By Mike Detwiler

As second quarter job and economic growth numbers are debated, we all sit back and listen. What does it all mean?

We need to start with what we know. There are no “talking heads” on the news saying that recovery is going to be fast. The most positive of pundits predict that unemployment will again hit double digits, and recovery will be slow. You still have those on the other side fearing the dreaded double dip.

Let’s face it, things have changed, and we can no longer pretend that they haven’t. So, what is a lender or originator to do?

First, everyone who wants to succeed in this new world has to come to the realization that there is a profound shift going on that points to the need for everyone to focus on offering the best consumer experience possible. If you think about it long and hard, new rules and updates to current regulations in the mortgage industry are being implemented at an astonishing pace. During the last few months alone, regulators have crafted revisions to a number of the regulations that have been a part of the mortgage industry for many years. As a result, lenders are forced to take greater control of the origination process.

For example, with Dodd-Frank Reform, the federal government is making it virtually impossible to be a mortgage broker. By extending the application of the Truth-in-Lending Act to include mortgage brokers (formerly limited to “creditors”). By clearly defining, and otherwise limiting, how brokers can be compensated (YSP is dead), the act is forcing lenders to rethink the wholesale and consumer-direct channels. Lenders simply have no choice but to go directly to the borrower more often if they want to be successful. Make no mistake, the fight for the borrower is in full swing.

As a result, lenders have to take a close look at the borrower. This dynamic shift is forcing lenders to embrace the importance of fostering a direct relationship with the borrower. What does that mean? Lenders have to employ more strategic marketing, control and compliance. As the consumer-direct channel grows, the lender’s understanding of what makes the borrower tick must also grow.

Second, lenders have to rollout a comprehensive online strategy. Compared to all lending business channels, we are seeing online origination growing the fastest. How fast is fast? The consumer-direct online origination channel is projected to grow faster than any other channel in the next three years. Overall, it will see a more than a twofold (157%) increase in loan volume from 2010 to 2013 according to research done by Lieberman Research Group.

Further, online application volume at banks will triple. Historically, banks have been more reluctant to offer borrowers an online mortgage application. However, by 2013 the volume of online applications taken by banks is expected to more than triple from 4% to 13% of total volume—a 225% increase. Online applications at credit unions will increase to nearly one-third of the total volume. By 2013, online applications taken by credit unions are expected to grow from 20% to 31% of total volume—a 55% increase. Among banks surveyed, 71% said they envision a time in the future when they will need to offer borrowers a smart, online mortgage application. Yet, to date, only 18% claim to offer such a smart online app, while 39% offer no Web-based mortgage app at all.

In the end, it’s not just about introducing an online channel; it’s about making the most of that online channel.
I don’t want lenders who have a website that enables the borrower to apply online to think they’re off the hook because they’re not. Why should lenders go down this road?

Originating loans online can reduce costs by up to 80% compared to traditional application methods (e.g. call centers or branches). Customers who apply online find the process faster, easier and more convenient according to “The Online Opportunity” by Deloitte Consulting. Specifically, 73% of applicants reported that online applications are more convenient; 66% said that it is easier to submit information online; 58% of borrowers surveyed felt that the process was faster; 59% were actually more comfortable with the online process then they were with traditional methods; and 61% of online applicants were significantly more likely to recommend their lending institution as a result of the application experience.

Why is online lending so important going forward? Over 100 million people can now be considered part of Generation X and Generation Y. Why should lenders care about this demographic? These Internet-savvy consumers were brought up in the instant information age and prefer to do everything themselves - electronically and immediately. This group is no longer satisfied with static websites asking them to fill out a form and wait for someone to call them back. They want more.

So, what do they really want? How can lenders better serve this group going forward? They are looking for customized product recommendations, competitive rates, detailed closing costs and a fast, secure and easy to use online application process. By giving an instant decision and electronically delivering their upfront disclosures, lenders have fulfilled their requirements and allowed the consumer to stop shopping for a loan.
In the end, this approach greatly reduces loan fallout.

Once approved, these borrowers want information on the process like how long it will take and the status of their loan. It is critical to provide 24/7 loan statuses, “live chat” and effective communication tools with their loan officer. From there, lenders need to take the “e” process even further. You can’t just automate the point-of-sale to give borrowers an easy way to apply, get approved and e-sign their disclosures and stop there. You have to take it even further.

