Electronic Market Hypothesis: Case Study

From Information Systems at Pitt Business

In the mid 1980s, the loan industry began to automate the front-end portion of the loan process. The industry response and initial indication was that this change was going to inspire a dramatic change and overhaul of the whole industry. To date, this change has not occured, and this paper investigates why the industry as a whole has not altered too dramatically from what it was before the increased automation by IT.

According to the electronic markets hypothesis, the introduction of IT into an industry should reduce the ties that link the hierarchies and provide for a more open market enabled with the electronic transmissions and exchange of information. By following the history of five automation mortgage systems, the authors review the case history of this market and its failure to align with the electronic markets hypothesis during the time period reviewed.

[edit] Abstract

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 LoanExpress, 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.

[edit] Paper Information

Authors: Christopher Hess, Chris Kemerer

Check out the paper at Computerized Loan Origination Systems: An Industry Case Study of the Electronic Markets Hypothesis

This article was originally published in MISQ, Vol 18, No. 3, September 1994.

[edit] Keywords

Computerized loan origination systems, electronic markets, electronic hierarchies, incomplete contracts, Shelternet, mortgages