Talk to any mortgage technologist about the future of the industry and two topics will emerge immediately: big data and smarter automation. I know this because this is what we’ve been talking about in our industry for the past decade. While big data and smart automation are still at the forefront of these conversations today, the focus has evolved.
When the concept of big data first emerged, it was a dream based on the need to centralize information so lenders could run analytics to gain insight into the nature of their evolving businesses and the changing demands of customers.
While we discussed the details, other industries, like healthcare, manufacturing and pharmaceuticals, were building out robust API infrastructures to pool information into big data centers. Today, while the mortgage industry has the technology to support this, we’re still in the early stages of determining how it should be used.
We have fared much better on the automation side. Purveyors of very complex financial instruments, sold to risk-averse investors under the careful oversight of government regulators, have given us a process that must conform to investor and regulatory compliance requirements. Uniformity is a perfect breeding ground for automation.
With the advances we’re seeing in Artificial Intelligence, Machine Learning and Robotic Process Automation, we have become experts at configuring our technology to meet the changing needs of lenders.
But there is still a problem.
Over the past few years, we’ve applied virtually all of our solutions to the front end of the mortgage loan origination process. The goal has been to improve the efficiency of the origination process, primarily from the borrower’s perspective, in order to better ease consumers into a process they find intimidating at best.
Almost all of the lender’s technology investment over the past few years has been focused on the Point of Sale (POS). While there has been some increase in borrower satisfaction and front-end efficiency, lenders have not recouped these investments in savings on manufacturing loan assets.
Worse, because we are not yet leveraging the power of big data in our industry, for reasons we will discuss in this article, most of the technology deployed on the front end is not being well adopted and utilized and its effects on the back-office have been negligible.
As we look to the future, big data and smart automation will continue to drive our development efforts, but the focus of the resulting innovations will evolve, and that will change everything.
Lending technology out of focus
Focusing our efforts to leverage big data and smarter automation on the front end of the loan origination process made sense in the beginning when the mortgage industry was entering the digital age.
After all, if we can get more borrowers into the process more efficiently, lenders reduce the risk that they will lose the borrower to one of the other lenders they applied with concurrently.
However, the back-office efficiencies that were supposed to result from collecting all of the borrower’s financial information into the loan origination system (LOS) electronically – a revolutionary result of the application of big data principles to the mortgage lending lifecycle – never materialized.
Part of the reason efficiencies from the emerging digital mortgage did not, and still have not, fully translated in the back-office is due to the trust that comes along with the wide-adoption of any new technology. Borrowers were not comfortable turning over their credentials to loan officers or processors. In other cases, the loan officers didn’t trust the technology. Although LOs sent the loan application and disclosure documents electronically and acknowledged borrowers’ digital signatures, they also then presented them with a stack of paperwork as well, just to be safe. When it came time to gather documents, LOs fell back on the security of what they know, which is paper-centric.
So, instead of a seamless big data transfer from the borrower’s other financial systems into the LOS, the loan processor was handed a stack of paper documents or images. The front office offered a modernized 21st Century App but the lender’s back-office personnel were still operating in the same manual manner they traditionally had.
Today, we’re operating in an industry where best-of-breed digital technologies have been vetted by the nation’s largest investor, but lender adoption of Day One Certainty offerings is still in the single digits. Rocket Mortgage may offer its prospects an easy button, but a very low percentage its borrowers actually meet the qualifications to complete the process in a fully digital manner.
Although our industry’s digital investments and strides to-date haven’t realized their full potential return, I believe that by evolving our business’s focus on the application of big data and smart automation, we can change this.
Two signs that the mortgage industry is ready for change
I see two signs that indicate now is the perfect time for our industry to embrace the changes we’ve been discussing for years.
Both of these signs revealed themselves in the weeks following the COVID-19 non-essential business closings, social distancing protocols and stay-at-home orders that heralded the beginning of the Coronavirus response. The pandemic accelerated the adoption of existing trends across all industries and life’s verticals, such as remote working and grocery delivery services. The shock of the pandemic catapulted our industry into the future. Forced to adapt, both the industry and its regulators made adjustments that both had been resisting for years.
The first sign that the industry is ready for change is mortgage lenders adjusting to a mobile workforce and shifting resources to the consumer direct channel, both out of necessity due to COVID impacts.
In the hours following the shelter-in-place orders that sent workers home, mortgage lenders were reconfiguring their systems for remote work. Many were pleasantly surprised that today’s modern web-based LOS platforms were designed to accommodate this. The hard work for the lender was learning how to manage the process when the staff was not working within its four walls. Industry executives picked this up quickly.
