Eas­ing the Grow­ing Pains

National Mortgage News - - Compliance & Regulation -

The scale and scope of im­ple­ment­ing a dig­i­tal mort­gage strat­egy may seem in­sur­mount­able to many lenders. But suc­cess can be achieved when ex­ec­u­tives stay com­mit­ted to their vi­sion, while re­main­ing nim­ble enough to over­come myr­iad road­blocks along the way.

The lead­ers at Quicken Loans and Mid Amer­ica Mort­gage know first­hand the chal­lenges that come with dis­rupt­ing a deep-rooted in­dus­try like mort­gage lend­ing. It hasn’t been easy and their jour­ney is far from over, but these early dig­i­tal mort­gage adopters have charted a course for the rest of the in­dus­try to fol­low.

“I got push­back in­ter­nally,” said Jeff Bode, CEO of Mid Amer­ica, which uses the brand

Click n’ Close for its dig­i­tal mort­gage ex­pe­ri­ence. “No­body likes change. Every­one wants to come in and do their job like they did the day be­fore.”

But in­fus­ing au­to­ma­tion into on­line mort­gage ap­pli­ca­tions and stream­lin­ing the clos­ing process wasn’t devel­op­ing tech­nol­ogy for the sake of sim­ply hav­ing more bells and whis­tles. The goal was to trans­form not just how busi­ness is done in­ter­nally, but through­out the en­tire loan process.

“We were also wor­ried about the per­cep­tion from the loan of­fi­cers as to what our bor­row­ers and ti­tle com­pa­nies would feel about it. We did have a few ti­tle com­pa­nies that were averse to try­ing it,” Bode said. “Af­ter they did one clos­ing, they thought it was great. They didn’t have to pro­duce a pile of doc­u­ments or chase down anything from the bor­row­ers post-clos­ing. I wish I’d done it five years ear­lier.”

Still, ini­tial progress was slow.

“We didn’t roll out a fully closed sys­tem right out of the gate. Ini­tially, we had a bi­fur­cated process where the bor­rower would go to the ti­tle com­pany and sign anything that needed to be no­ta­rized in front of the closer,” Bode said. “It was a clunky process where they still had some pa­per to deal with.”

Han­dling the e-signed notes af­ter clos­ing was even more dif­fi­cult.

“We found a big chal­lenge in the ex­e­cu­tion al­lo­ca­tion in our secondary mar­ket­ing,” Bode said. “We had to break what worked be­fore, un­til we fig­ured out the process, found our best ex­e­cu­tion and made sure we got the best price for our loans.”

Sim­pli­fy­ing the over­all process and mak­ing it faster — while still main­tain­ing rig­or­ous un­der­writ­ing stan­dards — is es­sen­tial to any dig­i­tal mort­gage strat­egy. Iden­ti­fy­ing which parts of the process to mod­ern­ize is of­ten best achieved by lis­ten­ing to bor­row­ers.

“Im­port­ing fi­nan­cial in­for­ma­tion is some­thing clients love and tell us about all the time,” said Regis Ha­di­aris, ex­ec­u­tive di­rec­tor of Rocket Mort­gage at Quicken Loans. “Con­nect­ing bank ac­counts and dig­i­tally ver­i­fy­ing in­for­ma­tion in real time gives a lot less for the client to do and the bur­den of proof is lifted from them. With ev­ery­thing all ver­i­fied up­front, it shaves a week off clos­ing time. There’s no ad­di­tional man­ual ver­i­fi­ca­tion and they don’t have to find doc­u­ments they never use.”

The speed and ease of other types of on­line com­merce has raised ex­pec­ta­tions for all man­ner of con­sumer trans­ac­tions. But mort­gage lend­ing is unique in how far it has to go to meet these de­mands.

“Con­sumers and their ex­pec­ta­tions are chang­ing very rapidly. We live in a world where we ex­pect to do anything at a touch of a but­ton on our phones and when we can’t, it seems odd. Our whole in­dus­try has to live up to that,” said Ha­di­aris.

But speed is only part of the equa­tion. Con­sumers demand cer­tainty as well.

