Lending's Winding Road

Fannie Mae is working with lenders to simplify the "fundamental business processes to close and fund a loan," Flaxman says. Electronic mortgages will begin to appear next year, he says. One step in this effort: Fannie Mae and Freddie Mac have enhanced automated underwriting software they license to banks to help them determine whether a loan application conforms to their risk standards.

Technology helps mortgage companies tap into segments of the population that have been left out of the housing market. For example, Freddie Mac has fine-tuned its automated underwriting software, Loan Originator, to reach out to minorities who've shied away because of distrust of financial intermediaries or misconceptions that they'll get turned down because of poor credit histories. Freddie Mac was able to hike approval rates to 85%, up from 50% in the mid-1990s, letting banks offer more loans to people who would have been turned down in the past.

"Mortgage products need to be more creative," says Freddie Mac VP Patricia McClung. "Electronic mortgages are the wave of the future, but it's not going to happen overnight."

One problem: Digital-signature laws have been enacted, making electronic documents the legal equivalent of paper, but they haven't been tested in court yet with respect to mortgages. That's just one of many obstacles potentially in the way of using technology to simplify the business processes of an industry built on complexity. One thing is clear, though: If lenders can succeed in just some of what they're planning, they'll have come a long way from where they are now.