By: Trevor Gauthier, "The Familiar - and Unfamiliar - Next Era of Mortgage Lending," for MBA Newslink
My team and I just had the pleasure of spending an entire week with hundreds of the most energized and enthusiastic post-TRID lenders and industry suppliers you'd find anywhere. It's our favorite time of year, though this year's annual user conference was particularly special. There's a new, bright mood blossoming in the mortgage industry--something we should all take a moment to acknowledge and learn from.
My own reason for optimism is easy to explain. We stand at the cusp of the next era of mortgage lending. Hyperbole? Exaggeration? Not at all. This is the first time in more than eight years that we are collectively looking ahead rather than over our shoulder. Looking ahead is good, though not enough. We have a bigger responsibility.
By most measures, the housing and mortgage markets are "healed," and the economy is on good footing. Despite this, the housing market and those who should be buying are not connecting as they should. Leaders in the mortgage industry have an obligation to shape this new era of mortgage lending with a clear focus on long-term, manageable growth and stability.
Some things in the new era look pretty familiar. Ever notice fashions return again and again? For example, the bohemian look of the ‘60s is back. There's a parallel in lending that was popular in the ‘60s, too: simple, fixed rate loans are more popular today than ever.
In a recently completed survey we participated in, more than 80 percent of lenders agreed that conventional conforming loans meet the needs of the majority of their borrowers. Likely because they are durable. They last as long as 30 years, and they are easy to understand. Just like a car loan, only much bigger. Lenders ought to like them because they are the easiest to manufacture, or at least as easy as any loan is to create these days. That's why many people like jeans, I suppose. Because they are durable. Buy them once, where them a lot. Take out a 30-year fixed, keep it forever.
My takeaway from what looks familiar is this: we'd be wise, in this new era, to shape a simpler, smarter future. One built on the fundamentals. That's one of the things that got us into trouble. While focusing on simple, we forgot the things that make a good loan durable.
Then there's the familiar, yet different elements of the new era. Today's wave of first-time homebuyers, described as the biggest in history so far, are familiar because we have seen them before: in the late 1940s through the early 1960s. This generation started the mortgage process knowing it would be hard. They had low expectations, and they were often met.
Similarly, today's first-timers feel the same. They saw firsthand what can happen from poor lending practices, and as a result, think getting a mortgage is more trouble than it's worth. Of course, the difference lies in the fact that today's first-time buyers have something called liquid expectations. Buying a home and financing it should be as easy as one-click online purchases they're used to. Why not a 30-second mortgage? Borrowers originate their own loans online today, after all. What takes so long?
Here, too, is where the borrowers of yesteryear and the borrowers of today converge. They have no idea what it takes to manufacture a mortgage. Likely most of them don't much care, either. Like anything you'll do only a few times in your life, it's not important enough to them to invest a lot of time learning. It's true: there are plenty of things more interesting than a 30-year fixed-rate mortgage.
It is unlikely we can do much to change our borrowers' non-interest in the vagaries of manufacturing mortgage loans. What we can do, though, and this is my takeaway from the familiar/not familiar aspect of the future, is give today's borrowers the chance to look deep into the origination cycle, and let them participate as much as they desire. These borrowers, unlike their mortgagor ancestors, have great expectations, and we can meet them. We simply have to let them participate.
Then there's the less unfamiliar, though very exciting work we'll do on the future of our business, and that's the technologies we'll apply to manufacturing loans. We plan to spend our days shaping the future in pursuit of the truly electronic, paperless digital mortgage that, quite frankly, is possible today, though elusive for most lenders and most borrowers.
Pioneering lending technologies over the past 17 years has been very rewarding. We're looking forward with even more earnest enthusiasm than we had in the late 1990s. This new era will be the best and most interesting in the history of mortgage lending. A time when real, positive change will yield the best times the mortgage industry and homebuyers have ever experienced.
By: Dan Green, "Coming of Age: The Digital Mortgage," for Today's Lending Insights
The digital mortgage is nothing new. Lenders began talking about the fully paperless, all-electronic loan at the dawn of online lending more than a decade ago. A few have made the leap; their borrowers self-originate, their teams ‘screen-process’ rather than folder process, and closing documents are delivered electronically in advance of closing. Closing takes place with the stroke of a digital pen or with a finger signature on a tablet computer, just like paying a barista for that morning latte. The resulting closed loan then takes a cyber-trip to its investor. All very neat, very clean and with nary a ream of paper disturbed.
