REQUIRED READING: Once upon a time – actually, circa 2005 – the ‘future’ of the mortgage transaction seemed perfectly clear. A consumer would contact a lender, providing some basic personal and transactional information. Then, in a matter of days – or even hours – all processing would be complete. The closing would then be scheduled, and the loan officer would provide the customer with a wide array of loan program options tailored to the customer's profile and circumstances, enabling him or her to select the best possible loan program terms.
Making use of established standards plus an extensive network connecting data sources and service providers, everything that would be needed to process and close the mortgage would be available. The borrower's identity could be easily validated, and qualified income would be established by a link to payroll, employment or Internal Revenue Service databases.Â
Furthermore, credit data from the repositories would be evaluated and scored, and the subject property value would be established via an automated valuation model, with appraisals ordered for properties that could not be valued with an appropriate level of certainty. Assets would be identified and valued via direct links to financial institutions, and title, taxes, liens and other information would be accessed via a networked clearinghouse.
In addition, advanced technologies using other data sources and models would further evaluate the transaction, providing the loan officer or processor with additional information and guidance, while risk engines would evaluate risk attributes and score the transaction, with risk-based pricing attributes applied by pricing engines.Â
The overall approval would be completed by automated underwriting engines, which would provide documentation and processing requirements while flagging loans that might require further human review. The benefits of this new world would be unmistakable.
That was the future that never was. Today, the dream of an efficient mortgage origination process and healthy secondary environment has been seriously sidetracked. The number of major investors in the market for new originations has dwindled to two – Fannie Mae and Freddie Mac. Other ‘investors’ are chasing pools of nonperforming or troubled mortgages.Â
And forget about relying on automation to handle the heavy lifting – fully documented loan packages with manual processing and underwriting have returned for all loans, while automated underwriting is now about whether Fannie or Freddie will buy the mortgage. Even worse, consumers have seen their borrowing options shrink significantly, with many of these prospective borrowers blocked from getting new loans due to hefty loan-level price adjustments applied to new originations.Â
So what does the future hold for the industry? With so many variables at play, even a best guess could be far from the ultimate reality. The only reasonable approach – which is, at best, cloudy – is to study what is happening today.Â
The continued existence of Fannie Mae and Freddie Mac is likely limited. Although they were often controversial in their reach, Fannie and Freddie helped to set standards in risk assessment, processing requirements, documentation, forms, data and transactional standards. They were active financial sponsors of MISMO and MERS, and were highly responsible for the adoption of technologies by the mortgage industry – most notably, automated underwriting.Â
The Consumer Financial Protection Bureau is still under development, but its substantial powers will clearly impact how the mortgage industry does business. Already within its future purview are long-discussed consumer disclosure changes and the definition of the Qualified Residential Mortgage (QRM). The roles of the other governmental entities in policy development and enforcement will remain in place, for better or worse, pending future legislation and actions by the Obama administration.Â
Unfortunately, due to the chaos of the last few years, innovations in mortgage industry methods and technology have stalled. While the government-sponsored enterprises recently re-engaged on data standards – adopting and sponsoring MISMO transactions for delivery and appraisal – in other areas, they seem to have taken a step backward. Desktop Underwriter and Loan Prospector are no longer industry utilities, but simply tools of delivery for Fannie Mae and Freddie Mac, respectively – a move to broad-based manual underwriting.Â
A strong sponsorship of data standards by mortgage lenders is nonexistent – a quick scan of the MISMO subscriber list identified fewer than 15 lender subscribers. The secondary market for nonconforming mortgages is almost nonexistent – since last year, there have been only two issuances of jumbo securities, and both were from the same issuer.
Looking at the current environment, a few conclusions may be reached. First, the pace of change will accelerate before the industry reaches any level of stability. The industry standards, methods and technologies that could reduce risk, bring efficiencies and improve lending overall for the consumer and the lender will not evolve as broad-based offerings in the near future.
The mortgage industry that was envisioned only a half dozen years ago will not emerge for years to come. As a result, the intelligent use of technology will, once again, emerge as a differentiator for industry participants.
Investments in new methods and technologies will be required to maintain flexibilities that will be demanded to remain competitive in an industry that is poised for a period of rapid change. These should be at the top of the industry's strategic checklist, and they will be crucial in bringing about the future we should have enjoyed.
David Coleman is managing director at The Summit Point Group, based in Fairfax, Va. He can be reached at (703) 303-3587.
