek to offer 40- and 50-year mortgages to customers, Freddie Mac will have to update Loan Prospector to accept these loans. “Our ability to respond to that need [quickly] puts us in a more advantageous position,” said Smialowski.
Freddie Mac also liked the audit-trail capabilities in the BPM tool, which let the system diligently check any changes to rules, according to Smialowski.
Freddie Mac expects the use of the BPM tools to cut the operating and maintenance costs for the updated system by 30% compared with the current version’s costs, Smialowski said. He estimated that it will take 12 to 18 months to covert all its mortgage lender clients to the new system.
The approach Freddie Mac is taking — abstracting rules out of the code to allow them to be changed more easily — is becoming a best practice among many corporations, said Janelle Hill, an analyst at Gartner Inc.
D Fragoso