How important is information technology to the mortgage insurance industry? These days, the lack of a functional system in a company’s formative stage, a system that already has several back-office and customer-facing parts before the company is launched, is considered a barrier to entry.
That’s especially true in a speed-to-market scenario that was explored recently during private strategic briefings at WTN’s Fusion 2013. In a remarkable entrepreneurial rise, a California start-up company has cleared that hurdle and one more, and did so with the help of technology developed in Madison.
Stan Pachura, executive vice president and chief information officer of that company, National Mortgage Insurance Corp., has about 500 million reasons to appreciate the significance of a sound technology platform, because that’s about how much money NMIC had to raise in a 60-day period in 2011 to become a viable start up in an industry that isn’t very crowded.
Investor familiarity with the Bay Area company’s top executives – including CEO Brad Shuster and CFO Jay Sherwood – didn’t hurt, but when the goal is to raise $500 million for escrow and claims to launch the business, plus another $50 million for operations, a good management reputation qualifies as a nice start.
Raising that amount of private equity within a year’s time, during a period that can hardly be described as a go-go era for venture capital, is no small feat, but National Mortgage now boasts of support from 40 investors. “There are two major hurdles to entering the mortgage insurance industry,” Pachura explained. “The first is capital because it does require a significant amount of capital to hold in reserve for the policies that you write. It requires a lot of capital, which was the big reason for the very large capital raise.
“The other barrier to entry is the company’s technology system, because mortgage insurance is a small industry with a small number of players. There have been less than 10 players in the mortgage insurance industry historically. So it’s not the kind of industry where you can go buy a shrink-wrapped package and/or a ready-made package to support the business operations.”
In addition, mortgage insurance is a B-2-B industry, where customers are the lenders that originate mortgage insurance policies. A large percentage of NMIC’s business is transacted electronically, particularly the exchange of both data and documents. To raise the necessary capital, potential investors “want to know that you can build out ahead with the required technology,” Pachura stated. “When you’re going through a capital raise, one of the early questions you will get is, “So where are you going to get your technology from?’
“People looking at this industry know you need to have a system from somewhere, and then they ask about your technology plans going forward to grow the business.”
Mana from Madison
The answer to the technology question had been found in Wisconsin’s capital city, where NMIC acquired another would-be mortgage insurance start up called Mortgage Insurance Corp., aka MAC, which also was in a very early stage and looking to get funding. To attract that funding, it had started to build a basic system that would eventually serve as National Mortgage’s technology foundation.
“We were able to tell the investors that ‘we’re going to take this system, we’re going to build upon it, and we’re going to take it to the next level, and here is what we’re going to do,’” Pachura said.
By the time it met with investors, National Mortgage could perform demonstrations of the basic functionality of the system it purchased. But even after securing the money, there were anxious moments around the need to pass an independent validation test of its entire platform, which was completed by year’s end, and there was the matter of building disaster recovery, gaining PIC compliance, and certification form Fannie Mae and Freddie Mac.
National Mortgage, based in Emeryville, Calif., not only has ties to the Madison area, as a MAC executive joined the organization, it is domiciled in Wisconsin and worked closely here with CDW, which is hosting its solutions.
As a former CIO at another mortgage insurance company, PMI Mortgage Insurance Co., Pachura was eager to do the necessary integration, and use cloud computing (software-as-a-service) and open source to complete a system that would bring significant capability to market. The availability of these new options enabled an accelerated launch that the acquisition of an Oracle suite, and its two-year development cycle, would have rendered impossible a few years ago.
MAC had developed the modules that support internal operation, including basic functions like premium billing and claims processing. It had not yet addressed customer-facing capabilities such as electronic data interchange, document management, and document capture capabilities, nor had it built the human exchange functions required in the mortgage insurance industry.
“As far as the e-commerce piece, we have licensed an enterprise service to make our B-2-B activity for electronic transactions, and we are using a market- provided business intelligence solution,” Pachura said. “We also have document-capture capability that allows us to exchange mortgage loan documents with our customers, and then bring that into our enterprise content management solution, where we are managing the storage and retrieval of all those documents, as well as the underwriting workflow for our business.
“So we also have the enterprise service bus, which is managing our B-2-B transactions, and we are building out our data warehouse to support the analytic and reporting requirements of the company.”
With a total workforce of 89 people, including a distributed sales force of people working out of their dens and living rooms, National Mortgage’s 14-member IT staff also relies on solutions like Salesforce.com and Microsoft Office 365. It also out-shored functions like stress testing so that it could be done on the company’s off hours.
