Creating a Strategic Checklist for the New Mortgage Industry


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Investments in technology are required to remain competitive in today\'s mortgage industry.

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Creating a Strategic Checklist for the New Mortgage Industry

  1. 1. The Summit Point Group Creating a Strategic Checklist for the “New” Mortgage Industry The path to the future may have changed, but technology will still be critical.Once upon a time, the “future” of the mortgage transaction seemed perfectly clear. Aconsumer would contact a lender, providing some basic personal and transactionalinformation. Then, in a matter of days - or even hours - all processing would be complete.The closing would then be scheduled, and the loan officer or advisor would provide thecustomer with a wide array of loan program options tailored to the customer’s profile andcircumstances, enabling him or her to select the best possible loan program terms.Making use of established standards and an extensive network connecting data sources andservice providers, everything that would be needed to process and close the mortgage wouldbe available. The borrower’s identity could be validated by SSN or driver’s license numberand qualified income established by a link to payroll, employment, or IRS databases. Creditdata from the repositories would be evaluated and scored and the subject property valueestablished via automated valuation model, with appraisals ordered for properties that couldnot be valued with an appropriate level of certainty. Assets would be identified and valuedvia direct links to financial institutions and title, taxes, liens, and other informationaccessed via a networked “clearinghouse.”In addition, advanced technologies using other data sources and models would furtherevaluate the transaction, providing the loan officer or processor with additional informationand guidance. Business rules engines would evaluate and validate all data and terms,flagging missing items or those needing additional attention. Risk engines would evaluaterisk attributes and score the transaction, with risk-based pricing attributes applied by pricingengines. Loan programs would be dynamically constructed and priced by best-fittechnologies. Loan offers could be tailored to match the profile, needs, and desires of theborrower, and priced according to transaction and risk attributes. Fraud risks would beidentified by intelligent systems that would access databases of detailed information aboutthe loan officer, lender, property, and the like. The overall approval would be provided byautomated underwriting engines, providing documentation and processing requirementswhile flagging loans that might require further human review.The advantages and benefits of this new world were unmistakable. Use of independent third-party data to establish the loan transaction would avoid mistakes and practically removeany chance of origination fraud. Business rules engines would replace many human activitiesand provide significant efficiencies, while insuring consistency and accuracy and removingany bias. Lenders could reserve their human resources for only those transactions that wereidentified as requiring exceptional processing or a second look. Risk models used with rulesCopyright © 2011 The Summit Point Group
  2. 2. Page 2 Creating a Strategic Checklist for the “New” Mortgage Industryengines would accurately assign transaction risk attributes and enable flexible loan programsthat could be precisely priced according to terms and risks. The investment value ofsecurities with mortgages as collateral would increase due to the rich data model andtransparent value/risk-based pricing. And the consumer would “win,” with a mortgageprocess that was quick, easy, flexible and fair. Borrowers that truly deserved and couldafford a mortgage could easily get one with terms that matched their profile andcircumstances.That was the vision only a few years ago. Now, fast forward to today. The dream of anefficient mortgage origination process and healthy secondary environment has been seriouslyside-tracked. The number of major investors in the market for new originations hasdwindled to two – Fannie Mae and Freddie Mac. Other “investors” are chasing pools of non-performing or troubled mortgages. Fully documented loan packages with manual processingand underwriting have returned for all loans. Automated underwriting is now about whetherFannie or Freddie will buy the mortgage. MERS is under attack by courts across the country,as millions of loans enter foreclosure. Mortgage technology innovation seems to be stifled,with resources instead focused on responding to the myriad of new legislative and regulatoryrule changes. Technology is even under attack, as commentators would have us believe thattechnology enabled or even caused the current industry crisis. And consumers have seentheir borrowing options shrink significantly, with many blocked from getting new loans dueto hefty loan level price adjustments applied to new originations.So the question; if we had reached the future-state vision before 2005, could we haveavoided the melt-down of the last few years? The answer: possibly . . . and possibly not. Use of third party employment, income, and asset data to establish the mortgage transaction could have avoided fraudulent applications; NINA programs and paper documentation, probably not . . . Affordability and risk models could have disqualified borrowers for loans that they clearly could not or would not pay; manager overrides (approvals) and flawed models based upon transaction loss rather than borrower payment performance, probably not . . . Property databases and rules engines could have identified multiple transactions for the same property, quickly inflated prices, and owners of multiple properties; appraisal-only (and sometimes duress-based) valuations, probably not . . . Full transparency into transaction data and various value/risk attributes could have helped analysts more accurately value collateral and thus the securities. Of course, even the best valuations would not have stood in the way of excessively aggressive practices. Copyright © 2011 The Summit Point Group