The digital mortgage is now more hard fact than science fiction. We believe the digital mortgage will come of age in 2015 not merely because it is possible, but rather because three converging factors now make it necessary.
Factor 1: Today’s Borrower
Meet the Millennials: your newest borrower demographic and the largest group since the boomers. When economists talk about household formation, they are largely talking about this group of potential borrowers. Born in the early 80s to the early 2000s, its older members are beginning to look at homeownership in increasing numbers for some of the same reasons their parents did. With the added incentive of rapidly rising rental rates, Millennials are discovering it is cheaper to own rather than rent a home.
One of our Millennial teammates just bought her first home. She had a secondary goal in mind with this purchase: To learn as much about the financing process first-hand as possible. After all, she’s surrounded by mortgage nerds who talk about the most arcane aspects of real estate finance ad nauseam. In the interest of making an informed decision, our teammate submitted three separate applications to three different lenders, which resulted in three completely different experiences.
The lender that ultimately closed her loan offered the digital experience. Our borrower self-originated using the lender’s online portal. The application took about 20 minutes, after which she had a credit approval, a full disclosure package and a place to return for real-time updates on the loan’s progress.
Note the entire digital application took just 20 minutes. This was no ‘online 1003’. The online portal used in this example collected all the right information, though it did so in a much more borrower-friendly way. Lenders are used to the paper 1003. It’s an old friend and has been a useful tool for decades. From the perspective of the applicant, however, it’s intimidating.
One of the other lenders our teammate chose had their prospective borrowers download the traditional mortgage application, fill it out, and fax it back to them. Our Millennial, in the interest of research, did just that. Most of her cohorts probably won’t.
The lender that closed her loan was in contact within an hour of application. They talked about options, the entire mortgage process, and immediate next steps. This personal touch is an important aspect of the digital mortgage experience. Digital lending does not mean impersonal lending. Buying a home remains the largest financial transaction most consumers ever undertake. Digital or not, it is still a scary process. Technology makes personalization and service easy. Millennials are attached to the internet. Their lenders must be as well.
Today’s borrowers are ready for the digital mortgage. Millennials are a very important demographic that will drive the industry in this direction, but other borrowers, including boomers, are comfortable with digital processes. Let’s not forget that boomers created much of the technology that makes this all possible. They, too, are ready to abandon pen and ink.
Factor 2: Know Before You Owe – RESPA-TILA
The latest chapter of Know Before You Owe (KBYO) takes the form of the RESPA-TILA changes scheduled for August 1, 2015. Two new documents replace three well-known, well-worn disclosures familiar to every lender and every borrower who has been mortgage-active in the last four or so decades. Complying with the RESPA-TILA changes seems like an easy exercise: simply replace documents and keep lending. Yet there is much more to KBYO preparedness.
RESPA-TILA introduces a monumental process change: the Closing Disclosure must be delivered three days before the actual closing. This is big, especially in an industry that may just be the original just-in-time manufacturer. Mortgage lenders still deliver closing packages right before the closing itself, giving settlement agents, attorneys, closing agents and borrowers little time for review. A major impetus for this change is to give borrowers the opportunity to better understand what they are getting themselves into. ‘Hurry up and close’ is being replaced by ‘reflect before you close’. The hoped-for result is a more informed, more empowered homeowner.
Technology makes this aspect of the digital mortgage possible, too, especially when the process begins with an electronic, rather than a physical application. Being ready three days before the big event is made easier when the process is highly automated, which in turn is made even easier when the raw materials are delivered in electronic rather than physical form.
Factor 3 – Efficiency
The rising cost of lending has been nagging lenders for a number of years. The picture painted by the Mortgage Bankers Association’s quarterly cost study is discouraging. Origination was a losing proposition until recently. While per loan profitability has returned, the cost of origination remains very high, over $6,000 per loan. Productivity, the most telling indicator of the cost of making a mortgage loan, remains low.
Should the mortgage industry resign itself to high cost/low productivity lending? We don’t think so. Although it is unlikely lenders can, or will, return to the low-cost extremes of the early 2000s, it is not acceptable to capitulate. The industry’s historically cyclical volumes have made it difficult to achieve and maintain efficiencies. The steadier state volumes of the next several years ought to make it easier to build higher productivity loan manufacturing processes. Technology and the digital mortgage play a significant role in reducing costs since they enable easier, more predictable manufacturing, improved compliance and vastly better customer service opportunities. Scaling for growth becomes easier, too. The cost of lending can be made to trend lower, but only if we focus on it.
