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HW FOCUS / A CONCENTRATED LOOK AT INDUSTRY ISSUES / SPECIAL EDITION OF HOUSINGWIRE MAGAZINE / 2011

O R I G I N AT I O N


contents Volume 2, Issue 3

ORIGINATION

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Uncertainty abounds

Banks exit reverse mortgages

Economists say recovery hinges on the strength of the housing market. The same housing market that produced the bubble that popped, starting the worst recession in generations. But as lenders, borrowers, servicers and investors await new regulations for the mortgage industry, the road to a housing recovery remains elusive.

Extending reverse mortgages to homeowners older than 62 is no longer profitbale enough nor worth the risk for some lenders. The nation’s largest mortgage underwriters stopped offering the product earlier this year, as they increase focus on more pressing issues with originations and securitizations.

2 Editor’s note 5 Origination at a glance

perspectives SCOTT BRINKLEY LOREN COOKE AARON COPE

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DAVID FOURNIER

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ARTURO GARCIA

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GARTH GRAHAM

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DON COVEY

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PAUL MASS

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ANDY CRISENBERY

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LINDA NAYLOR

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HEATHER CZERMAK

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DAVID RASMUSSEN

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MICHAEL DETWILER

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LEONARD RYAN

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BRIAN K. FITZPATRICK

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SCOTT STUCKY

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ad index CALYX SOFTWARE CORELOGIC FIRST AMERICAN TITLE INSURANCE

7 BC IBC

HARLAND FINANCIAL SOLUTIONS

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LENDER PROCESSING SERVICES

IFC

MORTECH

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RMS REVERSE MORTGAGE SOLUTIONS 29 RR DONNELLY

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SERVICELINK

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VEROS

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On the dotted line Mortgage rates are at historical lows. But Americans aren’t buying homes. And many are unable to refinance existing mortgages because they owe more on the loan than the property is worth or tighter underwriting standards preclude approval. A prospective homebuyer with good credit can get an interest rate less than 4.5% for a 30-year, fixed mortgage. Pristine credit and a willingness to be flexible with loan terms may even garner a borrower an initial interest rate around 3%. Yet, demand remains limited. After peaking at $1.2 trillion in the third quarter of 2003, mortgage originations cratered to about $297.2 billion in the third quarter of 2008. Mortgage originations have sputtered along the bottom since. The secondary mortgage market is also stalled. In addition to all the problems associated with mortgage-backed securities issued in 2005 through 2007, the muted supply of quality loans and evolving regulatory landscape has limited MBS deals coming to market. And it only gets harder for mortgage lenders. Most financial institutions tightened underwriting standards in the wake of the financial crisis. And some of the largest U.S. banks have stopped writing reverse mortgages entirely. The sweeping reforms of the Dodd-Frank Act and the uncertainty regarding the role of the Consumer Financial Protection Bureau have created an atmosphere of rapid change and as-yet-unknown challenges for mortgage origination.

The loan origination systems of the future must quickly adapt to changes while consistently producing clear, concise mortgage documents for the consumer. Of course, that’s the same consumer who’s facing the likelihood of being rejected for a mortgage for failing to meet new underwriting guidelines, be it federal mandates or the bank’s own tightened rules. So, with a growing number of distressed properties and limited demand for new homes, it may be a great time to find a home. But it may not be a great time to find a mortgage … or a mortgagee.

Jason Philyaw, Copy Editor

EDITORIAL PUBLISHER & EDITOR IN CHIEF Paul Jackson ASSOCIATE PUBLISHER Richard Bitner EXECUTIVE EDITOR Kerry Curry COPY EDTIOR Jason Philyaw CONTRIBUTOR Karen Nielsen

CREATIVE SENIOR ART DIRECTOR Polly d’Avignon DESIGNERS Rosangel de Moreira, Jessica Fung, Michele Finger

ADVERTISING & BUSINESS ACCOUNT EXECUTIVES Christi Lingard clingard @ HousingWire.com

Lauren Border lborder @ HousingWire.com MARKETING DIRECTOR Sally Powell Schall WEB EVENTS & CIRCULATION Christina Vick

THE LTV GROUP EXECUTIVE CREATIVE DIRECTOR Greg Lakloufi DIRECTOR OF INTERACTIVE SERVICES Jason Clemens DIGITAL DEVELOPERS Ron Ferguson, Jody Thigpen

ABOUT HW Focus is published by The LTV Group, 2701 Dallas Parkway, Suite 200, Plano, TX 75093; 469.893.1480 The information contained within should not be construed as a recommendation for any course of action regarding legal, financial or accounting matters. All written materials are disseminated with the understanding that the publisher is not engaged in rendering legal advice or other professional services. The LTV Group does not guarantee the accuracy of information provided, and is not liable for any damages, losses, or other detriment that may result from the use of these materials.

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EDITOR’S NOTE

For HousingWire’s first HWfocus on Originations, we gathered perspectives from lenders, venders and servicers to see what lies ahead for home loan underwriting. Many of the authors point to technology as a way out.

VOLUME 2, ISSUE 3 AUGUST 2011

© 2011 by The LTV Group • All rights reserved


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Bring your business into focus. NOVEMBER TOPIC

DEFAULT SERVICING ADVERTISING DEADLINE: OCTOBER 5

TO ADVERTISE, CONTACT: Christi Lingard 469.893.1492 clingard@theLTVgroup.com

Contact Jason Philyaw at jphilyaw@HousingWire.com or 469.893.1513 to contribute your PERSPECTIVE to HW Focus. Deadline for August’s Origination issue is Sept. 9.

Lauren Border 469.893.1500 lborder@theLTVgroup.com

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ORIGINATION AT A GLANCE 2003

$3.94

2004

TR I LLI O N

$2.92 TRILLIO N

2001

$2.21 TR I LLI O N

2007

$2.43 TRILLIO N 1998

$1.45

TRILLION

1995

$639

BILLION

2010

$1.57 TRILLIO N

1991

$562

BILLION

Please fasten your seatbelt In 1990, lenders originated $458.4 billion worth of mortgages. For the final three months of 2010, about $500 billion of mortgages was originated. What once took a year, now takes a quarter. Mortgage originations first topped $1 trillion in 1993, $2 trillion in 2001 and peaked at nearly $3.95 trillion in 2003, falling steadily since. The primary and secondary mortgage markets became dependent upon the volume of originations during the bubble. But is that volume sustainable?


Are lenders ready to capitalize? The three essentials of sound mortgage lending By Scott Brinkley

PEOPLE: JUST ENOUGH TO MANAGE VOLUME As servicers discovered when loan modification requests surged, managing volumes requires having enough knowledgeable people on the front lines serving customers and enough skilled people behind the scenes to carry out tasks. Borrowers need seamless access to lender representatives they know are working for them. Lenders must also avoid confusing interactions or long delays caused by bottlenecks in loan processing, underwriting, or other key functions. But let’s face it, today’s skeletal origination departments are not positioned to respond to a market rebound. Even minor upticks in origination volumes send shockwaves through many organizations. On the other hand, ramping up to meet hoped-for volumes makes little sense to organizations striving to maintain shareholder equity and market favor.