What do I mean exactly? You have to keep the borrower informed. They want to know what’s going on all the time. This is a very big step in their life. Buying a house is the biggest purchase one will make in their lifetime. The borrower wants their part of the “American Dream”. Every mortgage has a story. What that means for the lender is they need to use technology to reach out to the borrower and keep them in the loop.

Now, we move on to closing. Let’s say you’re a tech-savvy lender that has a great electronic point-of-sale presence that includes technology to keep the borrower informed after the point-of-sale, it still may not be enough. Why? If the closing process is horrible, that’s what the borrower will remember. You have to seal the deal with that borrower. You can awe them in the front-end of the process and through the loan lifecycle and think your job is done, but you would be dead wrong. Your job is not done with that borrower until the loan is closed. Does that mean you have to offer an e-closing process? Not necessarily, but you do have to use technology whenever possible to ensure that the closing process is smooth.

The third component to the new way of originating is paying closer attention to prefunding due diligence. Investors were burned during the meltdown as well. Some would argue that they were to blame, but that’s another debate. In this new world, investors have remained on the sidelines. A vast majority of originations are government loans. We need to get those investors back in the business of lending.

How do we do that? Investors want to know about quality before they buy a loan or a pool of loans. A statistic sampling will not suffice in making them comfortable anymore. Transparency is critical. What lenders don’t realize is that by creating and maximizing an online consumer-direct channel, they’re also better serving investors. How so? When the borrower applies online, gets an instant decision and e-signs their disclosures, the lender has an ironclad record of that transaction. If they take it further and provide things like automatic
statusing, live chat, etc. to keep the borrower informed about where that loan is in the process, the investor can also get the same access and insight.

A byproduct of the meltdown is that all parties are more educated about the mortgage process nowadays. The investors are demanding more in the way of transparency as detailed, but borrowers are demanding more, too. The next generation of borrowers are far more educated about the mortgage process. As mortgage news continues to capture the attention of the world, borrowers are becoming more informed about the mortgage process. The perception is that lenders duped borrower, and nobody likes to be duped. Only 8% of Americans don’t know what type of mortgage loan they have. That’s a lot lower than the 26% of respondents in a Bankrate study done two years ago who said they were in the dark about their mortgage type.

Think about how auto financing has changed over the years for a second. It used to be that you walked into a car dealership, got a sales pitch, bought a car, got financing and left with your car. Today, the borrower goes online and finds out all they need to know about the car they want before ever stepping into the dealership. They know what model they want, what features they want and how much it costs to make the car. What’s happening as a result? The car borrower is more informed before the transaction ever starts, and they’re going into the dealership with all that information at hand. That’s what we have to look forward to when dealing with borrowers. They are more informed, and they’re going to bring that information with them when they go into a local branch or if they lock online.

Now that we’ve established how originating will likely change forever and what lenders have to do in order to adapt, I would be remiss without offering some technology buying advice. In my view, there are three critical technologies that will become important going forward. Lenders need analytics to better understand their own business, data validation so they can better understand the loans that they originate and intuitive applications so they can change their processes based on the data they get back after analyzing their business and the loans they’re originating. When they say knowledge is power, they aren’t kidding.

What will these three technologies mean for the future of originating? Automation will allow for dynamic workflows so that there will not be a need for separate departments to handle different types of loans or different aspects of the lending process. Lenders will be able to leverage the same staff regardless of what job needs to be done. These new technologies will enable the lender to employ a more efficient process. Lenders will be better able to respond to changing market conditions more quickly through the use of technology. The end result will be better quality loans; a goal we should all aspire to, wouldn’t you agree?

About the Author
Michael Detwiler is the CEO of Mortgage Cadence and oversees strategic planning for the overall operations of the company and is responsible for sales, marketing and managing the Mortgage Cadence product suite and additional service offerings. His responsibilities reflect and align with the company’s commitment to sustaining a leadership position among the mortgage industry’s top tier technology providers through his leadership, innovation and dedication. Michael can be reached via e-mail at mdetwiler@mortgagecadence.com.