“First-time home­buy­ers want to un­der­stand what they qual­ify for so they can start mak­ing of­fers with con­fi­dence. Real es­tate agents want ver­i­fied ap­proval from po­ten­tial home­buy­ers. We’ve learned that and lever­aged the tech­nol­ogy to roll out those things,” Ha­di­aris said.

Uni­ver­sal, re­mote no­ta­riza­tion is the fi­nal piece of the mort­gage process await­ing full dig­i­ti­za­tion. Less than one-fifth of the states per­mit re­mote no­taries, but it’s grad­u­ally chang­ing across the coun­try.

“Fully dig­i­tal, re­mote e-closings is the thing clients want that we haven’t been able to fully roll out yet. That’s a state-bystate change that has to hap­pen to en­able that,” Ha­di­aris said.

“It’s crazy to think you can go on­line, do your re­search, cus­tom­ize your mort­gage op­tions, get ap­proved, and lock your in- ter­est rate,” he added. “Then at the clos­ing ta­ble, here comes a stack of pa­per and a pen. We have a hy­brid model, but where we want the whole in­dus­try to go is the fully re­mote on­line clos­ing.”

Bode agreed. “We still could do a bet­ter job on the ap­pli­ca­tion side. The re­mote no­tary piece through all the states needs to ex­pand, but that un­for­tu­nately re­quires law changes and that’s never easy.” — Paul Cen­topani

Find­ing ROI in Data Val­i­da­tion

Fan­nie Mae and Fred­die Mac’s loan data val­i­da­tion ini­tia­tives prom­ise lenders faster turn times and cer­tainty on buy­back risk. But op­er­a­tional in­te­gra­tion and loan of­fi­cer ac­cep­tance re­main im­ped­i­ments to a wide­spread em­brace of these pro­grams.

Fan­nie’s Day 1 Cer­tainty and Fred­die’s Loan Ad­vi­sor Suite of­fer waivers on rep­re­sen­ta­tion and war­ranty re­quire­ments on data points in the loan file that have been au­to­mat­i­cally val­i­dated through ap­proved, third-party ven­dors.

When asked about their as­sess­ment of the ini­tia­tives, lenders view them fa­vor­ably, with an av­er­age score of 7.8 on a scale of 10 in a sur­vey con­ducted by in­dus­try an­a­lyst Tom LaMalfa, pres­i­dent of TSL Con­sult­ing.

To be sure, the group of 26 lenders, sur­veyed at the Mort­gage Bankers As­so­ci­a­tion’s Secondary Mar­ket Con­fer­ence ear­lier this year, is a small sam­ple. But those sur­veyed said only 24% of their loan vol­ume is be­ing closed us­ing ei­ther govern­ment-spon­sored en­ter­prise pro­gram.

“There are an aw­ful lot of things every­one likes about them, but a sur­pris­ing num­ber haven’t yet em­ployed them for one rea­son or an­other,” LaMalfa said.

One pos­si­ble rea­son is that lenders are fo­cus­ing their re­sources on more press­ing is­sues, such as the TILA-RESPA in­te­grated dis­clo­sures and Home Mort­gage Dis­clo­sure Act up­dates.

“Lenders over the past three to four years also had to spread their tech­nol­ogy in­vest­ments and time on im­ple­ment­ing and re­vis­ing TRID and the HMDA changes, as well as dig­i­tal point of sale ini­tia­tives,” said Craig Fo­cardi, se­nior an­a­lyst for bank­ing at Ce­lent.

“It’s not just a busi­ness de­ci­sion, but an op­er­a­tional de­ci­sion to im­ple­ment sig­nif­i­cant GSE tech­nol­ogy. There’s lots of data

el­e­ments to map, in­te­gra­tions and work­flows and pro­cesses to change,” he added.

The adop­tion pace is sim­i­lar to what hap­pened when the GSEs first rolled out their au­to­mated un­der­writ­ing sys­tems.

“I look back to those early AU days and it took a good three to five years un­til there was nor­mal­iza­tion of process, and the ac­cep­tance of staff within the lend­ing or­ga­ni­za­tions that it was not go­ing to take over their jobs, it was a tool to en­hance what they do,” said Randy Jones, Fred­die Mac vice pres­i­dent of client so­lu­tions, who worked on its Loan Prospec­tor pi­lot in the mid ‘ 90s.

