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.