PERSON OF THE WEEK: In order for mortgage lenders to thrive in this current recessionary environment, they must be willing to broaden their product suite to include the addition of alternative loan products and the use of alternative data in underwriting.
But as they do so, they must be extremely vigilant in their use of alternative data, so as to maintain compliance and ensure a borrower’s ability to repay. They also must be cautious not to become too narrow in terms of the data they utilize for underwriting. For most lenders, verification of a borrower’s income and employment will continue to be a standard in the underwriting process, regardless of how much they branch out into alternative products that utilize other data sources such as rent and utility bills.
Meanwhile, the labor market is shifting again, which means many potential borrowers could soon become gig workers or become self-employed, thus driving the growth of alternative loan products.
In addition, the mortgage lending industry is expected to see significant layoffs resulting from the massive drop-off in loan volume, which means automation of key processes – including employment and income versification – will become more important.
To learn more about how these factors will impact mortgage lending – and more specifically why income and employment verification will continue to be critical – MortgageOrb recently interviewed Jarod Jones, sales director, mortgage verification services, Equifax Workforce Solutions.
Q: There is lots of movement in the labor market. Can you speak to how employment shifts impact lenders and borrowers?
Jones: Volatility in the current market, a changing workforce, and talks of a recession have made a risky landscape even more challenging for the mortgage industry. Consumers are increasingly changing where and how they work—with many diverting away from staying with one employer for long tenures. There are talks of a recession, and analysts are saying that it isn’t a matter of if we will enter a recession, it is instead a question of when we will enter a recession.
Many variables can affect a consumer’s ability to pay back debt or take on new credit, such as job changes, accommodation costs, inflation, and other economic impacts. Financial and economic gains made during the pandemic may be easily lost. The loss of economic strength means borrowers’ credit scores may begin to drop, monthly disposable income might decline, and consumers’ prospects for long-term financial health and wealth creation may be curtailed.
In this climate, income and employment data is one of the strongest indicators of consumers with the financial durability to take on additional loans and credit. Relying on consumer-supplied data, like W-2 forms, estimated income, and pay stubs, can open up risks such as altered or incomplete information provided by the applicant. Plus, while credit scores serve as a solid foundation for assessing a consumer’s propensity to pay financial obligations, utilizing income and employment verifications helps provide a more holistic view of applicants that can allow lenders to say “yes” to more consumers.
Q: We see an increase in layoffs within the mortgage industry. How can technology help provide business continuity and security in this industry?
Jones: The entire industry feels the impacts of layoffs and recognizes the need to adjust its operational strategies to compete in today’s market. Mortgage professionals can better streamline tasks by utilizing technology and automation. By implementing tools to help streamline time-consuming tasks that are traditionally paper-based, mortgage professionals can create a win-win situation for themselves and consumers.
Automating tasks such as income and employment verification may increase efficiency and provide a smoother and more secure application process for new and existing consumers.
Automated technologies mean employees spend less time on traditionally manual tasks. By reducing the time spent on tedious tasks, reducing the chances of human error, and speeding up the time to close, lenders may be able to operate more efficiently, reduce costs, and increase conversions simply through automation.
Q: How can income and employment data be used to help lenders compete in today’s HELOC market?
Jones: Although housing costs rose above pre-pandemic pricing, so did many homes’ property value, which led some homeowners to tap into home equity. Modern consumers expect instant results, tending to prefer high-touch digital channels and mobile app experiences instead of traditional home equity lending models with a lack of personalization.
In addition, the Federal Reserve has already increased its rates multiple times in 2022, making homeowners more likely than ever to choose to leverage their equity to remodel or upgrade their existing home rather than purchase a new one.
Alternative data can provide real-time verifications of a borrower’s employment and income status. With this data, the decisioning time on a loan can be reduced from days to just minutes, potentially efficiently originating more loans through the pipeline and dramatically reducing processing costs.
Accurate and reliable consumer data is paramount in today’s environment of stringent regulatory requirements and consumers’ intolerance for disruption in service or access. Lenders need the ability to make more informed decisions, mitigate risk and fulfill underwriting requirements using current, reliable, and market-leading data on income and employment.
Q: Technology and data insights play a significant role in providing a temperature of borrowers’ overall financial health. So how can it also bring more borrowers into the lending landscape?
Jones: Alternative data is the bridge to homeownership for many borrowers with “thin” credit histories and subprime scores. The trouble with lenders utilizing a narrow scope of information for assessing financial well-being is the potential it has to negatively impact consumers or bring forth additional risks for lenders.
When lenders take a limited view of a consumer’s financial situation, they could be reducing their opportunities to extend credit to worthy applicants.
Greater visibility with technology and alternative data sets can revolutionize how lenders evaluate borrower credit and risk, leading to more inclusive lending systems.
Without a more holistic view of each applicant’s ability to repay a loan, a lender could be saying “no” to someone who is potentially a good customer.
Knowing a borrower has consistent employment and income history can put lenders at ease when gauging a borrower’s ability to repay debt.