Some­thing sim­i­lar is hap­pen­ing with Loan Ad­vi­sor Suite, he said.

“We are cur­rently track­ing as ex­pected,” in terms of lender adop­tion, said Fan­nie Mae Di­rec­tor of Prod­uct De­vel­op­ment Cindy Keith. “We’ve learned a lot of good lessons along the way with the sup­port lenders need for adopt­ing” Day 1 Cer­tainty.

The dif­fi­culty for lenders of­ten lies in im­ple­ment­ing new pro­ce­dures for loan of­fi­cers and other staff, in­clud­ing tasks like or­der­ing re­ports ear­lier in the orig­i­na­tion process, she said.

“Those with chal­lenges have asked us to give them some best prac­tices,” Keith said, so Fan­nie cre­ated ad­di­tional sup­port tools, in­clud­ing the abil­ity for lenders to mea­sure re­turn on in­vest­ment.

“The lenders them­selves are not re­luc­tant; se­nior man­age­ment is ac­cept­ing of the con­cept,” said Michael Ce­lenza, vice pres­i­dent and head of con­sult­ing at Dig­i­tal Risk.

Dig­i­tal Risk has a con­tract with Fan­nie to help lenders in­cor­po­rate Day 1 Cer­tainty. That work has shown that lenders lack a true un­der­stand­ing of the time and ef­fort needed to in­cor­po­rate the data val­i­da­tion pro­grams into lenders’ op­er­a­tions, Ce­lenza said.

“It’s sig­nif­i­cant, it’s a process change; it’s not nec­es­sar­ily a tech­nol­ogy change,” he said.

An­other part of the ac­cep­tance prob­lem, he said, is at the loan of­fi­cer level. “Change is hard, but this is a strug­gle for them,” he said. “But when they let go of the doc­u­men­ta­tion and let the process work, the re­sults are dra­matic.”

When lenders use Fan­nie’s prop­erty val­u­a­tion tools, they save 20 days in the process, while us­ing em­ploy­ment ver­i­fi­ca­tion saved 12 days and as­set ver­i­fi­ca­tion saved six days, Keith said.

Fred­die Mac’s im­ple­men­ta­tion ap­proach in­cludes hav­ing a ded­i­cated team to help cus­tomers in­te­grate its tech­nolo- gy. It also teams with the ven­dors to as­sist lenders, Jones said.

Loan Ad­vi­sor Suite brings in the other two “c’s” of mort­gage loan un­der­writ­ing — col­lat­eral and ca­pa­bil­ity — that were left be­hind when au­to­mated un­der­writ­ing sys­tems were first in­tro­duced. But the cen­ter­piece of Fred­die’s pro­gram is the credit part, Loan Prod­uct Ad­vi­sor, and that’s where a lot of the new ca­pa­bil­i­ties re­side, Jones said.

This in­cludes the ca­pa­bil­ity Cloud­virga cre­ated ear­lier this year with Fred­die that al­lows for a sin­gle-click sub­mis­sion into both Fred­die’s Loan Prod­uct Ad­vi­sor and Fan­nie’s Desk­top Un­der­writer.

“That’s where our whole push and di­rec­tion is. It shouldn’t be an ei­ther/or choice, you should have easy access to both sys­tems so you can see that up­front,” Jones said.

“The track that we’re on is not sur­pris­ing. When you’re build­ing things to try and pro­vide value and help change, you al­ways want it to hap­pen overnight but that’s not re­al­ity,” he said. — Brad Finkel­stein

Dig­i­tiz­ing De­fault

The orig­i­na­tion seg­ment has gar­nered much of the dig­i­tal mort­gage at­ten­tion in the in­dus­try, par­tic­u­larly when it comes to cus­tomer ex­pe­ri­ence and sat­is­fac­tion. But in­cor­po­rat­ing many of those same pro­cesses into the ser­vic­ing side of the busi­ness presents an at­trac­tive opportunity to re­al­ize those same ob­jec­tives, par­tic­u­larly for bor­row­ers fac­ing fi­nan­cial dif­fi­cul­ties.

