"It" will fundamentally change the mortgage brokerage business forever. In fact, "it" already has. But only 20 of almost 700 attendees at the recent North Carolina Association of Mortgage Brokers Annual Convention in Pinehurst attended a seminar on the last day of the convention to hear about "it." (Interestingly enough, some of the most successful mortgage brokers in the state were among the twenty.)

"It," Fannie Mae's Desktop Underwriter/Desktop Originator, or DU/DO, cousin to Freddie Mac's Loan Prospector, automated underwriting systems that promise point-of-sale underwriting and appraisal decisions "maximizing efficiencies for borrowers who are excellent credit risks," and proving so popular and efficient it is estimated that one out of every four home mortgage loans originated in 1998 will be processed through underwriting systems that didn't even exist three years ago.

Fannie Mae's Michael Koch, addressing what he called "a cozy group," made the understatement of the day - maybe of the decade - when he said DU/DO would cause "a significant reshaping of the mortgage industry."

Significant indeed.

DU/DO, in a nutshell, allows mortgage brokers to fax a completed 1003, a GFE, one paystub (or one year's tax returns for self-employed borrowers) and one bank/asset statement to their wholesaler, who then inputs the information into the program, which spits out an answer within seconds. Some lenders are giving some brokers direct access to the program. (Some wholesalers who have rolled out the program to only a few brokers have found themselves inundated with files, causing backups of from one to three days, a backup that is significantly reduced once wholesale staff get up to speed and get more administrative help.) Those brokers who are given direct access to DU/DO can submit through Byte, Contour, Calyx, and Genesis, which covers about 80% of the broker market according to Koch. (Brokers actually use Desktop Originator or DO, while lenders have the more powerful DU.) (A previous stand-alone "application" forced users to input the data, export it from the processing/origination application to the Fannie Mae application, send it to DU, then retrieve the results and import them back into the processing/origination software. Now, after partnering and coordinating with the commercial developers, Fannie Mae has dramatically shortened and simplified the procedure.) Brokers with direct access have to be Mornet subscribers (about $26 a month plus $5.95 an hour connect time, which equals about fifty cents a file), have to be sponsored by a wholesaler, and have to have the right software. The sponsoring lender still controls the products offered to brokers. In fact, says Koch, not all lenders offer all of their products through DU/DO, although some lenders offer some products only through DU/DO, such as 95% LTV 1, 3, and 5 year ARMs and 7 year balloons (single unit/owner occupied). Other lenders have expanded their loan offerings to stated income and verbal VOE, purchase and refi, fixed and 10/1, salaried and self-employed, 1 and 2 unit properties, along with 80% LTV cash-out refis for owner occupied and second homes as well as 80% LTV investor single-unit and 65% cash-out investor refi one unit. The system is more flexible with CLTV requirements and with some investors allows a 95% LTV non-owner-occupant co-borrower. And these loans are conforming-priced. Of course, most of these loans are available only to those with relatively high credit scores.

The new version of DU even offers a "streamlined 1003," further reducing the amount of data the system needs to make a decision. With this version, Fannie says it will have succeeded in shortening the approval process for mortgages from four weeks to four minutes, and will have reduced the documents required of borrowers from 40 pages to 40 data points. Also with this new version, Fannie has made good on its promise to expand access to the technology, to reduce by 30 percent the amount of data required, and to create an automated appraisal system.

The system is moving to a twenty-four hour availability, but currently is open from 8am to 9pm EST Monday through Friday and Saturday 10am-6pm EST and is not open on Sundays.

DU comes back with one of four decisions: Approved Eligible, Approved Ineligible (Fannie Mae won't buy it, probably because it is a jumbo), Refer, and Refer With Caution (which is, essentially, a turndown). (Later this year Fannie plans to offer an automatic approval upgrade if additional mortgage insurance is obtained.) The program also tells the broker what additional documentation (if any) is required, and what kind of appraisal to order. (The program will mandate one of three different appraisal forms, down to the level of a simple property inspection.) Koch says the most the system will ever ask for is one paystub, two bank statements and one W-2 for salaried borrowers.

At the core of DU is the credit report and the credit score that results. Also important are ratios and job stability. Koch says traditional underwriting rules and compensating factors "are laid over the system."