The digital mortgage yields other benefits, too. The typical paper mortgage might use as much as an entire ream of paper once all is said and done. Five pounds of paper per mortgage times more than the five million mortgage loans made annually equals 12,500 tons of mortgages per year!
Everyone thinks about losing weight in the New Year. Substituting electrons – which weigh very little – for paper can help mortgage lenders keep in fighting trim in 2015 and beyond.
By: Michelle Oliphant for CBInsight
Last month I talked about How I Met My Lender, where I suggested that advertising, a true online, interactive application and web portal, and regular follow-up are essential lures for the millennial market. My bank focused on technology and communication, cementing them as my lender.
December’s article was about origination. This month’s focus is on lessons learned in getting to the closing table. Lenders and borrowers alike know this is a complex process, one that requires a great deal of interaction, and one that is largely in the lender’s control. Yet throughout the process I wanted to help. And, throughout the process, I also wanted to know exactly where my loan stood at all times.
The first lesson in retaining millennial borrowers is this: Increased borrower education – undertaken before the process begins – about financial literacy in general, and the mortgage process in particular, improves the experience for both parties in the transaction. While I was relatively well-prepared with statements and W2s, I was probably the exception rather than the rule. Working in the mortgage industry, surrounded by lots of people with extensive experience helped enormously. The vast majority of millennials are not lucky enough to be associated with so many mortgage geeks. My bank worked to explain the process when I seemed confused. This was helpful, as was the first-time homebuyer education class I had to take in order to qualify for the first-time homebuyer program I was using. Our bank answered every question, talking me through everything they needed and why they needed it.
Still, I do wish my lender had been more transparent from the outset as to what they needed and why. Receiving a high-level schedule and overview of the process from the moment the contract was signed would have helped me understand the progression of the loan and also would also have helped me help them. While major deadlines such as inspection and appraisal were outlined in the contract, the contract did not say when my bank would need my tax returns.
It would have been helpful to get a list of documents that would be needed, and the reason they would be needed. I would also like to have known what was happening with the loan, beyond posting the loan status of “processing” or “underwriting” on the online portal. These terms mean something to me, but may not mean much to many millennials. It would be more informative to know what, specifically, is happening with the loan, and in greater detail. My questions were always answered quickly and in a friendly way. I know, though, from the team I work with, that the fewer questions borrowers have, the more efficient the lending process. To put it another way, a more informed, educated borrower yields a more profitable loan.
My lender’s online portal is wonderful. It is one of the reasons I chose them and closed my loan with them. Yet it could be even more useful in at least two ways. First – and I was warned about this by my colleagues – every mortgage loan requires documentation, lots of it. I happily complied, of course, though uploading the paperwork directly to the portal would have made it faster and easier for everyone. Second, millennials do everything with their phones. Why not utilize smartphone image capture, as we do, to deposit the rare paper check we still receive? Mobile capture is sure to be one of the next innovations in mortgage lending – it’s a feature that will lure millennials and increase market share. It will also result in higher overall customer satisfaction as well as greater lending efficiency. This is the second lesson:Millennials want instant, online access from their phones from the beginning of the process to its end, including document upload and real-time, detailed loan status.
The communications standards set during the application process continued throughout the mortgage cycle. However, proactive communication – not just waiting until I asked a question – would have provided for a smoother and easier process. Providing an overview of what the process would look like, from start to finish, would have made me more confident and comfortable along the way. Anticipating common questions, or even developing a First Time Home Buyer FAQ document, would also help the millennial borrower stay engaged with minimal stress. Finally, utilizing technology to the fullest extent possible, by offering robust loan status updates via an online portal or even via text message, would close the loop on proactive communication with borrowers.
Today’s millennial borrowers demand transparency; it is no longer acceptable to keep your borrowers in the dark and expect them to be agreeable. The final lesson is this: Stay proactive from application to closing, without waiting for the borrower to ask a question.
From initial education, to responsiveness and transparency, to advanced mobility, millennials expect a high degree of lender involvement to get through the mortgage process with ease. By staying proactive and offering advanced technology, you can be sure you’ve done your part to attract and retain your millennial borrowers.
Next month, I’ll end this series with my experience in closing the loan.