The in­dus­try is ac­cel­er­at­ing the pace of tech­nol­ogy adop­tion to de­velop a more ef­fi­cient process, but ef­forts to stream­line the mort­gage mar­ket haven’t strayed much from the orig­i­na­tions sec­tor.

While lenders are de­ploy­ing con­sumer-fac­ing dig­i­tal tools that of­fer stream­lined pro­cesses to ap­ply and get ap­proved for a loan, de­fault ser­vicers are of­ten re­ly­ing on disjointed sys­tems and fax ma­chines to process loan mod­i­fi­ca­tions and other forms of loss mit­i­ga­tion.

At a time when the in­dus­try is ob­sessed with cus­tomer ex­pe­ri­ence, it seems ironic that de­fault — per­haps the most stress­ful and com­plex as­pect a bor­rower en­coun­ters with a loan — has largely been an af­ter­thought in the dig­i­tal mort­gage revo­lu­tion.

Af­ter all, the steps in­volved in ex­e­cut­ing a loan mod­i­fi­ca­tion share a strik­ing re­sem­blance to un­der­writ­ing a new mort­gage.

“De­fault is re­ally the last is­land yet to be over­taken by the tide of new tech­nol­ogy, and that’s be­cause it’s more com­plex; there’s a lot of di­men­sion­al­ity in de­fault, a lot of dif­fer­ent data, a lot of dif­fer­ent par­tic­i­pants,” said Steve Horne, the former CEO of Wing­span Port­fo­lio Ad­vi­sors, a spe­cialty ser­vicer he founded in 2008 and op­er­ated un­til it de­clared bank­ruptcy in 2016.

“That be­ing said, tech­nol­ogy is catch­ing up,” Horne, now the CEO of con­sult­ing firm Alta Vista Ad­vi­sors, said.

In the run-up to the hous­ing bub­ble burst, the mort­gage in­dus­try had lit­tle in­cen­tive to of­fer, let only stream­line, loss mit­i­ga­tion pro­cesses. Home prices were soar­ing, delin­quen­cies were low and the small vol­ume of de­faults that did ex­ist were tol­er­a­ble risks.

But af­ter the Great Re­ces­sion, an in­flux of loss mit­i­ga­tion pro­grams and new reg­u­la­tions were cre­ated to ad­dress the mount­ing fore­clo­sure prob­lem. Ser­vicers were too over­whelmed to in­no­vate.

But to­day’s mort­gage en­vi­ron­ment, filled with a thirst for tech­nol­ogy and far fewer delin­quen­cies, weaves to­gether the per­fect cir­cum­stances for an over­haul of de­fault ser­vic­ing.

“The cri­sis took ev­ery­body there in or­der to man­age through it, and now that the cri­sis is over and the de­fault num­bers are at record lows, it’s time to play catch-up in that space and look at how can we pro­vide the best con­sumer ex­pe­ri­ence for our clients and cus­tomers that are go­ing through a tough time,” said Anne Beck, prod­uct man­ager at Fis­erv Lend­ing So­lu­tions.

Ven­dors like Fis­erv have de­vel­oped loss mit­i­ga­tion tools, in­clud­ing on­line bor­rower por­tals, to make it eas­ier for bor­row­ers to ap­ply for loan mod­i­fi­ca­tions. Mean­while, Quicken Loans is ap­ply­ing its Rocket Mort­gage ap­proach to loss mit­i­ga­tion.

“It’s not the sexy part of ser­vic­ing; it’s not the flash and bang or the thing that you go out and pro­mote,” said Ni­cole Beat­tie, vice pres­i­dent of ser­vic­ing at Quicken Loans. “It’s an un­der­served area of the mar­ket that we just thought dif­fer­ently about and said, re­gard­less of what a client may be go­ing through, re­gard­less of if they’re per­form­ing or not per­form­ing, they de­serve the ex­act same re­spect and we

should in­vest in our tech­nol­ogy re­gard­less of the client’s sit­u­a­tion.”

Quicken’s loss mit­i­ga­tion plat­form, called Rocket So­lu­tions, pro­vides re­sponses to con­sumer mort­gage mod­i­fi­ca­tion re­quests via Rocket Mort­gage’s ser­vic­ing web­site.