In today’s uncertain market, entering into scalable outsourcing relationships with trusted business partners offers the most logical solution. Quality outsourcing delivers surge capacity by rapidly scaling up and down from a core team that remains in place to preserve expertise. Through this type of ongoing engagement, lenders can avoid unnecessary overhead costs by adding trained outsourcing employees and removing them when volumes drop. TECHNOLOGY: BUILD, BUY OR PLUG INTO? Establishing sound lending policies is essential to restoring confidence, but those policies must be put into daily practice and enforced across the enterprise. Today’s loan origination systems should integrate verified borrower and property information and incorporate business rules that align with lender policies. By doing so, loan origination systems can help simplify, streamline, and standardize loan delivery. It’s been four years since origination demand dramatically receded and, as we know, technology ages quickly. Resource constraints or insufficient returns on origination investments have put many lenders behind the technology curve. However, rather than viewing the four-year gap and technology’s pace as problems, astute originators can take advantage of the timing — because as the lending market slowed, technology advanced rapidly. Cloud-based computing gained traction and began fulfilling its promise of accessanywhere computing. Instead of deciding whether to buy or build, lenders can now connect to cloud-computing loan origination systems with very little upfront capital outlay. Many industries are adopting cloud computing for the cost savings it offers. Remotely hosted software significantly reduces hardware costs and enables secure access from any Web-enabled device and location. And because cloud appli-

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PERSPECTIVES

As David Stevens, president of the Mortgage Bankers Association, told National Secondary Market Conference attendees, “It is hard to forget the dream of owning a home.” While our industry understands loan originations will eventually rebound, the question many are asking is “When?” And while that’s a fair question, the more critical question might be, “Are we ready?” As we emerge from the mortgage crisis, lenders are also right to wonder what “ready” means. It means having the pieces in place to address the eventual demand increase and meet the highest levels of loan quality. Only then can our industry quiet homeowners and investors’ fears and restore confidence. Though concerns vary, they all center on trust. Rebuilding trust is not an overnight event; it’s a process requiring initiatives in three key areas: people, technology and loan quality.

Unfortunately, we’ve learned THE HARD WAY that misrepresentations are common.


cations receive continuous updates, costly IT staff hours are not spent maintaining software installed on local servers and PCs. In addition, cloud-based loan origination system solutions adapt to lenders’ processes and business rules, speeding implementation, increasing operational efficiencies, and reducing origination costs. LOAN QUALITY: KNOW AND SHOW With Freddie Mae and Fannie Mac in flux, market liquidity depends on private investors returning to the secondary mortgage market. For that to occur, skittish investors must be certain lenders know and share key information on every loan originated. It’s fair to expect that private investors will be vigilant in their due diligence and merciless on buybacks if portfolio loans show evidence of souring. Despite lenders’ best intentions, rampant mortgage fraud poses a serious challenge to loan quality. Delivering quality loans would be easy if lenders could be certain every mortgage broker was honest, every appraisal accurate, and every borrower presented complete, accurate information. Unfortunately, we’ve learned the hard way that misrepresentations are common. Lenders need proof of borrower identity, income, credit, employment and occupancy status, along with certainty that property valuations are accurate.

By adopting a validated approach, lenders can avoid buyback requests and rebuttal campaigns that can cost millions of dollars and consume valuable staff resources. Market liquidity rests on loan quality — and data and analytics are crucial ingredients in the loan quality mix. Lenders must have easy access to ample data that’s current and reliable. But they must also be able to turn raw data into actionable knowledge. When even minor misrepresentations can result in repurchases, tools that verify borrower information, confirm property values, and detect fraud are vital. Moreover, these tools must easily calibrate to lenders’ risk tolerance and integrate with the loan origination system to ensure enterprise-wide adherence to standards. Forward-thinking lenders who instill investor confidence will kick-start the origination rebound and lead the market resurgence. As that happens, demand will begin to increase and lenders who expect to compete must be ready with people, processes, technology, and loan-quality assurance in place. Lenders caught unprepared when the rebound begins will be left scrambling to catch up as they lose market share. The question of when the origination market will rebound, then, is less important than how lenders can position themselves to capitalize on its inevitable return.

Brinkley is senior vice president of outsourcing and technology solutions at CoreLogic.


Lenders looking to comply Regulations lead to entrepreneurial zeal

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By Aaron Cope It appears that those of us who had pinned our hopes on mortgage industry trade groups being able to at least slow, if not stop, regulations from Washington have been disappointed. For a brief time, it looked like the effort would be successful, but it was not. Instead, it is likely that lenders will face some pretty consumer-friendly legislation over the next few years. That has caused some in our industry to leave the business, but that was an overreaction to the situation. At the same time, the mortgage industry is burdened by the highest levels of regulatory oversight in its history. As a result, lenders are devoting as much money to compliance as they spent on marketing in past years. It’s a burden few other industries face. They are being told how to compensate people. But it goes further than that: Lenders earn money and they are told how they can spend it. I doubt this will continue over the long term because it is inconsistent with the role some Americans think the government should play in the economy. In the short term, however, lenders had to learn to comply with Dodd-Frank, RESPA, the good faith estimate and other regulations that cost money, depressed earnings, and forced some successful loan originators out of the business. Some were unwilling to wait and see how things would work out or if they would be able to continue to earn a living in the mortgage business. So they simply headed for the exits. But most originators, however much concern they felt, have stuck it out and will remain in the business. What has changed, and continues to evolve, are the expectations lenders express for loan origination system vendors. Over the past few months, lenders, working with their technology partners, have begun to recognize that the new regulatory order is not going away. One way to help ensure compliance with the new regulation — and with any that may come in the future — is to license a technology platform that has seamlessly integrated checks and balances into the system. Originators are more likely to stay in the business than they were a few months ago, but they are also more likely to seek a new origination platform that delivers a compliant, secure, high-quality loan document preparation and lending platform. Their legacy systems cannot handle these demands, so lenders are beginning to shop around for systems that can keep them compliant in an automated fashion.

Based on what I have seen, there is a growing appetite for loan origination software that can address the regulations, that is web-based and offers cutting-edge technology, flexibility, and customization at an affordable cost. One of the unintended consequences of the regulations is that some of the most well-established loan origination system providers will lose market share. Their technology simply cannot handle these expectations. The process of creating and distributing initial disclosures needs to be safe, simple, instantaneous, and inexpensive. Lenders require and expect an automated method ensures compliance with RESPA and the Truth-in-Lending regulation ensures disclosures are produced and postmarked within 72 hours. Recent advances mean that lenders neither have to worry they will miss the deadline, nor will they suffer delays or have to pay for ink, paper or postage. This point leads me to a conclusion that surprises me even as I write it: Angst-ridden mortgage professionals are turning to technology to soothe their battered nerves and deliver peace of mind. Lenders are keen for this sort of functionality because they know it will keep them compliant with the regulations. Moreover, access to documents, such as the HUD-1, the Good Faith Estimate, Truth in Lending and servicing documents, should be no more than a click away. And systems that make uploading documents and sharing them easy are preferred. When a document is updated, users expect to be notified. They want intuitive offerings that are easy to use and make access to the documents virtually instantaneous. At the top of many lenders’ wish lists is automation, such as a Truth-in-Lending form with automatic payment schedule calculation as well as separate Good Faith Estimate and HUD-1 documents with the ability to synchronize fees between them. In addition, lenders are looking for closing worksheets with easy-to-use navigation of the HUD-1 settlement statement, an escrow summary, and a built-in error validation tool to make sure everything is correct before submitting the loan to the investor. Without a doubt, the past few years have been difficult ones, but they seem to have caused an entrepreneurial frenzy as lenders look for ways to comply with the regulations and LOS vendors respond with innovations that save time and money for lenders. Hopefully, that will be the lasting legacy of the end of the real estate bubble.

Cope is the head of operations at SaM Solutions US and the developer of Engage, a loan origination system.