  3. 3. Creating a Strategic Checklist for the “New” Mortgage Industry Page 3The next question is “where are we going from here?” Unfortunately, the future is far frombeing predictable. With so many variables at play, even a best guess could be far from theultimate reality. The only reasonable approach (which is at best, cloudy) is to study what ishappening today. The continued existence of Fannie Mae and Freddie Mac is likely limited.While often controversial in their reach, Fannie and Freddie helped to set standards in riskassessment, processing requirements, documentation, forms, data, and transactionalstandards. They were active (financial) sponsors of MISMO and MERS, and were highlyresponsible for the adoption of technologies by the mortgage industry – automatedunderwriting as an example. They spent hundreds of millions of dollars in these areas andtheir exit will surely leave a gap. The Consumer Financial Protection Bureau is still underdevelopment, but with substantial powers, it will clearly impact how the mortgage industrydoes business. Already within its future purview are long-discussed consumer disclosurechanges and the definition of the Qualified Residential Mortgage (QRM). The roles of FHFA,HUD, FDIC, and other governmental entities in policy development and enforcement remainin place, pending future legislation and administration actions. FHFA has driven HVCCadoption and FDIC continues with policies that effectively block covered bond issuance.Congress continues to debate legislation that will determine the future of the GSEs andmortgage industry methods and practices.While the above list is not anywhere close to being exhaustive, these topics alonedemonstrate that the future will be one of transformation. Unfortunately, due to the chaosof the last few years, innovations in mortgage industry methods and technology have stalled.While the GSEs recently re-engaged on data standards, adopting and sponsoring MISMOtransactions for delivery and appraisal, other areas of their domain seem to have taken astep backward; Desktop Underwriter and Loan Prospector are no longer industry utilities, butsimply tools of delivery for Fannie Mae and Freddie Mac – thus the move to broad-basedmanual underwriting. Broad sponsorship of data standards by mortgage lenders is non-existent. A quick scan of the MISMO subscriber list identified less than 15 lender subscribers.The secondary/securities market for non-conforming mortgages is almost non-existent.There have been only two issuances of jumbo securities in the last two years by the sameissuer; and Fannie Mae/Freddie Mac delivery eligibility is due to contract later this year.Looking at the current environment, a few conclusions may be reached. The pace of changewill accelerate before the industry reaches any level of stability. Changes in originationmethods and loan programs that provide the flexibilities that borrowers need will not beabundant. The industry standards, methods, and technologies that could reduce risk, bringefficiencies, and improve lending overall for the consumer and the lender will not evolve asbroad-based offerings in the near future. The mortgage industry that was envisioned only afew years ago will not emerge for years to come. As a result, intelligent use of technologywill once again emerge as a differentiator for industry participants.Assuming that the above conclusions are anywhere close to being correct, this writerCopyright © 2011 The Summit Point Group
  4. 4. Page 4 Creating a Strategic Checklist for the “New” Mortgage Industrybelieves that there are technology priorities that mortgage lenders should be looking attoday. 1. Ensure that loan origination and processing systems have the ability to capture and store all data related to the mortgage transaction, including credit trade lines and all appraisal data fields; the direction is for more data, not less, as reporting requirements expand. 2. Buy or build enterprise-level business rules capabilities; BRMS solutions will expand capabilities, support rapid change, and offer new efficiencies required to meet changing markets, new rules and regulations. 3. Evaluate using best-in-class providers of mortgage related services for flexibility, quality and value.Investments in new methods and technologies are required to maintain flexibilities that willbe demanded to remain competitive in an industry that is poised for a period of rapidchange; put them at the top of your “strategic checklist.” About the author: David Coleman is Managing Director of The Summit Point Group, a strategic management and technology consulting firm. He is an accomplished mortgage industry executive with more than 20 years of demonstrated success developing and executing strategies for major business and technology initiatives, turn-around transitions, and operational start-ups. Prior to founding The Summit Point Group, David served as Vice President of Technology at Fannie Mae, where he led strategic business and technology planning. His accomplishments while at Fannie Mae included the development and roll-out of Desktop Underwriter. davidcoleman@thesummitpointgroup.comCopyright © 2011 The Summit Point Group