Ser­vicers have now had a num­ber of years to im­ple­ment and un­der­stand the myr­iad new reg­u­la­tions on their seg­ment of the in­dus­try. That’s now mak­ing it eas­ier to de­velop tech­nol­ogy to stream­line and au­to­mate com­pli­ant pro­cesses.

“I think new tech­nol­ogy is 100% aligned with the new com­pli­ance and reg­u­la­tory re­quire­ments be­cause it’s all about trans­parency at the end of the day, whereas older sys­tems were about re­ally anything but,” said Horne.

In­stead of be­ing man­ual la­bor­ers by col­lect­ing and pass­ing on data, de­fault ser­vicers can fo­cus on over­see­ing pro­cesses to en­sure bor­row­ers are de­liv­ered the best pos­si­ble out­comes for their sit­u­a­tions.

“It will re­work ev­ery­thing in the in­dus­try, and if you look at the new wave of tech­nol­ogy com­ing into the fi­nan­cial ser­vices space, it has com­pletely re­done un­se­cured lend­ing, con­sumer lend­ing and even made strides on mort­gage orig­i­na­tion, which is chang­ing all of the roles,” Horne said.

This shift also helps ser­vicers make bet­ter use of their em­ploy­ees.

“We don’t need as many team mem­bers mak­ing the de­ci­sion. We’ve now put them as part of the de­fense and said, ‘ Now you’re go­ing to au­dit to make sure that the prod­uct that we’re de­liv­er­ing is 100% the right de­ci­sion for the client,’” said Beat­tie.

While the orig­i­na­tions seg­ment is lead­ing by ex­am­ple in its pur­suit of a com­pletely dig­i­tal mort­gage, it’s un­re­al­is­tic to think that the de­fault ser­vic­ing sec­tor will ever be fully au­to­mated, which is prob­a­bly for the best, ac­cord­ing to Beck.

“You can­not re­ally man­age through a mod­i­fi­ca­tion process, or a short sale, or a deed in lieu, with­out hav­ing phys­i­cally spo­ken to your ser­vicer,” she said. “But it’s tak­ing those first steps and tak­ing the process of get­ting the doc­u­men­ta­tion and un­der­stand­ing the process bet­ter that’s help­ful. So much of ser­vic­ing still re­lies upon get­ting a faxed doc­u­ment.” — Elina Tarkazikis

A New Era for Com­pli­ance

The Trea­sury Depart­ment’s re­cent re­port on how to reg­u­late non­banks drew praise from tech star­tups and mort­gage in­dus­try in­sid­ers alike. In ad­di­tion to rec­om­men­da­tions for a new fed­eral fin­tech char­ter and that reg­u­la­tors pull back from pay­day lend­ing rules, the re­port con­tained a sec­tion that might be mu­sic to a mort­gage banker’s ears, in­clud­ing sup­port for the in­dus­try’s au­to­ma­tion ef­forts and an­other call to soften the use of the False Claims Act against lenders.

The re­port dis­cussed ways to ac­cel­er­ate adop­tion of elec­tronic prom­is­sory notes — or eNotes — in fed­eral mort­gage pro­grams, as well as au­to­mated ap­praisals. Reg­u­la­tions no­to­ri­ously lag the pace of new in­no­va­tions, so in­dus­try ex­perts are hope­ful the Trea­sury re­port will fa­cil­i­tate an on­go­ing di­a­logue about es­tab­lish­ing a reg­u­la­tory frame­work that re­flects the re­al­i­ties of a mod­ern­ized mort­gage mar­ket.

“My sense right now is that the in­dus­try is re­ally at a tip­ping point in terms of adop­tion of dig­i­tal mort­gage or e-mort­gage tech­nolo­gies,” said Michael Fratan­toni, chief econ­o­mist for the Mort­gage Bankers As­so­ci­a­tion. “The tech­nol­ogy is there, the in­dus­try de­sire is there, but there are some reg­u­la­tory hur­dles and the Trea­sury re­port iden­ti­fied some of them.”

Trea­sury en­dorsed the use of elec­tronic prom­is­sory notes at Gin­nie Mae, the Fed­eral Hous­ing Ad­min­is­tra­tion and the Fed­eral Home Loan banks, not­ing that the FHA would first need the bud­get to do so. The depart­ment still uses an older main­frame-based op­er­at­ing sys­tem, and of­fi­cials have em­pha­sized the des­per­ate need for tech­nol­ogy up­grades.