The state of compliance Uniform mortgage standards and nationwide licensing coming By Leonard Ryan With all the focus on national regulatory issues such as the Dodd-Frank Act, some of the major regulations being applied at the state level have flown under the radar. QuestSoft’s third annual compliance survey polled 405 lenders on their level of concern regarding regulatory changes affecting originators in the mortgage industry in 2011. The Dodd-Frank Act ranked as the greatest mortgage compliance concern with 70% of lenders citing the change as the most significant. Surprisingly, concern for multistate exams that many lenders will face this year remained at the bottom of the list for the second consecutive year. Lenders must ensure they are also prepared for the new processes for licensing, quarterly call reports and the creation of a comprehensive LEF file. LEF is the data format approved and accepted by the Conference of State Bank Supervisors for use in a multistate exam. Loan officers are familiar with the licensing process administered by the Nationwide Mortgage Licensing System & Registry. Depending on how the originator’s company is chartered, loan officers must either obtain a statelevel license or a federal registration. The state licensing process is quite in-depth, but requirements vary in each state. Some larger lenders who report to federal regulatory agencies will be mandated to apply for federal registration and remain exempt from state licensing. Lenders need to be aware of the licensing required of them to avoid costly fines and loss of business. Under the SAFE Act requirements, lenders holding a state license through NMLS will also be required to submit a quarterly mortgage call report. The report contains two major components, residential mortgage loan activity and financial condition. Residential mortgage loan activity is due quarterly and includes application, closed loans, individual mortgage loan office, line of credit and repurchasing information to be collected by state. The financial condition component requires the financial information at the company level to be presented annually within 90 days of a company’s fiscal year end. Lenders will be required to report on every application and all activity completed by loan officers, which could require a great deal of labor and time to prepare. The mortgage

call report will aid lenders in quality and antifraud control, as data will be more heavily scrutinized. Traditionally, lenders have had to submit to regulatory exams at the federal level for every state they operate in. For those who serve multiple areas, this can mean a heavy exam load, with separate audits from each state board. The Conference of State Bank Supervisors and American Association of Residential Mortgage Regulators formed a committee in 2008 to transform the process of conducting state exams for lenders under the authority of multiple states. Testing began in 2010, and multistate exams have begun to be implemented this year. The Multistate Mortgage Committee will oversee the newly administered state-level exam process and has established a group of state examiners qualified to conduct a single exam covering the regulations of multiple states. Standards were developed that are applicable to lenders in every state, and the Multistate Mortgage Committee implemented methods for sharing information through a standardized file format, the LEF, to ensure the same information was being reported by all lenders across the nation. The LEF accelerates exams by pre-auditing each loan against regulations at the federal, state and municipal levels. Lenders will now only have to prepare one information request, for one exam, and the hassle of submitting exams to multiple states will be eliminated. There remains a need for a more automated process to cost-effectively reduce the amount of manually entered data to prepare the LEF. To make sure lenders are well aware and prepared for these new regulations, compliance technology and automation can be implemented to enhance accuracy, reduce fines, simplify the process and reduce the time spent in preparation. Using automated compliance software will alleviate the worry of lenders who are concerned about keeping up with rapidly changing regulations. Today’s systems are strongly integrated with the loan origination software to automatically import data, eliminating error prone manual data entry. These programs can use that data to prepare the mortgage call report, track loan officer licensing status and submit their LEF. Compliance software will automatically ensure that the system is updated and compliant well in advance of new regulations, at the federal and state level. With hundreds of new rules being proposed or passed each year, loan officers must utilize the tools available to ensure they are in a “state” of compliance.

Ryan is president of QuestSoft, a Laguna Hills, Calif.-based provider of automated compliance and geocoding services to the mortgage industry.


What do we know? Lenders need strong web-based tools for consumers

Mass is the president of ClosingCorp, a real estate information and data services company based in La Jolla, Calif.

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There are so many proposed regulatory changes on the horizon for the banking and mortgage industries, it is hard to keep track of what the future might bring — particularly with respect to consumer protections. But one thing is certain: there will be change. With that in mind, lenders should focus on harnessing the power of technology to cope with the ever-changing landscape so they can remain competitive and consumer-friendly. Another thing we know is mortgage lenders face the burden of producing a timely, accurate good faith estimate. While software platforms for the loan origination process are abundant, estimating third-party closing costs still begs for automated, web-based technologies that can expedite the process and ensure compliance with relevant regulations. Keep in mind that originators still manually collect information from vendors for title, settlement, pest inspection and the other requisite blocks of the good faith estimate. A recent survey of 54 title agencies revealed more than 75% of them do not have an online system and still exclusively provide their title rates to lenders via the phone. Almost 80% provide their settlement fees by written schedule or by phone. Remember, these particular costs are just one block of the data required for the good faith estimate. The inconvenience, inefficiency and potential for error represented by these methods are shocking. Under Real Estate Settlement Procedures Act regulations, some good faith estimates must be precisely accurate when compared to actual costs; other estimates (such as title and settlement costs) are allowed a small margin of error. Regardless, within three days of receiving a loan application, a lender must deliver an accurate good faith estimate to avoid having to pay the borrower for any tolerance violations. We estimate it takes one to three hours for a loan officer to manually complete a good faith estimate. We know with the proper technology in place, the process can be lowered to just five minutes. Along with the enormous labor cost savings, loan officers are now free to spend more time cultivating relationships with customers and business partners. Another thing we know is there are powerful, comprehensive databases of mortgage costs and closing service providers available online that can be incorporated into loan origination systems. With this level of access, many lenders are creating new ways to use this data. Some lenders are making available online fee worksheets that allow a potential borrower to shop for vendors and compile their own estimate of closing costs early in the process. Ultimately, making this information available online can

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By Paul Mass save the lender significant time and risk if that borrower applies for a loan and the lender must issue a GFE. Much of the required information is available and can be instantly used to populate the good faith estimate (including borrower-selected vendors who are then not subject to tolerance constraints). This is exactly what the Department of Housing and Urban Development had envisioned when formulating objectives for its 2010 RESPA reforms — encourage consumer shopping for loans and closing services, thereby lowering the costs of each. In the near future, companies will also provide technology that “marries” the good faith estimate and HUD-1 so that lenders, real estate agents and settlement service professionals can maintain relevant data throughout the closing process; automatically populate the HUD-1 at closing; and compare the good faith estimate and HUD-1 for compliance with relevant RESPA requirements. This will enable mortgage lenders to have more control over the closing and to mitigate risk prior to closing. There is a clear trend, particularly on the part of larger mortgage lenders, to seek out permanent, integrated data and technology for their loan compliance and processing needs. For today’s loan officers, navigating complex regulations and using data from potentially hundreds of vendors to complete origination forms poses significant risks and unnecessary inefficiencies. These manual and sometimes untraceable methods of processing mortgages are no longer acceptable policy. With the newly created Consumer Financial Protection Bureau there is much speculation about the possible changes to RESPA and lenders’ compliance obligations. Other than the fact RESPA will be administered by the new bureau instead of HUD, and the good faith estimate and HUD forms will likely undergo even more changes in the future (a stated priority), there is only speculation about other changes. While it is a good bet that the CFPB will only strengthen the consumer protections implicit in the existing RESPA regulations, no one knows what form those objectives will take. Given there will be one or more opportunities for public comment prior to proposed changes, it is safe to say the existing RESPA forms and requirements are and will remain quite relevant for the foreseeable future. Many lenders and vendors have already invested significant sums of money and enormous amounts of time and resources to create or adapt technology addressing the requirements of the 2010 RESPA changes. Whatever changes come, lenders already using technology and web-based solutions for their loan origination process and data collection will be much better positioned to quickly adapt to any new compliance requirements. That we do know.


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Verify and validate Technology ensures accurate data used to originate mortgages

Fitzpatrick is chief executive officer of Aklero, a provider of automated data and document validity assurance for the mortgage industry.

