In the wake of the United Kingdom’s historic vote to leave the European Union at the end of June, investors reacted in a familiar fashion when faced with global economic uncertainty: they sought the safe haven afforded by U.S. Treasuries. As a result, this drove down yields on benchmark 10-year bonds, which in turn drove down mortgage interest rates.
And then the race was on.
As Black Knight Financial Services’ Data & Analytics division reported in its June 2016 Mortgage Monitor report, post-‘Brexit,’ mortgage interest rates only declined by about 15 basis points. However, even that modest drop was enough to increase the number of refinance candidates in the market by 1.3 million, for a total of 8.7 million potential candidates – borrowers who could both likely qualify for and benefit from a refinance.
There was a difference with this new crop of refi candidates. Prior to the surge of 1.3 million, approximately 60% of the 5.4 million strong refinanceable population in the spring of 2016 was also eligible and could benefit from refinancing back in the spring of 2015, but for one reason or another did not do so. In contrast, these post-‘Brexit’ refi candidates had newfound incentive, and seemed ready, willing – even anxious – to take advantage of the opportunity.
According to the Mortgage Bankers Association, refinance applications jumped more than 100% in the first few weeks post-‘Brexit’ as compared to a year ago, and many lenders found themselves over capacity and struggling to keep up with the increase in volume. A CNBC report cited some lenders as hiring over 30 loan officers a month in an effort to keep up, and we’ve seen similar stories first hand, on the ground, throughout the industry recently.
While not quite the same situation as during the peak years before the crisis - when volume was through the roof and it was all lenders could do to keep the wheels on - the solution is very much the same: mortgage technology.
Planning for the Unknown
While there is a surge in refinance activity now, and many lenders find themselves staffing up to match demand, this is still the same industry that downsized in the wake of reduced origination volumes over the past several years. It’s also the same industry that is very much tied to the volatility of interest rate fluctuations, which are tied to factors far beyond our control.
What we do know is that lenders can prepare for nearly all eventualities to a certain extent.
While long-term changes in volume may require some permanent staffing decisions, both long- and short-term shifts can and should be supported by technology. Rather than cycles of hiring and subsequent layoffs, the implementation of leading technologies can help manage the (sometimes extreme) ebb and flow of origination volumes.
Key to managing spikes in volume is achieving a paperless environment, with a heavy concentration on event driven, “lights out processing” work. Next generation automation and scalability mean that even when the flow of applications outpace loan officers’ ability to touch each application within a set amount of time, regulatory and operational milestones can still be achieved. It also means that critical procedural steps occur on schedule, and borrower needs and expectations are met.
In a word, business demands persevere, despite fluctuations in volume.
For example, consider the process around ordering flood services. All loans, whether purchase or refinance, must have a flood letter and flood verification, and this has always meant some degree of hands-on processing.
Historically, to obtain the flood verification, an order was placed manually. This could mean just pushing a button, or even faxing something off to a service provider – and then waiting for the results. Then once in hand, the results would be reviewed to determine whether or not the property is in a particular Flood Zone – and then appropriate next steps would be taken.
In an automated, paperless environment, once a certain triggering event has occurred – for example, the loan has been approved and the lender has collected an application fee –the system automatically fires off an order to the vendor. As soon as the vendor returns the results (still within the system), the data is automatically analyzed to determine if the property is in a Flood Zone or not.
If the property is not in a Flood Zone, it is marked as such, the task is closed and the loan moves on through the origination pipeline. On the other hand, if it is in a Flood Zone, the system will establish the additional tasks required in such a case. A Flood Notification will be generated and sent out, and an appropriate person on staff will be alerted to telephone the borrower about the need to purchase flood insurance.
The same sort of event-driven workflow can be employed to meet required regulatory milestones – such as TRID timeline-driven communications – on schedule, even if volume is off the charts. This is not to mention the many origination tasks that need to occur within given rate-lock time frames, in order for the lender to avoid any potential losses from missing those deadlines.
Most importantly, all of these many event-driven tasks occur automatically, without requiring anyone to stop what they’re otherwise doing, or the need to bring in additional staff when volumes unexpectedly spike. In addition, the more automated workflow events a lender has implemented, the more time loan officers and other staff have to focus on other, more high-touch, complex or customer facing tasks.
Technology as Marketing Guru
The benefits go even further. Technology can also be used to make sure that lenders retain the incredible opportunity that exists within their own servicing portfolios. As the refinanceable population has exploded, so have competitor marketing efforts in hopes of capturing that business. Certainly, if a lender isn’t actively courting its own customers to refinance, someone else will.
The trick is using technology, data and analytics to identify those customers within the portfolio who could both qualify for and benefit from a refinance opportunity. With the right data and analytics integrated into the loan origination system, it becomes a simple matter to scan the first-mortgage portfolio for borrowers that meet predetermined thresholds in terms of current combined LTV – including any second liens and a current and accurate valuation on the property – credit score and current interest rate.
From there, targeted and individualized informational marketing efforts can be deployed. The value to a customer of a communication that shares the specific benefits of refinancing based on their particular circumstances would be significant. Beyond that, though, the same paperless environment that makes it possible to adapt to spikes in origination volume also makes it possible to streamline the entire application process for both lender and borrower.
This kind of marketing outreach isn’t limited solely to the lender’s own portfolio. Merging its own in-house data with quality, robust property records databases, industry-leading valuation technologies and any number of third-party data sources, lenders can also expand their refinance marketing efforts outside their own portfolios. Knowing, for example, which homeowners meet basic criteria – current interest rate, estimated property value, equity level, etc. – within a given area of operations can also help to produce highly targeted marketing campaigns.
Once contact has been made and the borrower has decided to move forward with a refinance, the LOS can pull information from the servicing system of record and pre-populate the refinance application. From there, it becomes a matter of verifying and updating existing information, rather than starting over from scratch. The result is a smoother, faster, more streamlined application process, which then shifts into a paperless, event-driven, automated origination to closing process, all of which results in a significantly improved customer experience, which itself contributes to portfolio retention efforts.
The technology that can assist in effectively managing these spikes in refinance volumes, while maintaining service excellence – can also help lenders identify and capture customers who can both qualify for and benefit from a refinance. Portfolio retention, customer satisfaction, operational efficiency, production level maintenance and personnel cost control – all of these and more are within reach with the right technology.