BLOG VIEW: 2023 has been quite a wake-up call for the mortgage industry. Market forces such as low inventory and sustained high home prices, combined with the economic realities of steady rate hikes and a stubborn inflationary environment, created a perfect storm that left many companies struggling to survive – much less thrive. Most lenders began the year with price increases for credit. Unfortunately, that trend is going to continue in 2024 – it’s an industry-wide concern.
There was also a significant migration from hard pulls to soft pulls in an effort to minimize trigger leads and reduce initial file costs. The GSEs introduced initiatives that enabled lenders to obtain initial underwriting approvals with a single bureau report and score.
But next year promises to be a whole new ballgame. For 2024, the credit bureaus are mandating a significant change around the use of Soft Pull Credit Reports, with and without Trended Data. A soft pull will not be much less expensive than a hard inquiry, which is needed to underwrite the mortgage.
And even more challenges are expected. In addition to the ongoing economic pressures associated with rates, home prices, low inventory, and persistent inflation – as well as rising costs of credit and data – new technologies are expected to take center stage. Artificial Intelligence (AI) tools will be used more pervasively throughout the origination process which will help streamline workflows and create more efficiencies. However, it will be incumbent upon lenders to determine how to use them safely and responsibly.
So, what are lenders to do – just merely “survive until ’25?” Adopting a more proactive approach is likely a better way to navigate 2024. Lenders must reconsider their entire process and ask themselves important questions. Ultimately, they will have to work with their partners to reassess workflows and arrive at solutions that will increase efficiencies and contain costs.
What Lenders Can Expect in 2024
As we hope for the best, the forecasts for 2024 show a slightly softer market than the industry experienced in 2023. In a recent Forbes article, some experts predicted how market conditions will affect the average 30-year, fixed-rate mortgage in the months ahead:
- National Association of Realtors chief economist Lawrence Yun. “Mortgage rates look to head towards 7% in a few months and into the 6% range by the spring of 2024.”
- Mortgage Bankers Association (MBA). MBA’s baseline forecast is for mortgage rates to end 2024 at 6.1% and reach 5.5% at the end of 2025 as Treasury rates decline and the spread narrows.
- Bank of America head of retail lending Matt Vernon. “The Fed’s likely decision to cut rates in 2024 would be a key factor that could breathe new life into the housing market. However, it’s important to note that significant drops in mortgage rates might not happen in the early months of 2024. If any reductions occur, they are likely to be gradual, possibly beginning in the latter part of the year.”
Given the potential for a softer market coupled with lingering economic conditions, the most important question lenders should be asking themselves going into 2024 is what is our priority? Is it to protect our pipeline against triggers or is it to reduce the cost of credit reports? Once a lender determines that, they can reassess their workflows and milestones and should consider:
Charging an application fee or sharing costs with consumers earlier in the process: While in a purchase market, lenders might want to explore charging an application fee or working with consumers to subsidize these costs so lenders can recoup fees sooner. Another benefit of consumers having skin in the game at the outset of the process is that it could reduce the risk of triggers and loans falling out of lenders’ pipelines since applicants will not want to pay fees multiple times.
Changing when certain verifications are ordered in the process: Lenders may want to reconsider when they move from a single bureau soft pull inquiry to a tri-merge hard inquiry – maybe that comes later in underwriting. This shouldn’t just be restricted to credit. Another area could be flood. Why wait to find out that a property is on a flood plain? Lenders could obtain an indication as to whether or not flood insurance will be required for the subject property sooner (i.e., a pre-flood report) and purchase the official flood report later in the process.
Boosting buying power: Lenders should also be considering bundling verification services to help reduce costs. It’s really about leveraging their own purchasing power. More services mean less cost. That goes for technology too. Consolidating venders down to one technology provider puts the lender in control – the more they buy, the more they save. A single, strong relationship can also help lenders stay at the forefront when new technology solutions emerge.
Addressing upcoming FHFA updates: While it is still unclear as to when the industry will move from a tri-merge to a bi-merge and adapt different scoring models, it’s not too soon for lenders to start thinking through the impact this will have on their operations. They should be considering things such as whether their LOS is in a position to support multiple scores – and understanding the difference between FICO 10T and VantageScore 4.0, etc.