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When it comes to the data that lenders rely on to originate mortgages, the industry needs to take a page from Ronald Reagan’s playbook: Trust but verify. That’s because in the past 10 or 15 years, the quality of data in the mortgage business has not improved and may have even deteriorated. Without a doubt, there are many lessons to be learned from the end of the real estate boom, but none are of greater importance than the necessity to improve the quality of loan data, scrutinize it, and verify its accuracy — several times throughout the mortgage process. At most mortgage companies, data is entered by hand by one individual, leaving lenders vulnerable to manual errors. Even the best trained, most well-intentioned employee who spends eight or 10 hours a day in front of a computer screen will make mistakes entering data. According to some estimates, 25% to 30% of the data that is entered is inaccurate. That’s as devastating to the business as it is inevitable. Up to now, mortgage quality control was performed only at the end of the process and half-heartedly, at best. After origination, just 10% to 15% were reviewed to determine if lenders did a good job and handled everything correctly. That approach is no longer satisfactory, especially when we know that even if the quality control check is performed at the highest standard, the auditor is using information already in the loan origination system — information we already know is incorrect about one third of the time. Instead, lenders need to perform quality control early and often. And mortgage quality control should focus on what matters most: the relevant, or so-called “true data,” culled from original documents in the loan file, which ensures everything is validated from the beginning of the transaction. True data is the information that populates the documents found in a loan file, such as W2s, bank statements, and appraisals. Examining these documents — and not just information in the loan origination system — is the only way to verify the data are accurate. Validation can only be done against the original documents because the information contained in them is accurate (no forgeries) while the information entered in the system may not be accurate. For example, a processor may make a mistake when inputting data from a tax return or other document, and that mistake may be the reason the loan was approved. Fannie Mae and Freddie Mac and other investors have no way of verifying that the information they receive is correct because they do not have immediate access to the original documents.

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By Brian K. Fitzpatrick To eliminate this, lenders need a technology that replaces manual entry, can double validate the information from the original documents and run it against a rules engine before continuing process. That way, after a loan comes out of underwriting and before it goes to closing, the information has been validated and meets the investor’s checks and guidelines. A step in the right direction is Fannie Mae’s Early Check, but this service does not go far enough because it does not gather the true data. It has been common practice for inaccurate data to be used several times at different points in the mortgage process. The loan is touched by more people now than in the past, and by people who rely on data that has not been compared, much less verified, against the original documents. That’s why many veteran mortgage professionals believe that data quality has deteriorated over the past 10 to 15 years. In addition, once the loan closes, the data is relied on by rating agencies, Wall Street firms and servicers. The industry has not been able to fix this problem. So it’s no wonder investors are reluctant to invest in mortgage bonds, especially Alt-A and subprime paper. They are unsure of the level of risk they are assuming. Restoring investor confidence in the mortgage market cannot occur without improving the quality of data that fuels the origination process and ensuring that the right measures are in place to mitigate risk. Many mortgage executives are aware of the situation and terrified they will have to repurchase loans because of inaccurate data included in the mortgage file and identified years later by an investor. To begin addressing the problem of inaccurate data, the mortgage industry needs to embrace technologies that can compare the information on W2s, investment accounts, credit reports and other important documents to the data included in the mortgage file in an automated fashion. In fact, two or three electronic quality checks during the origination process should be completed. The technology would generate reports populated with discrepancies, inaccuracies or areas of concern at each step of the mortgage process that point to issues that can then be researched and resolved before the loan is closed. Even before the real estate market collapsed, many mortgage professionals discussed how important data integrity was to selling loans to Wall Street and how critical the data was to their businesses — but almost no one got it right. The industry is now ready for a solution. A good industry standard would be to require data verification against the original documents before a file is sent to an investor. We have the technology required to make that happen today and lenders have many excellent reasons for making sure it does.


The latest trend in regulatory compliance Enhancing profitability and creating a competitive advantage By Heather Czermak Tighter underwriting standards and a decline in mortgage originations have increased mortgage originators’ focus on loan profitability in addition to the challenges of meeting evolving regulatory compliance requirements. With more than 350 sets of implementing rules required by the Dodd-Frank Act, it is paramount lenders are able to establish compliance with new regulatory requirements and integrate it into workflow quickly and efficiently. Those who are able to accomplish this will create a competitive advantage through the efficient processing of a compliant, profitable loan pool. To proactively ensure compliant loans and create operational efficiencies by reducing data cleanup needed post-close, many lenders are leveraging Software-as-aService technologies. SaaS can help lenders automate compliance rules in support of workflow-invoking tests at multiple points in the loan lifecycle. This implementation applies the same standards and lending policies to the entire portfolio, reducing errors in regulatory interpretation and training. Compliance automation helps to guarantee the proper application of high-cost loan limits and restrictions on fees and loan officer compensation by providing real-time alerts when limits have been exceeded. This allows a correction to be made before underwriting or closing a loan. Most often these tests are automatically triggered to run whenever the terms or fees associated with the loan change. This identifies new compliance problems that may have been introduced later in the loan lifecycle. In addition to testing for regulatory requirements, these real-time tests may be configured in support of institution specific tolerances and thresholds. Using this approach, potential high-cost violations and excess fee limits can be identified as a warning based on a pre-defined margin of caution even before a violation occurs. Along with helping to reduce risk, proactive compliance enables lenders to optimize loan portfolio value. Pre-closing tests can automatically highlight compliance inconsistencies and potential misinterpretations in regulatory legislation among loan originators and brokers. These

tests usually include a pricing and fair lending review that compares, among other things, a predicted range of interest rates and APRs, as well as variable points and fees. The fair lending analysis not only validates the pricing of the loan but also ensures fair treatment of the borrower. This analysis identifies potential fair lending problems that might not otherwise be recognized until after the loan has been made and also highlights potential lost business by flagging loans the institution should be making that potentially could have been denied. Beyond mitigating costly compliance errors, automation contributes to overall profitability by streamlining data collection. This helps ensure accuracy on the front-end to minimize the amount of time and resources needed to dedicate to data cleanup in order to ensure accurate Home Mortgage Disclosure Act and Community Reinvestment Act data. The upcoming changes to HMDA and small business data collection under Dodd-Frank will only increase the effort and regulatory scrutiny related to data quality and accuracy. Institutions proactively addressing these requirements early in the loan lifecycle, in support of lending operations, will have the benefit of accurate and compliant data as they extend their data collection processes in support of the new regulations. In addition to data accuracy and consistency, automated SaaS compliance rules can be used to identify loans that qualify for a premium on the secondary market. Custom rule configuration enables lenders to define criteria to identify loans that qualify for a premium on certain characteristics like Community Reinvestment Act. Looking forward at the proposed requirements to identify qualified mortgages and qualified residential mortgages, institutions may employ this technology to identify those loans that meet the new definitions for these standards. The many benefits of automated compliance include improved data quality and reduced cost and risk, resulting in an improvement in overall portfolio value. Delivery methods for proactive compliance SaaS include web services, which are invoked in existing systems in support of workflow, as well as through comprehensive platforms that give lenders everything necessary from a compliance, data and workflow perspective to create a complete loan, mortgage, deposit or individual retirement account package.

Czermak is chief product manager and director of consumer compliance at Wolters Kluwer Financial Services.


