The pandemic created greater acceptance regarding the use of technology in general, not just in the home lending business. And yet, the mortgage industry in many ways remains antiquated in its processes, said Lee Smith, president of mortgage at Flagstar Bank, which just completed its third accelerator class.
While reviewing some of the innovations coming out of the program, Smith and others discussed the new capabilities and where some in the field have regressed in their use of technologies adopted over the past two years.
Broadly speaking, there are many more efficiencies yet to come. Typically it takes 30 to 45 days to get a mortgage. "In this day and age, you should be able to do things a lot quicker than that given technology now," Smith said. "There are reasons why it still takes longer. It's a heavily regulated industry. We obviously want to comply with the agency standards, and loans need to be saleable."
But it's also a matter of getting every entity involved in the process — from originators and staff to vendors and those in the secondary market — to adopt these technologies.
Technology has evolved to allow for more of the verification process to be done online, with limited human intervention, which is now accepted by Fannie Mae and Freddie Mac — an important piece of the puzzle.
"Obviously, they set the minimum standards in the industry as to what a mortgage needs to look like if it's to be saleable," said Smith "And they've done a great job of evolving their processes with this technology, and you need both to come to the table, and that's what's happened. So you've had the innovation piece, and then you've had the acceptance piece as well."
Below we round up a few emerging companies launching software products in the mortgage space.
Interest rates are rising, and for independent mortgage bankers, that affects the cost of funds needed to originate a loan.
During the good times, managing warehouse usage tends to have a lower priority because everybody's making money on the float. With leaner times ahead, efficiency may become even more important for those still in the game.
OptiFunder is a warehouse management system. "So as an independent originator, you have multiple warehouse lines that you have to manage and every single loan in your pipeline could theoretically go to every warehouse line you have," CEO Mike McFadden said. "The reality is, that's not true because you have a lot of restrictions and eligibility considerations, capacity and supplements and all of these things that need to be managed."
It leverages artificial intelligence and machine learning to determine the optimal execution for each loan.
"The amount of costs that they incur while the loan is in the warehouse, approaches around $1,000 when you consider the interest expense, the fees and all the post-closing costs that the company incurs," McFadden said. "Our system really is designed to cut as much of that $1,000 out as possible."
OptiFunder provides tools around delivering data and docs to the warehouse lender, receiving all the loan purchase advisories and the line payoffs.
McFadden started working on OptiFunder in 2017 after leaving Stonegate Mortgage following its sale to Home Point. It was brought to market at the tail end of 2019 and now has over 50 clients.
"That growth has really been driven by just listening to our clients and understanding pain points through this entire kind of post-closing process and where there's opportunity to provide solutions for those problems," McFadden said.
One of the current pain points was addressing the replacement of Libor, which had been the most common index used by warehouse lenders. Many have turned to the Secured Overnight Financing Rate, but all sorts of different reference rates are popping up and those need to be dealt with in OptiFunder, McFadden noted.
Meanwhile, three participants in Flagstar's accelerator offer products to help the loss mitigation process. Executives at all three companies in the accelerator program praised the process for helping provide access to a broader marketplace for their product.
Brace was part of the first accelerator's first class in 2019. "We were able to, in the midst of COVID over the last about 15 months, interact with over 100,000 of their homeowners to manage a lot of that intake process and understanding how to get from that forbearance environment into more of a traditional loss mitigation environment," said its CEO Eric Rachmel. "The real value driver that we've created for them was that kind of application start to signature or that complete application."
Brace learned in that process that 50% of those needing loss mitigation were doing so on their mobile phone.
Fannie Mae's Day 1 Certainty uses direct integrations to get bank deposit information and pay stubs. Brace adopted this for its product, "because no one ever thought about leveraging these tools for a homeowner in default to better gather the documents required when they're coming out of forbearance," Rachmel said.
The only constant in this area is change, as legislators and regulators react to the headlines. "Loss mitigation constantly evolves, and you have to stay ahead of those changes," Rachmel said. "As we continue to move across the servicing lifecycle, that applies to everything or a wide variety of topics in mortgage servicing."
