REQUIRED READING: For more than a decade, the industry has foretold a day when mortgages will be originated, closed and delivered in a totally electronic lifecycle. Many lenders have achieved portions of this electronic production chain, but the fully realized ‘end to end’ e-mortgage has not happened yet. Reasons for this situation fall along the lines of the following:
- ‘MISMO hasn't finalized its procedures and standards for electronic originations!’;
- ‘The county clerk offices won't accept electronically signed documents!’;
- ‘Security technology isn't advanced enough to ensure consumer privacy!’; and
- ‘Uh, the dog ate my homework?’
Obviously, the last statement is a jest, but the image it suggests – shamefaced children grasping at straws for a reason why they had not done what they knew needed to be done – is no joke. Lenders have already incorporated things like online rate searches and online applications, but paper and/or manual processes always seem to be brought back into the mix at some point, because the industry is thinking too small about what it means to originate a loan electronically.
It is time to re-examine how consumers secure mortgages and to rethink how the industry constructs the loan production chain. In short, it's time for us to get with the times.
Most critics finger exotic loan products and questionable lending practices as the culprits for the 2008 economic meltdown, but these were simply by-products of more systemic issues that enabled those things to occur. Instead, the real culprits were a lack of granular attention to numerous points in the loan production chain where problems could occur, and the extent to which the complexity of the process itself inhibited operational innovation.Â
For almost 30 years, the industry has been originating loans in roughly the same way. Think about what has changed in that span of time: Would you want your surgeon, for example, to rely on 30-year-old surgical techniques? How about your IT support? Tried and true techniques have their place, but I would argue that our current origination model has been tried and found untrue.
Furthermore, the regulatory aftershock of the subprime collapse has dramatically increased the cost of compliance and, by extension, lenders' overhead costs. Without an equally dramatic decrease in the cost of doing business, either most lenders will not survive or consumers will bear the cost burden of heightened systemic compliance.
Consumer centricity is where regulators are driving our industry. Richard Cordray's recess appointment as director of the Consumer Financial Protection Bureau essentially cements the existence of this agency, and given the bureau's activity since its inception, consumer finance organizations of all stripes are going to be required to embrace a more consumer-friendly mentality. Adapt, or become irrelevant, folks – it is the way of nature, and it is certainly the nature of this industry.
Lessons learned
That being said, here are some recommendations for lenders looking to modernize their business model.
Think bigger. As far as most lenders are concerned, their involvement in the loan lifecycle is over as soon as the investor purchase is completed, with check in hand. That's a shortsighted perspective at best.
Rethink your place in the loan lifecycle. Mortgage lenders earn repeat business via subsequent mortgages from the same borrower on either new or existing properties and refinancing. In addition to origination fees, mortgage lenders profit from how they manage secondary market activities. Focus on molding your model to expand your success in these two critical areas.Â
It is not enough simply to think about originating, underwriting, closing and delivering a paperless mortgage. That is purely tactical. Lenders' strategic operations goals must be more all-encompassing to truly transform business performance. Striving for anything less than total transformation is going to be a waste of time.
Think like your customer. Most mortgage lenders have embraced automation for its back-office benefits, and with good reason. However, that mentality shortchanges lenders because it narrows the focus of what can be achieved through automation.
For example, in a financial context, borrowers see negative numbers in overdrawn bank accounts, maxed out credit card balances and plunging stock markets. In other words, nothing good economically ever comes from negative numbers. Now try explaining a rebate to a borrower using a negative figure. It makes sense to loan officers because they understand the process and the calculations behind that figure. To a consumer, however, a negative number means he or she owes something.
Avoid off-the-shelf solutions. If you're looking for a pre-packaged solution to transform your business, you might as well start looking for the entrance to Narnia, because you are more likely to find the latter than the former. Current third-party technology products are built with antiquated lending models in mind. Mortgage bankers should make technology work in a more modern model by seeking out vendors that will work with them to customize specific solutions.
Put transparency first. One could argue that the reason consumers are ignorant about the ins and outs of home financing is because lenders have traditionally held their cards close to the vest and guided borrowers through the process with the entreaty, ‘Trust me.’ Well, the trust is gone – consumers have been scorned too much and too frequently by the financial services sector to be blindly led along without insight into the process.
Besides, if a company is complying to the letter and the spirit of the law, why should it act as if it had something to hide?
Furthermore, transparency eliminates the need for the hard sell. That is a foreign concept for loan officers to grasp, because the hard sell is all they know, and previous loan officer compensation schemes required an element of duplicity (i.e., yield-spread premium) on the loan officer's part in order to make a profitable loan. In a transparent origination model, all fees are flat and up-front so it requires some reconditioning to help loan officers understand that their role has changed from salesperson to counselor.
Mortgage lending is a business, and the goal of any business is profit earning. However, the days of uninhibited greed and irresponsible corporate behavior are at an end. Transparency and accountability are the new standards by which the financial services industry must operate.
When a lender empowers consumers and provides them with the tools and information necessary to make educated decisions about their mortgage, customers come willingly. In addition, the cost savings achieved through lower overhead and minimal marketing expense ensure that the customer receives the lowest-cost mortgage available while maximizing the lender's profit.
Mark Pickett is CEO of Nail Your Mortgage, based in Chicago. He can be reached at mark.pickett@nailyourmortgage.com.