Automate docs to lower costs Unintended consequences of new disclosure, lending rules

The relationship between security and risk is one of constant flux. In sports, the underdog often uses a riskier game plan. It provides a better chance of success, but the risk of failure is higher as well. The favored team often plays things more conservatively, since the risk of failure is much lower if they can just avoid mistakes. Likewise, the mortgage industry also fluctuates between an open, risky market and a regulated, strict one. If there is a massive market failure, such as the one that began in 2007, the appetite for risk decreases dramatically. In the mortgage industry, regulations are added that attempt to limit the risk to borrowers and lenders alike. These regulations may make loans less likely to default, but the cost of business increases. Any increase in cost is always passed on to the consumer. One of the problems facing the current round of regulatory revisions is the uncertainty lenders face. Risk involves an unknown outcome, but sometimes there are enough data points to make educated decisions on an acceptable level of risk. For example, decades of performance numbers give lenders a reasonable rate of default risk for traditionally underwritten loans. Uncertainty abounds and lenders don’t know what rules they may be subject to in the near future. Consider the proposed disclosure forms, which would combine the Truth in Lending Act with the Real Estate Settlement Procedures Act. If executed well, the new form could reduce the amount of paper lenders have to send to borrowers, and consumers would have a clear outline of their costs. However, what the forms will look like, how the disclosure rules and timeframes might change, and what new technologies or processes will be needed to comply remain unknown. The initial proposals describe the forms as “shopping tools,” yet all industry data show consumer shopping ends at the time of application. Until this information is known, lenders cannot begin preparing and will not make any innovations that may be negated by the final ruling. There is no question predatory lending practices took place during the real estate boom of the past decade. People were steered into loans that were beneficial to the lender, even if it was not the best choice for the borrower. In many cases, borrowers were only offered one loan, which provided the most fee income to the lender and loan officer. All of these practices are shady, at best, and unethical and immoral, at worst.

There were also borrowers lying to lenders about income levels on low-doc loans. Both situations are problematic. It only makes sense to change or update laws to eliminate these practices and improve the home buying experience for consumers. However, with any major change there will be unintended costs and consequences. In the latest round of regulations, one of the unintended consequences is the rules that protect a borrower from bad loans have also made access to those loans much more expensive and restrictive. One example is the proposed qualified residential mortgage proposals. Loans that fall under the QRM standards will be exempt from capital retention requirements. In the proposed standards, which will not be finalized until later this year, borrowers must put at least a 20% down for purchases, among other requirements such as set loan-to-value ratios for refinances, standards for borrower debt load and a clean credit report for two years. The unintended costs? According to CoreLogic, roughly 39% of homebuyers in 2010 put less than 20% down. Furthermore, 25% put less than 10% down. While there will be some lenders willing to retain the extra capital to make these loans, the options will be fewer, and the costs will be higher to account for the extra risk. Inevitably, this will price a significant portion of this customer base out of a mortgage. Additionally, smaller banks and credit unions don’t have the funds to allow them to offer loan products that require a 5% hold back. This decreases competition, allowing the big lenders to become bigger, further increasing the cost of credit to borrowers. In a market already struggling to maintain sales volumes, cutting volume by 10% more would be very detrimental. In the end, lenders will be faced with more regulation in the foreseeable future. While the details may not be known yet, there will be a cost associated. It may be in higher capital needs. It may be in training, staff and technology costs. The best way to control these costs is to increase productivity with as much automation as possible. For example, when the disclosure rules change, lenders should find ways to automate the generation and fulfillment of these documents. Automated document systems take the guesswork out of generating the correct forms. They can also ensure compliance with all laws and create the needed reports for the examiner. Borrowers who agree to using electronic documents can receive disclosures by email, reducing mailing and printing costs. Each step of automation reduces costs by a small increment, which over the course of years can add up to significant savings. These savings just may make the cost of regulation profitable.

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By Scott Stucky

Stucky is chief operating officer at DocuTech Corp., an Idaho Falls, Idaho-based provider of compliance services and documentation technology for the mortgage industry.


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LONG ROAD AHEAD


CLOUDY REGULATION HINDERS RETURN TO HOUSING STABLILITY BY K A R EN N I EL SEN

FIVE YEARS AGO, it was hard for John Haring to get anyone in the financial industry to look at his resume. These days compliance is a growth industry that’s here to stay. It started with the Dodd-Frank Act’s sweeping changes to financial regulations last July, and now mortgage lenders are beefing up their compliance efforts more than ever as they await the next wave of federal mandates. Haring, who is vice president of compliance at Supreme Lending in Dallas, said his company is enhancing compliance and quality control platforms, while hiring more staff and outside counsel to prepare for a heightened level of scrutiny on home loans. “One of the biggest challenges is how do you build systems, a business plan and a comprehensive model when you’re having to keep an eye down the road,” said Haring, whose firm originated $2 billion in mortgages last year. “What happens (next) can totally turn our efforts upside down.” Lenders are already dealing with hundreds of new rules emanating from Dodd-Frank that have yet to be finalized. In late July, the Consumer Financial Protection Bureau assumed oversight of many of the mandates, most of are expected to unfold over the next 18 months. “The devil is in the details,” said Dan Cutaia, president of capital markets and risk management at Sun Prairie, Wis.based Fairway Independent Mortgage, which originated $4 billion in loans last year. Regulatory compliance is Fairway’s No. 1 focus this year. The result: legal costs have doubled and “it’s consuming all of our resources as a company. We expect that to continue,” he said. Under Dodd-Frank, regulators are tasked with clarifying which loans lenders and securitizers will have to retain 5% of the risk on after securitization. Succumbing to intense pressure from industry trade and lobby groups, regulators agreed to extend the public comment period on the proposed — and controversial — riskretention rule to Aug. 1 from June 10.


ONE OF THE BIGGEST CHALLENGES IS HOW DO YOU BUILD SYSTEMS, A BUSINESS PLAN AND A COMPREHENSIVE MODEL WHEN YOU’RE

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HAVING TO KEEP AN EYE DOWN THE ROAD.

QRM BATTLE One part of that rule is how to define a qualified residential mortgage, the cream of the crop borrower who is considered the least likely to default on his loan. While features such as the borrower’s debt-to-income ratio and credit history, and loan-to-value ratio are typical metrics, what’s drawing fire is the 20% downpayment needed on loans to be exempt from the risk-retention mandate. Critics say the 20% rule will make it more difficult for consumers to get loans. A CoreLogic study of 2010 mortgages showed that 39% of borrowers made a down payment of less than 20%. The rule could ultimately direct more mortgage business to larger financial institutions — further stifling private investment and conflicting plans to end government sponsorship of Fannie Mae and Freddie Mac. The risk-sharing proposition initally aimed at requiring lenders to do a better job of underwriting mortgages may further hinder housing sales and dampen economic recovery efforts. “I like the idea of QRM and risk retention, but it’s in the details,” Cutaia said. “If it becomes so restrictive that the normal creditworthy borrower can only get a loan at a significantly higher interest rate it won’t bode well for the housing market. Housing has led this country out of every recession for the last 70 years.” After the risk-retention rule was introduced this spring, Hank Cunningham, a Mortgage Bankers Association board member, testified before Congress that the proposed QRM definition is too narrow. “In fact, the QRM definition is so restricted that 80% of loans sold to Fannie Mae or Freddie Mac over the past decade would not meet these requirements,” he said in his April testimony. Last year, Wells Fargo, the country’s largest loan originator, went against the industry recommendation of 20% down and asked regulators to exempt mortgages with down payments of 30% or higher. If the QRM proposal is accepted as prime, then that means everything else is considered nonprime, or subprime. “Do we really want to go there?” asked Cutaia. “We already know how that ends — badly.” The risk-retention rule, or “skin in the game” requirement, is designed to hold originators and securitizers accountable for the quality of the loans they underwrite and securitize. Safer, QRM loans would be exempt from the 5% rule, which critics say could favor big banks that can afford to keep nonexempt loans on their balance sheet.

