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Still Plenty of Room for Improvement in the Digital Mortgage Process

At the beginning of the year the Federal Housing Administration released a mortgagee letter approving the use of third-party providers for verification of borrowers’ asset, income and employment information (further clarified in the administration’s updates to Handbook 4000.1). It’s been a welcome move for issuers of government-backed loans, if a bit Johnny-come-lately (Fannie Mae, Freddie Mac, and the U.S. Department of Veterans Affairs all began accepting third-party verifications in 2017 or earlier).

With originators now approved to deploy automated verification services across their entire product portfolios, we can expect a lot less manual collection of pay-stubs, W-2s and bank statements going forward. It’s a welcome jolt of efficiency for lenders in a time of high overhead and low profit margins.

But ever since the FHA announcement, people have been asking me: Is that it? Have we squeezed all the inefficiency we can out of the underwriting process?

Not even close. Having the GSEs, VA and FHA on board only opens up further opportunities for advancement in digital mortgage innovation. Here’s what’s I see on the horizon.


Shorter needs lists

Widespread acceptance of third-party verification means that, for the first time, verifications that once had to be completed and checked off the needs list individually — asset, credit, employment, identity and income — can now be collapsed into a single action, eliminating a significant source of borrower frustration and improving loan pull-through.

The efficiency lenders gain from any one of these automation points is already significant; lenders and GSEs have estimated that automated asset verification alone gets loans to closing 5 to 20 days sooner than they would otherwise. Lenders can further compress turn times with each additional verification they automate — especially when they combine all verifications into a single borrower touchpoint and corresponding report.

To accomplish this feat, lenders must either work with a vendor that provide “all in one” verification or attempt to build their own framework for combining multiple vendor services into a fluid user experience on the front end and a streamlined underwriting report on the back end.


A focus on the front-end

As more and more lenders combine verifications into a single data pull, the next issue to grapple with is where this step should happen in the origination process. We can expect to see borrower authentication moving earlier and earlier in the loan application process —and even ahead of the loan application altogether.

Because the “first touch” of the home-buying consumer is generally not the loan application — it’s the home search. By giving home shoppers opt-in tools that provide a robust understanding of their own financial DNA, we can also give Realtors a more precise understanding of what their clients can actually afford and streamline the downstream loan process with an upfront understanding of what products the borrower actually qualifies for. That information can be seamlessly transferred to any broker or lender using a unique and secure borrower token or Passport ID.  We call this process “Lead to Loan,” and it’s the future of lending made simple.

It’s not just about closing loans sooner — it’s about making decisions sooner. The business of originating loans has never been costlier, and most of that cost comes from personnel expenses. The sooner a lender can assess a borrower’s ability to pay, the quicker it can decide whether to extend a loan (or which loan to extend — which saves meaningful time and expense for originators, processors and underwriters while reducing fraud risk. Starting down the origination path without this information in hand is a needless waste of time and money. It’s simply bad business.


Stiffer competition

The companies that understand this are beginning to rise to the top. The ones that don’t are getting left behind. It’s amazing how you can watch this play out in the headlines. At the same time we have longtime lenders laying off workers and even closing their doors entirely, other lenders are growing revenue and hiring left and right.

As STRATMOR Group partner Garth Graham puts it, “borrowers expect a digital experience, and lenders who are not offering their customers options for executing disclosures, uploading docs and other origination steps are falling far behind their peers.”

The leaders in our space are not the ones scrambling to implement the efficiencies enabled by GSE initiatives — they’re the companies that recognize the GSE initiatives as the ground floor of innovation and take every opportunity to overlay additional efficiencies on top.

And it’s not just lender competition that’s growing fiercer. In the third-party verification space, specifically, we can expect to see providers differentiating themselves based on the quality of their data sources and the flexibility and creativity of their pricing models. Stay tuned for more on that front in my next post.

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