Stew Scott: Technology Helps Lenders Maintain Loan Quality During Volume Spikes


PERSON OF THE WEEK: It is well established that technology and automation can help mortgage lenders process loans faster and reduce operating costs – but how much does it help lenders reduce the overall risk of loan defects during periods of high volume?

This was put to the test during the pandemic, when loan volume soared; not only did origination volume increase dramatically, so did the average loan size, due to rapidly rising home prices. As a result, the pandemic ended up being a huge test for how lenders’ technology investments would hold up under the massive flood of volume.

What’s more, it was a huge test of how that technology would work during a period when many lenders were onboarding new underwriters and additional staff, thus increasing the risk of loan defects.

To learn more about how technology helped lenders handle the load while keeping loan quality under control, MortgageOrb interviewed Stew Scott, vice president of product management for ICE Mortgage Technology.

Q: We know that after a period of high lending volumes, credit problems appear. The GSEs and FHA start making loan repurchase demands due to defects. Did we increase the potential for error as volumes grew? And if so, how can technology help address this loan quality issue?

Scott: During the early stages of the pandemic when volumes were at historic highs, lenders struggled with capacity. Existing technology, as it was implemented in many institutions, could not handle the load. Processes were adjusted to shave time and for many, hiring new talent seemed like the most viable option. Lender profitability shrank as they were forced to pay exorbitant salaries to the dwindling pool of underwriting talent.

On the flip side, as astonishing as it sounds, many underwriters with no previous experience were receiving on the job training. All this culminated into a high-cost loan manufacturing process riddled with potential risk and inconsistencies. 

But for several lenders, we saw market share gains then and now, because they invested in understanding and refining their current process before implementing technology. Using this opportunity with volumes dipping is an excellent time to prepare for the future.

We often hear our company president, Joe Tyrell, speak about how our mission is to automate everything “automatable.” By embracing technology, lenders can quickly handle intricate transactions at a reduced cost with higher levels of consistency. Underwriting oversight delivered by technology produces loans that are highly sought after in the secondary market, due to their accuracy.

Q: With origination costs increasing and lack of housing still at risk, many lenders and investors are looking for ways to eliminate time consuming aspects of the underwriting process. How can technology automate time consuming data and document review tasks to underwrite more loans in less time, with reduced buyback risk?

Scott: An underwriter’s time is spent on disjointed and error-prone manual tasks, and almost all operational expenses are labor related, costing lenders hundreds of dollars per loan in margin. According to Freddie Mac’s analysis of lenders’ mortgage industry compensation and loan operations data, they estimated that every hour eliminated performing specific processing and underwriting tasks for a given loan results in a cost savings of $132 per loan.

There are several footnotes to this statistic, but they specifically call out time spent to get the customer’s W2 or other financial statements, and time spent underwriting could take between one and two hours. So, using technology to remove the manual prepping and sorting of incoming documents with automated data recognition and extraction, coupled with tools to reduce manual income and credit evaluation, can reduce time to close by days – not just hours.

Q: The volume of information and tasks underwriters are expected to market are monumental. Guidebooks are thousands of pages long; non-QM and other niche products are less formulaic and more labor intensive. Is it unrealistic to expect an underwriter to maintain quality standards without some form of oversight?

Scott: Yes, non-QM and other products now require more from even a highly experienced underwriter, so it’s extremely unrealistic. Some of the most successful lenders I’ve worked with have standardized and tailored their processes to address low hanging fruit and free up their underwriters to focus on the less formulaic decisions. Applying automation to tasks that lend to a credit decision, including applying the guidelines, corroborating on data points, clearing conditions, and seeing everything served up on a dashboard with red and green flags is underwriting utopia. That type of oversight is 100% achievable.

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