In his testimony, Cunningham said “regulators should clearly limit the duration of a securitizer’s risk-retention requirements to a reasonable time following the origination date.” QRM VARIATIONS Most industry observers don’t expect the QRM proposal to pass as is and some speculate the downpayment detail could be removed completely from the risk-rentention rule. Some propose tweaking the details. Department of Housing and Urban Development Acting Commissioner Bob Ryan, who served as the agency’s chief risk officer, said a 10% down payment would be more reasonable. Cutaia agrees that 10% down coupled with private mortgage insurance is a viable option with a higher loanto-value ratio. Haring of Supreme Lending says the feds were too narrow in their definition of the ideal loan and should seek more industry input. “(They were trying) to find the loan that would never not perform. That’s idealistic and naïve,” according to Haring. “They should have taken more guidance from the industry and they could have created some standards for loans there were not so narrow, but would have been well supported by metrics, low-risk transactions, and would have helped bring private money back in market. That way investors could set their expectations. Instead they went overboard,” he said. RETURN TO PRIVATE MARKET As Fannie Mae and Freddie Mac wind down over the next few years, many expect the return to a private investor market is inevitable. But how will it look and smell? The mortgage industry is propped up by Fannie and Freddie and the Federal Housing Authority. Consider more than 95% of new mortgages rely on support from these government-sponsored enterprises. A Treasury proposal to raise guarantee fees paid by the GSEs would likely raise pricing levels and send homebuyers back to the private sector, according to the American Bankers Association. The move could also drive up interest rates and increase homeownership costs, but ultimately boost private lending in the country. “(The winding down) should be a deliberate and wellthought out transition and there will be a lot of momentum toward privatized or multiple little GSEs,” said Jonathan Corr, chief strategy officer at Ellie Mae, which provides technology and services to the mortgage industry. “If we don’t get carried


away with QRM and qualified mortgage stuff it will open up private market to come back in and take advantage of it.” In 1990, Fannie and Freddie originated $170.5 billion in loans. At its peak in 2009, that market share hit $1.3 trillion in loans and dipped to $995 billion last year. “Before the bubble, Fannie and Freddie had less than 30 percent of the market,” Corr said. “To say that it got out of hand a bit is probably an understatement.” Corr said that Dodd-Frank and the transparencies created by the new federal mandates should boost confidence in the private market and return it to a healthier position. To be sure, regulatory uncertainty has contributed to a dormant mortgage-backed securities market. Little activity has surfaced since the credit markets froze in 2008. And private investors remain cautious about the secondary mortgage market. Redwood Trust CEO Martin Hughes said in testimony before Senate Banking Committee in May that investors are waiting to enter the market until the uncertainty is solved. Redwood Trust, which is the only firm currently issuing private-label residential mortgage-backed securities, said it was encouraged by the Federal Reserve’s auction of American International Group’s mortgage-backed securities. The company plans to close three RMBS deals this year totaling $800 million to $1 billion in securitized loans. Greg Hebner would like to see more nongoverment mortgage options. His company sells distressed properties in California and works with FHA loans all day long. He’s frustrated when he sees potential homeowners trying to re-establish themselves in the job market but many don’t qualify for government programs. “There are a lot of good borrowers out there who could still pick up inventory, but they need to be treated outside the traditional model,” said Hebner, managing director and chief investment officer at Beverly Hills, Calif.-based Community Rebuild Partners. “I wish there were more avenues for nongoverment private mortgages.” MARKET SHARE Loan originations at the nation’s big four banks continued to nosedive in the first quarter, and with those declines came thousands of job cuts. In the first quarter, Wells Fargo reported $84 billion in new mortgages, which was down from $128 billion in the previous quarter. Bank of America originated $52 billion during the first three months of 2011, a drop from $81.2 billion from the fourth quarter.

No. 3 ranked JPMorgan Chase’s $36.2 billion in new mortgages was a decline from $50.8 billion, while Citi originations totaled $14.1 billion down from $21.8 billion. Collectively the big four originate and service about 65% of the U.S. mortgages, and accounted for $186 billion in mortgages during the first quarter, down 33% over the previous quarter. While each banking giant reported billions in revenue for the quarter, their mortgage businesses took a hit due to foreclosures, fewer homebuyers and increased costs. As market share drops because of the reduced originations, lenders say there are new generations of homebuyers who could revive the industry given the opportunity. A recent study from Wells Fargo, showed a large number of Millennials, or those between the ages of 19 and 30, entering prime, first-time homebuyer age. This demographic outnumbers baby boomers by nearly 6 million during their peak home buying age in 1977. Cutaia of Fairway Independent Mortgage said Millennials are buying later in life and there’s a huge backlog of 20-somethings currently renting, not to mention qualified immigrants who would like to buy a house someday. “Other people will step up, provided we don’t get crazy with QRM and QM,” he said. MORE COOPERATION Not long ago, the competition between independent mortgage bankers was so fierce you couldn’t put two lenders in the same room. That rivalry has relaxed as lenders realize if they don’t stand together, they will fall divided, according to Haring of Supreme Lending. He’s working more with other compliance managers to gain perspective on interpreting Dodd-Frank. It’s not uncommon to send an email blast with a question to see how the issue has impacted others. “It’s like the Titanic is gone now and we’re all in rowboats tied together,” he said. Corr at Ellie Mae said clear lenders, servicvers, technology companies and even consumers have determined they’re all in this together. “The challenge is we’re going through a complete reinvention of the market,” he said. “It will be an opportunity for the industry to mature and rebuild. When we come out of it on the other end we will have a much more robust market and stronger infrastructure around residential finance and hopefully we won’t go down another path like this again.”


Tools to dig deep into data are there Opportunities in mortgage originations: data and analytics By David Rasmussen

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Mortgage origination continues to experience significant challenges in today’s housing market. Despite some steady growth, the industry has seen a recent dip, due in part, to declines in refinancing that ultimately has a negative effect on the entire sector. A recent industry report from the Federal Reserve Bank of Cleveland indicates the first-quarter drop was the worst since the start of the recession and is only the tip of the iceberg, projecting mortgage originations could fall to their lowest levels since 2000. Despite these depressing statistics, there is still profit and business growth to be found for the originator that is willing to dig deeper into data and analytics on a granular level using today’s technology. A majority of residential property markets throughout the country are dealing with critical concerns, most notably a high rate of home foreclosures and continued home value depreciation. It is important to know that not every county in the U.S. is having the same level of hardships. Furthermore, not every city within a hard hit county is struggling. There are pockets of profitability in many housing markets that don’t pose a high risk for originators and borrowers. Often times, these submarkets can be sitting right in the middle of a high risk and declining territory. The diligent originator will search out, identify, and then focus on maximizing profitability in these submarkets that have lower risks and desirable upsides. KNOWING MORE IS EASY Technology in the mortgage industry provides originators the ability to find attractive submarkets and develop a strategy to profit from these opportunities. Any originator, no matter the size, can and should take advantage of the information these solutions provide to examine market and submarket trends. Much like the veteran Realtor, mortgage technology can provide originators with invaluable specifics about neighborhood history, as well as necessary analytics and data to customize strategies and make smart decisions. The most common reasons originators overlook these submarkets is the sheer volume of data presented, as well as the significant amount of manual work that would be needed to sift through the available information. However, using today’s technology that same originator

can quickly and efficiently pull out relevant data to study and analyze the submarkets that might turn up desirable business opportunities. The more sophisticated analytic models take a multivariate approach, which not only digests numerous variables, but also takes into account the relationship of those variables and any appropriate lag influences. For example, if a main predictor in a local area is the unemployment rate, the model should appropriately balance it against other predictors, identify, and take into account any effects of lag factors. By using current technologies, an originator can examine submarket opportunities, as granular as ZIP code, property type and price tier. This provides an originator a clear historical view, as well as a reliable vision of what is to come. IT’S NOT A ‘ONE SIZE FITS ALL’ SOLUTION With the continued evolution of mortgage automation and technology, a number of solutions now exist which allow originators to effectively pair valuations, services and data, and form more complete perspective around lending decisions. An individual tool cannot be effective at providing originators with the comprehensive data and analytics needed to fully determine risk and recognize profit opportunities. The complexity of the mortgage market makes it necessary to use a variety of solutions together to allow originators to look at markets and submarkets from multiple vantage points and at various points in time. Most importantly, originators must conduct proper levels of analysis using the most detailed and accurate models in the industry along with a support team focused on safe, secure, and compliant lending practices. By not utilizing the easily accessible analytical tools available, originators are clearly putting themselves at a competitive disadvantage. The mortgage industry continues to move in the direction of increasing sophistication of automation and technology to provide for legitimate business profitability. This does not mitigate the need of appraisers, Realtors and field staff expertise, but seeks to incorporate them more fully into the automated mortgage chain to increase bottom-line efficiencies. The evolution of technology tools is specifically targeted at bridging gaps between parties in the mortgage chain, automating largely manual lending processes and moving everyone into a more fully electronic age. This makes originators better prepared for fluctuations in the market and opens business opportunities that might not have been previously recognized.