But one chal­lenge is that while Fan­nie and Fred­die ac­cept e-mort­gages, Gin­nie Mae does not, al­though it has out­lined a plan to even­tu­ally adopt the tech­nol­ogy.

The Home Loan banks also do not cur­rently lend against eNotes, and Trea­sury rec­om­mended that they work to­ward a goal of “ac­cept­ing eNotes on col­lat­eral pledged to se­cure ad­vances.”

The depart­ment also en­cour­aged the FHA to de­velop en­hanced au­to­mated prop­erty ap­praisals to “im­prove orig­i­na­tion qual­ity.”

In­dus­try rep­re­sen­ta­tives wel­comed the Trea­sury re­port’s recog­ni­tion of the FHA’s need for tech­nol­ogy up­grades. “CHLA sup­ports rec­om­men­da­tions in the Trea­sury Re- port to fully fund FHA IT needs, to im­prove their au­to­mated ap­praisal ca­pa­bil­i­ties and to pro­vide more clar­ity on the False Claims Act,” said Scott Ol­son, ex­ec­u­tive di­rec­tor of the Com­mu­nity Home Lenders As­so­ci­a­tion.

In a Fe­bru­ary re­port, Moody’s warned that al­ter­na­tives to tra­di­tional prop­erty ap­praisals could weaken the credit qual­ity of res­i­den­tial mort­gage-backed se­cu­ri­ties if risks are not mit­i­gated.

In its re­port, Trea­sury sug­gested that prop­erty ap­praisal pro­grams ex­plore of­fer­ing tar­geted ap­praisal waivers where a high de­gree of prop­erty stan­dard­iza­tion and in­for­ma­tion about credit risk ex­ists to sup­port au­to­mated val­u­a­tion.

“Trea­sury rec­om­mends FHA and other govern­ment loan pro­grams de­velop en­hanced au­to­mated ap­praisal ca­pa­bil­i­ties to im­prove orig­i­na­tion qual­ity and mit­i­gate the credit risk of over­val­u­a­tion,” the re­port said.

Re­gard­less of whether the FHA moves forward with au­to­mated ap­praisals, new al­ter­na­tives to the process are emerg­ing and con­tinue to make the prac­tice sim­pler, said Rob Zim­mer, head of ex­ter­nal com­mu­ni­ca­tions for the Com­mu­nity Mort­gage Lenders of Amer­ica. “On ap­praisals, we’ll see what hap­pens,” he said. Reg­u­la­tors and agen­cies “will con­tinue to find ways to stream­line the ap­praisal process.”

In a move sure to please lenders that have shied away from work­ing with the FHA be­cause of rigid False Claims Act stan­dards, Trea­sury also rec­om­mended that the Depart­ment of Hous­ing and Ur­ban De­vel­op­ment es­tab­lish trans­par­ent stan­dards to de­ter­mine which vi­o­la­tions it con­sid­ers to be most harm­ful in or­der to help the Jus­tice Depart­ment de­cide which abuses to pros­e­cute.

“En­force­ment of the False Claims Act is crit­i­cal to en­sur­ing in­tegrity of any fed­eral pro­gram and pro­tect­ing it against know­ing vi­o­la­tions,” Trea­sury said. “At the same time, FCA en­force­ment ac­tions can im­pose sig­nif­i­cant costs on a de­fen­dant both in terms of fi­nan­cial and rep­u­ta­tional dam­ages.”

MBA mem­bers are “very, very happy” that the ad­min­is­tra­tion ap­pears to be rec­og­niz­ing and val­i­dat­ing the con­cerns lenders have about work­ing un­der the False Claims Act, Fratan­toni said. “This has re­ally been a constraint and it’s im­pact­ing access to credit and it’s im­pact­ing the FHA pro­gram as a whole be­cause they have had a num­ber of both large and mid­size lenders back away from the pro­gram be­cause of this risk.” — Han­nah Lang

Jeff Bode

Randy Jones

Ni­cole Beat­tie

Michael Fratan­toni

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