National Mortgage has yet to write its first policy, but the IT setup work is largely complete. Still, with market launch approaching, the management team has little time to contemplate going from zero infrastructure, not even walls, to fully operational (or risk losing their funding and regulatory approval), and put themselves in a position to operate in 35 states and compete with the likes of Milwaukee’s MGIC Investment Corp. On the optimistic side, the resurgence of the housing industry means the timing is about right, and the recessionary losses of legacy companies gives NMIC management the confidence that they will bring much-needed capital to the market.
They also bring the right mindset when it comes to constant business progress. With any technology system, particularly in a company where technology plays a large role, Pachura understands that he must always enhance and bring new functionality to customers, especially ease of use.
The company has gone form PowerPoint to public in roughly 700 days. As a result, Pachura believes the only way to launch a business like National Mortgage is in the cloud. “If you can take a company like this from nothing to the cloud in 700 days, there is something to this cloud thing,” he stated.
Biz lessons
If the fast-track experience has produced any lasting lessons for NMIC’s chief information officer, they include the necessity of admitting mistakes and reacting quickly, planning for application integration upfront, realizing that service providers are learning too, and not being afraid to embrace multiple providers.
Primarily, however, it’s about the importance of finding providers that fit well with your strategy and meet your needs. “Even though we didn’t have a lot of time, it often pays to go out there and spend more time looking for a provider, whether it’s a car provider or a software provider that really meets your needs and fits well with your strategy,” he explained, “and also choose vendors that look very favorably upon standards. When you are assembling something, and you want to do it quickly and have it be resilient going forward, building things that are based on a solid set of standards is a high priority.
“As with anything, establish a clear, critical path to success, and stay on that path because when you are in a speed-to-market situation, it’s very critical to stay on that path.”
Core enablement
Fusion Conference Chair Rick Davidson, president and CEO of the IT services firm Cimphony, is mightily impressed with National Mortgage’s ability to quickly position itself to compete. In some sense, he could relate to what Pachura and his colleagues faced, having once launched an insurance company himself.
“It speaks to two or three points, including the dedication of his team and creativity and innovation that the team had relative to setting up the applications,” Davidson stated. “They took a big bet on the Madison-based company to provision a new system they could use to manage mortgage applications, and do that in a very short period of time. It was a big bet.
“Other elements had to come together. It wasn’t just a small company, but an ecosystem of apps that had to come together to integrate everything. Stan and his team did a fantastic job.”
Following Pachura’s Fusion presentation, Leslie Hearn, vice president and CIO for TDS Telecom in Madison, said the National Mortgage saga has reinforced her belief in the cloud’s possibilities in bringing real business value. Hearn noted that TDS is a cloud provider, but added that Pachura’s presentation helped her understand “that you can integrate various cloud providers and experiment more so in the cloud than you can in your own shop.”
“We’re a cloud provider, so you don’t have to sell us on the need for IT managers to employ cloud solutions, but this adds another dimension to it.”
Accelerating start ups
Perhaps it’s too much to expect the cloud to have this much impact on the plans of every start-up business, but the convergence of cloud computing and constant upgrades in broadband and computing power could help Wisconsin improve its performance in an all-important business category: the pace of new business formation.
While it’s generally acknowledged that Wisconsin is doing a better job in building companies in its core industry groups, the state consistently ranks below its Midwestern peers on new business formation, according to the Kauffman Foundation and other groups.
David Cagigal, CIO for the Wisconsin Department of Administration, is in the process of determining the uniformity of broadband strength statewide. He said the two schools of thought on that extend from both ends of the range – from sufficiently ample to well short of that.
However, there is little doubt about broadband capacity in the state’s two largest and most populous metropolitan areas. “Madison and Milwaukee are adequately prepared because there is no want for broadband in those high-density areas,” he stated. “So if a business wanted to move into a Milwaukee or Madison, we’re ready to go.”
The remaining examination focuses on whether and where to invest in broadband in the state’s smaller counties. “I’m still sorting that out,” he said. “For the number of people who are for expansion, and for the number of people who are against, it’s just an argument right now, but we’ll eventually have to understand what is fact and what is myth.
“Not withstanding that discussion, Madison and Milwaukee are well prepared to take on the entrepreneurial role, and I believe some significant companies like Google and Microsoft and others have investigated us as possible locations, and that we’ve met those requirements.”
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