Rasmussen is senior vice president at Veros and responsible for the operational logistics of valuation analytic and system strategies.


Reaching potential homebuyers Prospering in a challenging regulatory environment By David Fournier What does it take for mortgage lenders to thrive in the new regulatory environment? That’s the question lenders are asking themselves in the wake of several new regulatory changes, including the Dodd-Frank Wall Street Reform Act and Consumer Protection Act. The most successful companies are doing all they can to motivate originators to reach out to potential homebuyers in new and innovative ways. At the same time, mortgage lenders need to ensure their originators are marketing in a manner that’s compliant with all regulations. What can companies do to help their originators increase their production volume? Mortgage Success Source commissioned an independent study on the best practices of loan originators to identify what was behind the success of top producers. The study of more than 3,600 loan originators included results of detailed follow-up phone surveys with 657 of respondents. Originators were asked how they divide their time between four primary responsibilities: customer acquisition, knowledge acquisition, loan pipeline management and administration. The most successful originators share a common focus in customer acquisition and knowledge acquisition. Customer acquisition activities are designed to locate, identify and contact new clients through advertising, community activities and networking events, telemarketing, and social networks. Knowledge acquisition activities include attending seminars and reading professional publications. Top originators focus time and energy on getting close to their customers and learning about products, interest rates and industry news. They use that knowledge to deliver solutions their customers need, even when customers have to be reached in unconventional ways. The study found that more than 50% of originators who spend at least 33% of their time on customer acquisition were top-third performers. Only 10% of them were bottomthird performers. The highest producing originators spent a minimum of 30% of their time on knowledge acquisition. Three-fifths of originators who reached that threshold were top-third performers, only 5% of them were bottom-third performers. As a new generation relies more heavily on the Internet for banking and financial needs, top originators and their lending institutions are syndicating approved messages through social media. Top producers also turn to automated campaigns that regulate the message and ensure compliance.

This can be a great way to grow the business, but here’s a word of caution. While savvy originators are using social media to market to borrowers, both originators and the firms they work for need to be very careful that any postings or messages regarding loan programs or incentives are fully compliant with new regulations. Lenders can face a huge liability if it’s found that any of their originators are marketing in a manner that’s not compliant with Dodd-Frank, the Truth in Lending Act and Real Estate Settlement Procedures Act. It’s a conundrum faced by all lending institutions: balancing the need to reach out to borrowers in new and innovative ways while making sure that the marketing used by all of your originators is compliant with all the applicable regulations. For example, lenders need to know that they are ultimately responsible for anything relating to loans or interest rates posted by originators on social networking sites. With millions of consumers on Facebook, the social networking site is a great tool for reaching out to potential loan customers. However, under Dodd-Frank and RESPA, lending institutions are liable for anything their loan officers might post in social media with regard to loans. That means if just one of a bank’s loan officers makes a non-compliant posting about a special loan program on his individual Facebook page, the bank itself can be found liable. For instance, a loan officer post on Facebook offering a free television to anyone providing a client referral would spell a huge violation of RESPA. Even a seemingly innocent comment about rates and fees such as “call me to get a 5% rate with no closing costs” would be a problem under Dodd-Frank, if the comment did not also include the proper disclosure of the terms and conditions that would apply to the offer. While lenders should encourage originators to market to potential customers through social media, they should also give their originators specific and detailed directions on the proper way to put information on social networking sites. By providing loan officers with clear, precise guidance on how to properly post information, the lender retains the ability to control the message. Shrewd mortgage lenders should make sure their loan originators focus on two key areas: customer acquisition and knowledge acquisition. Successful lending firms also encourage their originators to make use of the Internet and social media to reach the broadest group of customers, but take measures to ensure that postings and messages are compliant with all the current regulations.

Fournier is CEO of Mortgage Success Source, which helps mortgage originators attract, sell and retain clients and referral partners.


Driving the eMortgage forward Consumers and lenders must adapt to paperless process

Crisenbery is vice president of professional services for eLynx, which provides electronic document collaboration and distribution services.

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The eMortgage is not a new concept. The industry has had access to the capabilities for over a decade, and yet, adoption has been slow. It’s not that we need to convince ourselves of the benefits anymore. We’re all aware of the significant savings in time and money, the increase in quality, and the greener public image that going paperless enables. We’re all agreed that we should go paperless. The question is no longer why? But how? At eLynx, we’ve performed studies on the best practices of how to drive electronic adoption. Just as with anything else, there are methods that work and methods that don’t, but one thing is certain: lenders aren’t going to be satisfied with the results they’ve been seeing in eMortgage adoption until they realize that adoption is a double-edged sword and that it is entirely up to them to wield it. Before a paperless process can catch on with consumers, it must first be welcomed and used by the employees of the lender as a part of the regular day-to-day processing. Then, once employees are convinced, it’s up to them to push it out to the consumers. Many lenders mistakenly believe that once a consumer enters the picture, they lose the power to influence adoption because the consumer will only do what he wants. Our studies indicate that this is simply not the case. Getting mortgage banking employees to send out documents electronically takes more than simply sending out a memo. As with any change to an organization’s workflow, the transition from paper to electronic deliveries impacts both the company’s technology strategy and its people. Ensuring that people use the new technology properly and consistently requires significant time and effort by the lender. Based on studies conducted by eLynx across a number of U.S. banks, a lender who rolls out electronic delivery technology and makes a simple announcement will have about 30% of its staff use the new tool consistently from that point forward. In other words, about one-third of bank employees will use the technology with little support from management. These users are likely to continue to use the technology even if management does not make electronic delivery a top priority or provide additional training. Unfortunately, adoption and usage will not increase over time without additional management intervention. One best practice lenders can use to get the ball rolling starts with up-front training and a formal kickoff. The key is to put a line in the sand as to when widespread use of electronic delivery technology should start and then equip the staff with the know-how to execute it. Across numerous clients, eLynx has seen this type of event — even after the service has been