The Role Technology is Expected to Play
The continual adoption of more and more technology – and using it to its fullest potential – will be a dominant theme in 2024 – with AI playing a leading role.
Because of AI’s ability to categorize data that match specific patterns and attach a confidence level to its findings, technology companies that use AI can provide actionable insights – as opposed to just the data itself. For lenders, this means they can input data into an AI platform and it will tell them, with a good degree of confidence, what action(s) they could take and how it would impact their businesses. In fact, it is likely to eventually help technology companies offer guidance to lenders to determine which loans should remain or be removed from their pipelines, as well as how to handle regulatory-related concerns. This will be a true game changer for the industry.
In addition, AI is increasingly being used to better understand lending challenges – especially around operational performance as it relates to fraud. For example, Xactus is building a complex benchmarking tool with AI and Machine Learning (ML) models that will enable lenders to better assess how they stack up to their competition in specific areas such as closing rates and FICO® scores, that is also enriched with federal lending rate information, unemployment statistics, and other valuable data. Lenders can gain critical insights from the enormous amount of industry data that’s available, and technology companies are working to anonymize it to ensure it cannot be traced back to individual consumers.
New Fraud Schemes and How to Prevent Them
Another area that is expected to take center stage in 2024 is mortgage fraud and its growing impact on the industry. Even though the real estate market is slower, it is expected that fraud will be prevalent. As technology replaces more human tasks, schemers are finding more entries to predatory positions where lenders are hard at work qualifying consumers.
Identity fraud is still considered the foundation of the majority of reported cybercrimes, and it continues to be prevalent in mortgage fraud transactions. What’s more, identity fraud is expected to increase because fraudsters are creating more ways to enhance their ability to alter and develop deep fake personas by combining false information with real consumer data. Another growing fraud trend is the creation of Consumer Privacy Numbers to provide emerging and thin file applicants with alternative credit profiles that match conventional origination requirements.
Other mortgage fraud examples include:
- Mortgage payoff fraud which involves “Business Email Compromise (BEC).” BEC is a kind of email fraud scheme that targets businesses that use wire transfers as a form of payment. According to the FBI’s IC3 (Internet Crime Complaint Center), BEC rose to become the second highest reported cybercrime, resulting in an excess of $2.7 billion dollars in losses.
- Occupancy fraud happens when a person falsifies their intention to occupy a property in order to secure better loan terms. Most property owners will go to great lengths to protect their investment in their primary home – as opposed to those using a property to generate rental income. They are generally more concerned with turning a profit and may not be as invested in a property if faced with a potential loss. Either way, both the investor and the lender lose when a homeowner defaults, resulting in a foreclosure.
- Employment and income fraud occurs when fake employers use technology to defraud lenders who are verifying an applicant’s income and employment status. Debt relief businesses often prey upon consumers pretending to help them improve their financial profile, but they often produce false information and manipulate credit. To mitigate the risk of fake employer verification, lenders today should use technology solutions to bypass direct employer contact.
- Tax return fraud is a major focus of the IRS as it continues to be pervasive. To identify possible inconsistencies and inaccuracies in financial reporting, instead of depending on consumer supplied documents, lenders should obtain transcripts through a third party.
Lenders can protect against these financial risks by utilizing technology services that eliminate the compromise of accurate information. “Trust but verify” is still the best way to reduce exposure to fraudsters who are well acquainted with the mortgage ecosystem and seek to make a profit from the potential gaps within it.
With 2023 in the rearview mirror, it’s time for lenders to take what they’ve learned during these challenging months and reevaluate their processes with an eye toward making necessary changes to their workflows to minimize risk and reduce their financial vulnerability. And this should be done with eyes wide open in terms of the trends, threats, and technologies that are expected to shape 2024. Lenders who have a strong partner by their side – one that is equipped with the experience, talent, and solutions to address today’s modern mortgage concerns – is one of the best ways to confidently move forward into the new year.
Shelley Leonard is president of Xactus, offering borrower verification solutions to the mortgage industry.
Greg Holmes, chief revenue officer at Xactus, co-authored this article.