Computerized Loan Origination Systems: An Industry Case Study of the Electronic Markets Hypothesis

Much has been written in recent years about the changes in corporate strategies and industry structures associated with electronic coordination of market activities. This paper considers the advent of electronic market coordination in the home mortgage industry, focusing on Computerized Loan Origination (CLO) systems. Case studies of five CLOs (First Boston's Shelternet, PRC's Loan Express, American Financial Network's Rennie Mae, Prudential's CLOS, and Citicorp's Mortgage Power Plus) reveal a range of system functionalities. Predictions from the Electronic Markets Hypothesis (EMH) are tested against the empirical results of the five case studies. As suggested by the EMH, financial intermediaries have been threatened by the introduction of CLOs, and in some cases, opposition has been mounted against the systems. On the other hand, despite the availability of the technology and mortgages' seemingly favorable characteristics as an electronically mediated market product, the industry has not been fundamentally changed by the introduction of these systems, despite more than a decade of experience with them. Of the two case studies that could be characterized as electronic markets, neither continues to exist in that form today. And the system with the largest dollar volume of mortgages of the five is best characterized as an electronic hierarchy. These results suggest that either the full results predicted by the EMH require a longer gestation period or that the underlying hypothesis will require augmentation in order to fully explain the results in the home mortgage market.