Version 4.0 of the technology (new versions have been released every 3-6 months so far) reduces further the amount of data needed, making the mortgage loan process "less obtrusive for your borrower" said Koch. At the NCAMB Annual Convention, Koch said Fannie Mae expects about a million loans will be processed through DO/DU this year - or about 5,000 a day - after upgrading the system to make it faster, easier, friendlier and cheaper, but in the past few months Fannie has seen a significantly higher volume than predicted.

Koch says the technology can expand markets, enhance customer service, and dramatically cut paperwork required both of customers and brokers while giving lenders better delivery prices.

"It maximizes efficiencies for borrowers with excellent credit and lets underwriters focus on higher-risk loans. And it increases your profitability and productivity," he says. "A six person office in Indianapolis last month closed 139 loans."

"We are witnessing a new age in mortgage financing," says Robert Levin, Fannie Mae's EVP of Marketing, and one of Koch's bosses. "Technology is transforming our industry by making the mortgage process less time-consuming and less intimidating for borrowers," he has said.

Koch claims "the system works best on the challenging loans. It is a myth that you can only send 'sweet deals' through this program." In fact, Fannie claims the system approves 80 percent of the loans it sees.

He says fears that borrowers with low credit scores will be automatically rejected by the system are unfounded.

"Eighty percent of borrowers with credit scores under 620 will not default, so don't be reluctant to submit files with credit scores below 620," he told the small group.

But, Koch did not rule out the possibility - even the probability - that those with low credit scores would pay more for their access to credit. Calling DU/DO "a sharpening of risk-based pricing," he maintained that Fannie Mae has "always had risk-based pricing. Its just that now the mechanisms are occurring closer to the origination."

Still, Koch believes the system will help more than it will hurt.

"Fannie Mae's goal is to provide more borrowers access to the conforming channel using risk-based pricing. We want to expand that channel. Access to the conforming channel translates into real economic benefits for borrowers. We have found that non-conforming borrowers on average pay a rate that is six percent higher than conforming borrowers. Fannie Mae is going to use advancements in risk assessment to redefine and broaden A."

Koch and others claim that, not only can brokers do more volume with fewer people, but that the system approves deals that a human underwriter never would, pushing ratios way past the traditional 28/36 (In fact, I have had loans approved with back ratios as high as 52.)

Technology is giving us the power to do instantaneously what we previously needed hours or days or weeks to do. It has dramatically shortened decision-making time, and has added what Koch calls "verticality" to even our most basic processes.

"Previously, tasks were sequential - one task needed to be completed before another began. Now, many tasks are being done simultaneously," he said. "DO/DU provide lenders and brokers with the tools and technology to maximize the efficiencies inherent in the tendencies" of verticality and instantaneity. (Koch, a former English Lit major and teacher, says his background gives him authority to create new words.) As fast and disconcerting as these changes may be, "inaction is not an alternative. Not participating is not an option - its writing your own pink slip."

Koch, who has given talks on DU to brokers throughout the country, apparently heard many of the same concerns in North Carolina as he has heard before, among them that Fannie Mae could use the system to go direct to the consumer ("Fannie Mae has a congressional charter as a secondary mortgage market agency. I just don't see Fannie Mae going direct to the consumer," says Koch.)

Could mortgage brokers go directly to Fannie Mae, cutting out the lenders? Again, not likely says Koch. He says the system was designed in partnership with the lenders and always gives the lenders control of the information flow and products delivered to mortgage brokers.

So, the question we mortgage brokers have to answer in this brave new world of DU/DO is what role will we play? Will we become data entry operators? How will we then bring value to the transaction and to borrowers? Or, as Koch asks, "Do I have a place in the value chain of the future?" Any thoughts? E-mail me at Mortgmoney@aol.com or call me at 336.993.3040.

(You can get more information about DU/DO through Fannie Mae's automated fax on demand line. Call 1-800-790-3662.)

Christopher Cruise, SMC, CRML, LA, is America's Most Experienced Homebuyer Educator and North Carolina's Most Credentialed Mortgage Broker. He owns Cruise & Speed Mortgage Planners in Kernersville, North Carolina. He is a candidate for NAMB's CMC designation.