The loss mitigation process has a lot of rules around it that mortgage servicers like Flagstar have to abide by. As a result, they have a very archaic way of dealing with exception management, said Todd Morbraten CEO of OrangeGrid, which was part of the most recent Flagstar accelerator.
"Now to go from A to Z sounds pretty simple as those steps, but it always shoots left, it always shoots right, and never goes in a straight path," Morbraten explained. "So if the servicer does not comply and do things exactly in a step process they're supposed to, in this timeline that's supposed to this process is, there are severe penalties for it."
OrangeGrid is "applying a very unique architecture" that allows us to connect to all the data and centralize it into one system, where it then can deploy all kinds of automation workflow.
"But the biggest thing we focus on that's impactful is that exception management," Morbraten said. "Instead of generating reports, all that data is already in OrangeGrid, we just pull it from their existing systems, and we put automated rules in there."
Dynamic dashboards allow for tracking and prioritization of accounts to work on. "And if you're going to rely on how you did it in the last wave by just putting good training programs and adding bodies you're probably going to fall short," Morbraten said.
Foreclosure is a last resort for lenders and "the better job they can do, the better chance they can keep people in their homes," he continued.
Stavvy, part of the 2020 Flagstar accelerator, modeled its improvement of the loan modification process on systems for origination.
Angel Hernandez, Stavvy's head of industry and regulatory affairs noted a Consumer Financial Protection Bureau study on digital closings, which found that consumers having access to the files that go with the closing ahead of time remotely and available anywhere had an increased level of understanding as to the content.
"We believe that the same net gains are likely present, perhaps even more so, when dealing with loan modifications," Hernandez said.
Ginnie Mae, which guarantees securities using mortgages from three government programs, requires loan modifications to be notarized, recorded instruments, so Stavvy brings electronic notarization to that process.
Among the benefits is environmental as it reduces reliance on paper and shipping and speeds up the delivery of relief to the homeowner.
"Overall, it's likely to have a net positive impact on the planet," Hernandez said.
"I think homeowner preference and just at large consumer preference toward digital convenient readily accessible solutions are something that servicers will have to respond to," Hernandez said.
The industry is beginning to recognize the need for adoption of digital loss mitigation and servicing workflows to help inch closer to a truly start-to-finish process, he said.
"I think just the fact that we have a degree of adoption on the front end that we've seen, prompts all of us to begin thinking about 'well, what else or where else can we squeeze out efficiencies once we are dealing with purely electronic collateral files?'" Hernandez said. "I think the execution of loss mitigation, and perhaps even some foreclosure handoffs, become the next natural phases of building out that end-to-end digital mortgage ecosystem."
Hernandez believes using these tools for creating recordable documents for modified loans will also help adoption on the front end of the mortgage process.
"Perhaps somebody had not been a first mover in the digital closing space, but that in digital loss mit, [it] just made sense because of the cost efficiencies," Hernandez said. "But now that you have the training, the enterprise expertise on how to deploy these tools and integrate them with their existing tech stack, it makes taking that next step for increasing eClosing that much easier."
Based on data from a recent Stratmor survey, Hernandez' comment is not that outlandish.
Remote online notarization and hybrid eClosings was used by over 70% of respondents in the 2020 study, albeit largely because they had to as a result of the pandemic, said Garth Graham, senior partner at Stratmor. This was up from less than 20% in 2019. The share has now dropped to roughly 50% of lenders.
"And that waning is because it's not as critical now," Graham said. "It's your classic bell curve, people who've got it committed are seen well above 50% adoption of eClosings and getting staggering benefits in productivity and efficiency, but also in customer satisfaction."
Some lenders are slipping back to the old ways, with client after client telling Stratmor their loan officers don't like eClosing tech.
"My natural reaction would be a) why do they not get that it's advantageous; b) Why do they care and c) why do you let them," Graham said. "I have never had anyone give me a piece of data, nor any claim that says a better closing process is for everyone to sit around a table and to take an hour and a half off work and read paperwork."
Still, a plurality of lenders think from a financial perspective eClosing is beneficial, as 42% said the return on investment is positive. However another third think it might be positive if they get enough adoption in their shop, and another 24% accept the cost, or perceive they will have negative ROI, because the customer experience is worth it.
Originations Editor, National Mortgage News