When a borrower wants to prepay a mortgage into next year, will the computers at the mortgage company be able to handle the transaction? How ready is the mortgage industry to deal with the Millenium Bug? If the 1998 Mortech study is accurate, there is some cause for concern. At the time participating mortgage companies were interviewed for the study, only a quarter of them said their internal systems were Y2K compliant.

Yet the mortgage industry has had more practical notice than most others about the danger of computers going haywire by misreading the year 2000 as 1900. After all, 30-year mortgages are the rule rather than the exception in residential lending, so creating amortization schedules by computer brings the Y2K problem right to the forefront. And though very few people make their mortgage payments in advance, some do -- even years in advance. Y2K glitches have been discussed for years among mortgage industry professionals. Though not all companies have completed their efforts to make sure their computer systems and those of their trading partners will function on January 1, 2000, only a very few have as yet done nothing. The financial services industries tend to be very sensitive to the public's perception of their competence in handling money, and federal regulators have been warning the industry to get Y2K-compliant since 1996.

Where prodding may have been necessary, the government-sponsored agencies stepped forward to provide it. Both Fannie Mae and Freddie Mac announced that they would require mortgage firms that operate as their approved servicers to participate in industrywide testing (see Fannie Mae Announcement 98-09 and Freddie Mac Bulletin 98-8).

From January through June of this year the Mortgage Bankers Association of America will be conducting a year 2000 readiness test for residential lending that will allow lenders, vendors, service providers, agencies and organizations to test the inter-connectivity of their mortgage systems with those of their trading partners in 16 specific transactions described inthe Year 2000 Readiness Test White Paper. A copy of the white paper may be downloaded from the MBA Y2K website at www.mbay2k.org.

Registrants for the test will receive a head start test package including instructions, test cases, scenarios, scripts, and a schedule for all 16 transactions; access to the MBA test call center; and a final test package including updates and a participant identification key. Registrants began receiving their head start packages in September of this year.

To participate registrants are required to have all their internal systems Y2K ready and tested. They must have adequate resources and skills to conduct testing with their trading partners, must be able to meet the schedule within the published deadlines, must have controls in place to keep test data separate from production data, and must be able to validate and interpret the test results.

What if they flunk? Well, companies are starting to give notice that trading partners whose systems are not Y2K compliant will be shunned in favor of companies that are. With 90% of the software used in the mortgage industry coming from outside vendors, any software vendor showing up as failing Year 2000 testing is likely to be out of business in a big hurry.

Published: January 11, 1999

Use of this article without permission is a violation of federal copyright laws.

Author/journalist Scott Kersnar is the west coast correspondent for the Faulkner & Gray mortgage division publications. As he has done annually, Scott wrote the Internet chapters for the 2000 Faulkner & Gray Mortgage Technology Directory. He also authored Net Success: How Real Estate Agents Use The Internet, published by O'Reilly & Associates. A former REALTOR®, Scott is a frequent speaker on the subject of Internet lending.