It helped that the Federal Reserve System kept interest rates at historic lows and the government threw stimulus money at the nation’s businesses in order to keep people working. It meant that while virtually every other industry was struggling to cope with the virus, most notably travel and leisure, business in the mortgage industry was hotter than ever. No other industry in the world has recovered as quickly or completely as the U.S. residential real estate business.
Lenders had to find a way to adapt to keep up with this growth using a distributed workforce and they did it very well.
The other party to the mortgage transaction was also forced to make changes. Applying for a loan in a lender’s branch was no longer an option for the consumer, nor was inviting a mortgage broker into their home. Due to the pandemic-induced buyer’s market, borrowers that had been shopping for homes and comparing mortgage rates online finally clicked the “Apply Now” button. Overnight, the industry was lending consumer direct and loan volumes reached historic highs.
The second sign that the industry is ready for change was announced by the lender’s compliance department as a result of new COVID-era requirements handed down by regulators and investors.
For years, the secondary market held tightly to appraisal and underwriting requirements designed to protect themselves and the financial system. Rules that many mortgage industry professionals thought would never evolve changed overnight when investors realized that holding to the status quo would mean losing everything.
Today, we have a range of collateral valuation options and underwriters are working from home all across the country. The result for lenders has been an increase in productivity of 30-40%. Ironically, the majority of this productivity increase had been promised to the industry by technologists for many years, but could not be realized in the past because the industry refused to change its processes to take advantage of these very digital innovations.
These changes catalyzed by the pandemic kept lenders operating during the crisis, but they still didn’t solve the lender’s biggest problem: too much investment in technology without sufficient return on investment. For that, we need to make one more change.
A new focus on the mortgage manufacturing process
The industry has deployed the latest technology at the POS, offering it up to loan officers, who are reluctant to trust technology, and consumers, who don’t trust anyone (with plenty of good reasons, thanks to fraudsters and scammers). This hasn’t worked out very well.
That’s changing. Today, we’re seeing the lender’s technology investment deployed in the mid- to back-office of the mortgage lending enterprise, where processors and underwriters are awash in work and eager to grab ahold of any new tool that promises to keep them from drowning in this high volume market.
This is a trend that will pick up speed and continue on into the next decade. Here are two concrete examples:
1. Collateral Valuation
When the pandemic caused consumers to restrict access to their homes, it made the traditional home appraisal impossible. As a result, the investors opened the door for desktop appraisals. Instead of visiting the home, the appraiser now accesses numerous databases to curate the information required to render an opinion of value.
What took an industry professional half a day or more to complete pre-pandemic could take less than a minute to perform if technology investments were focused on this event. The right technology in the hands of every appraiser can make them as efficient as the best ones.
While some may argue that the industry will return to the old way of doing things, I doubt that. First, lenders who have been fighting to get appraisal reports back within seven to 10 days will relish in the thought of the accelerated turnaround. Second, the industry’s largest investors will one day soon go back through the loan data to determine how the 2020 vintage of loans matured. If they find as few collateral-related problems in the files as I expect they will, they’ll have no reason to go back to the old ways.
2. Loan Underwriting
All of the consumer information that goes into the mortgage loan underwriting process exists somewhere as digital data. Collecting that information into documents, printing them out, transporting them to the underwriting department and then scanning (or worse, keying) that information back into the LOS is something we should never do again. And yet, lenders do this dance every single day.
This is where mortgage technology must be focused in the days ahead. A mortgage underwriter who can process two to 2.5 loans per day, according to numerous studies including the Mortgage Bankers Association, could with the right application of technology process up to four times as many loans. Given that these professionals are among the highest-paid in the lender’s shop, the impact on the lender’s cost to originate will reveal a massive return on investment.
We have the technology today to move this data seamlessly between systems and to validate it electronically. In fact, we have the technology today to do so much to improve the lender’s bottom line, but it just hasn’t been focused in the right place.
Now is the time to put that technology to work. The pandemic has expedited change in our industry and lenders have learned that limiting their technology investments to the front end will not generate acceptable returns.
It may surprise many to learn that to succeed in the future, we’ll have to spend less time focusing on the borrower experience at the beginning of the transaction and more time focusing on our own back-office efficiency. When we do so, not only will the lender realize the return on investment they deserve, but the speed with which they can close a mortgage loan will do more to increase customer satisfaction than anything they have done at the Point of Sale.