Lender Faces Merger Problems, Without the Merger

By Duff Mcdonald  |  Posted 05-05-2005

Lender Faces Merger Problems, Without the Merger

Unless you had your head under a rock for the past ten years, you've heard more than once about the nation's seemingly endless housing boom. Kansas City, Mo.-based NovaStar Financial is one of the many companies that enjoyed a substantial increase in business thanks to the low-interest-rate environment that spurred it.

The company, which originates and securitizes sub-prime mortgages, pulled in net interest income in 2004 of $171 million, capping a three-year period of 97 percent annual top-line growth. Net income grew from $32.3 million in 2001 to $112 million in 2003, though it fell slightly in 2004, to $109.1 million, thanks primarily to the rise in short-term interest rates.

As of the end of 2004, NovaStar managed a portfolio of $12.2 billion in loans, up 69 percent from just a year earlier.

The company essentially does business in two different directions. On the front end, its retail arm, NovaStar Home Mortgage and NovaStar Mortgage, generates 25 percent of the company's mortgage business, with the other 65 percent coming through a wholesale network of independent mortgage brokers.

On the back end, NovaStar packages those mortgages and sells them in the financial markets.

To date, the different sides of the operation have had vastly different information technology requirements, and the IT team has focused primarily on isolated tasks, such as the quick introduction of Web-based customer-facing loan approval applications that provide a competitive edge, and singular process improvements that speed up the decision of whether, and at what terms, the company will provide loans.

Such decisions allowed the company to continue gaining market share in the first seven years of its existence. But in 2004 management realized that to continue its growth without coming apart at the seams, NovaStar's IT strategy needed to incorporate a more holistic view of the entire business, rather than merely focusing on the speedy growth of its separate lines of business.

Lynn Ryan was hired as the company's new chief information officer in September 2004 to do just that. And she's approaching that task by focusing on three primary components of the company's information processes: the data itself, the transport of that data, and the applications that make use of it.

Ryan's primary goal is to rethink the company's multiple repositories of data, from its business and customer pipeline to the costs of doing business, daily changes in the pricing of mortgage securities on the financial markets, and even regulatory reporting information. "We are struggling with the ability to look at point-in-time critical information easily," she says. "We need to be able to go across multiple databases, extract data from each, and build reporting results that enable us to be more effective."

If interest rates make a sharp move in one direction or the other, for example, one of Ryan's goals is to speed up the company's ability to decide whether to keep certain loans in the company's portfolio, or to securitize them and sell them into the secondary market. It's a decision the company has long been making on a day-to-day basis, but by tying together its data infrastructure, NovaStar hopes to make such decisions much more quickly.

To do that, she thinks NovaStar will need to create a warehouse information model that would give executives a comprehensive understanding of how the company's component parts interact. Add to that the ability to measure employee performance—how quickly the company can process and approve a loan, how salespeople perform relative to particular products or in particular markets—and it's easy to see how one moving part can affect the entire company.


Paper Chase

The second rethinking of the company's IT strategy involves the transportation of that data, in particular an effort to drive the loan-approval decision closer to the point of entry—in other words, in the individual mortgage broker's office—and farther from the point of internal review.

That would eliminate as much paper as possible. The company is exploring the use of electronic signatures and electronic documentary evidence, including such simple ideas as a tool set that allows brokers to simply scan your paycheck or tax return and deliver it to headquarters electronically.

"A substantial amount of our operational costs come during the verification process," says Ryan. If NovaStar can speed up the process, it will not only be able to eliminate part of the cost component, but it should ultimately close more business. Ryan and her team are targeting a minimum of 20 percent operational improvement through such initiatives.

That would translate to a $41 million annual reduction in operating expenses in NovaStar's wholesale mortgage origination business.

The third aspect of Ryan's overhaul of NovaStar's IT strategy will be focused on its most visible part: the mortgage application software itself. Almost all of the company's broker applications have been developed in-house, and were designed with three primary objectives—efficiency, speed and quality.

While the company is proud of those applications—NovaStar was one of the first to offer an instantaneous automated approval process for sub-prime loans—it has also identified 5 of its 15 core applications for overhaul or complete replacement. "The key will be to make sure we don't blow up the business in the process," says Ryan.

Ask Lance Anderson, president and cofounder of NovaStar, what separates the company from the competition, and he will readily admit that it's not the company's products themselves. It's that in mortgages, operational efficiency wins the day.

"As a lender, the lower we can keep our own costs, the lower the rates we can offer our customers," he explains. "With the right IT strategy, we can not only keep our back-office costs down, but we can give brokers quicker turn times as well. That's how you stand out from the competition."

Duff Mcdonald is a freelance writer living in New York.