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By Andy Crisenbery in production for months — increase internal adoption and usage from roughly 30% to between 50% and 60%. To encourage ongoing efforts in electronic adoption, many lenders have benefited from utilizing leader boards or offering incentives. Overall, management must lead the way and give the employees a reason to want to change. Based on a targeted study of over 250,000 loans during a 12-month period, eLynx analysts compiled key strategies for streamlining efficiencies to drive consumer adoption. In companies with low adoption rates, they discovered breakdowns in productivity that, once rectified, enabled a dramatic increase in adoption, often by as much as 50%. What eLynx discovered was call center employees walking borrowers through an application process, but then send ing the file to a different group to send out the disclosures. These workers weren’t familiar with the applicants, there was a delay in sending the documents, and consumers had no reason to trust an email notification from an unfamiliar address. Because the emails were frequently ignored, the mortgage documents were ultimately printed and sent through the mail. By empowering call center employees to send disclosures immediately and then walk the borrower through them on the phone, consumer adoption rates skyrocketed. This took some reorganization on the part of the lender by changing call scripts and training the employees on how to distribute and educate the borrower on their disclosures. Consumers received documents immediately, were expecting them, and knew who they were from and what they were about. Increasing borrower adoption can have a real impact on a lender’s bottom line. A recent eLynx research study showed that getting a borrower to sign the upfront disclosures electronically had a significant pull-through effect leading to a closed loan. Other studies have shown that loans closed electronically can shave up to 12 days off the average cycle time. These are objective data points that seriously justify the ROI in electronic document delivery and process improvements. An added bonus of delivering documents while on the phone with the customer is lenders were able to bill customers instantly instead of waiting for the borrower to receive their disclosures. When a borrower begins the process electronically, he expects to complete it electronically, substantially decreasing the amount of paper involved. The benefits of going paperless are substantial, which is why high adoption rates have become a priority for banks that have an eye for the future. Fortunately, going paperless doesn’t have to be a mystery or a struggle when the best practices have already been determined. To achieve success in the electronic mortgage process, it’s up to the lender to take charge.


It is NOT Lonely Out There.

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Consumer education is key Financial literacy and its impact on originations

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By Garth Graham It is not yet clear everything the new Consumer Financial Protection Bureau will do to mortgage loan origination companies, but it’s readily apparent that the CFPB (the new cop on the beat) is trying to implement rules and processes that will make the process better for consumers. Most agree at least some of those rules will involve ensuring that borrowers can afford to repay the loans they buy, and that they understand the commitment they are making and they can confidently make decisions about their financial future. I know many in the industry are decrying this development. How can we be responsible for what a consumer knows or understands? I look at this opportunity differently, and it appears the folks at the CFPB do as well. As an industry, we need to change our mindset from having processes and programs that make it hard for borrowers to understand what they are buying into those that help consumers understand their mortgage. If we don’t begin moving in this direction, it seems clear that the government will drive us to do so. Of course, this will be no easy task. People do not understand the mortgages they buy and they know it. Studies consistently indicate, when asked 80% or more of the adults in the country say they feel they would benefit from more financial education. And when the government recently tested more than 80,000 high school students through its National Financial Capability Challenge Exam, the average score was 69%. When I was in school, that grade was a D. Everyone knows Americans need financial literacy, but where will they get it? This is a particularly important question to the mortgage lending industry, not just because this is a business that performs best when loans are repaid, but because the federal government is on the path to declaring financial capability a key part of the consideration of whether consumers should receive the loan in the first place. Those who have been in the industry for a while learned that mortgage underwriting was based on the 3 C’s — character, capacity and collateral. The 3 C’s are ways to objectively evaluate the risk inherent in a loan, but in all cases it’s an evaluation based on the data presented — we view the credit

report (character), the ratios (capacity) and the property appraisal (collateral) to determine if the consumer could and should repay the loan. Now the federal government has introduced this concept of capability — a fourth C — that addresses whether the borrower has the understanding of financial matters to confidently take action or make decisions about their financial future. So, what is financial capability and how should the industry view this development? In order to increase borrowers capability, we need to be able to educate consumers on mortgages and the commitments they are making. To be successful, I propose the mortgage industry needs to focus on three types of change: changing our products and processes to be more borrower centric; charging our disclosures and communication styles to be better understood; and embracing the concept of consumer empowerment. An excellent example of how processes could be more consumer centric comes from our work with housing counseling firms, who are doing much of the heavy lifting in the foreclosure prevention area. The work these nonprofit groups are doing can serve as a perfect model for loan origination in the future. One example is their reliance on budgeting as a key part of determining capability. This may seem obvious, but figuring out what you can afford — capability — should be based on how much money you have each month to pay your expenses. The credit counselors take this approach — understanding all of the expenses a consumer incurs, including discretionary items such as cable TV, cell phone bills, subscriptions and the critical items such as child care, food and medical expenses. The reason this is such a necessary part of determining capability is that its based on what the consumer actually spends each month, which really gets to the heart of how much they should spend on housing. The credit counselor then compares the full expense list (the real numbers) with the real take home income, and gets a clear picture of the client’s financial situation. Meanwhile, the traditional mortgage approach takes the reported debts (which are typically the credit report items)

Banks have more words on their disclosures than SHAKESPEARE put in Romeo and Juliet.


and divides that into the gross income (before federal, state and medical deductions) and then uses that ratio as an indication of qualification. So, traditional mortgage bankers use a subset of the actual expenses and an income figure the consumer never actually receives to determine qualification. No wonder there is a disconnect between what a consumer experiences each month (paying their debts) and what they qualify for (committing to the debt.) Financial capability requires the consumer to understand the financial commitments they make, and a big part of understanding could come from originators (and origination products) that focus on the consumer’s budget and what they can truly afford. Instead of educating them, we throw words and disclosures at consumers. Not long ago, I traveled to Washington to sit in on a meeting of the federal government’s Financial Literacy and Education Commission. The session featured Gail Hillebrand, associate director of consumer education and engagement for the CFPB. She was well received, partly because she is smart and her comments made sense, but also because she delivered some great one-liners, to wit: “Banks have more words on their disclosures than Shakespeare put in Romeo and Juliet.”

I love that, particularly when I remember how that story ended. I also love it because it’s true and it says a lot about how our industry operates. We throw words and disclosures at consumers while we should be delivering education and understanding. The universal story that ends in violence and tragedy (the love story not the industry story) should not be easier to tell than a story about finances. I know we all love to complain about regulators and more oversight, but at some point this sort of consumer centric approach make a lot of sense. If you’ve looked at the early drafts of the new disclosures CFPB has put out for comment, you probably already noticed a couple of things. First, they provide all of the information the government wants us to push out to consumers and, second, you don’t need a degree in finance to understand them. I’m not even mentioning what might be the most surprising thing: The CFPB asked for the industry’s opinion, and used new web based tools to do it. In most respects, the CFPB is a new kind of regulator. It’s safe to assume whomever ends up leading this organization will expect the industry to take financial capability as seriously as CFPB does. That means it’s time for lenders to start thinking a bit more like communicators and educators if they hope to remain top originators in the days ahead.

Graham is founder and president of Financial Literacy Solutions, a firm that uses video via the Internet to educate consumers about financial options and provides communication services for loan originators, servicers and asset managers.

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Process must continually improve Winning strategies for maintaining a competitive edge

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By Linda Naylor The current state of the mortgage market continues to present challenges to lenders. The continual stream of new finance regulations, the ongoing changes in credit standards and the increased focus on collateral review are all taking a toll on the cost of doing business. Lenders struggle like never before to find solutions that will allow them to conduct their business better, faster and cheaper. In a market where the competition is dealing with the same challenges, lenders need to be more creative in the approach they take to increasing productivity, streamlining processes and maximizing the use of technology.

careful balance of fixed and variable operations expense will allow them to stay ahead of their competition when interest rates tick down a bit and application volume once again increases. By outsourcing a portion of their business they are able to leverage both the headcount and the technology of the outsourced provider. Many outsourced providers have paperless workflow systems that are often times more advanced than what lenders have had the resources or the funds to develop on their own. There are systems that support end-to-end imaging and indexing, seamless integration to third party vendors that provide tools for fraud and compliance checks, and all the functionality associated with eSignature.

CONTINUOUS PROCESS IMPROVEMENT Some lenders have adopted and live by the disciplined practice of continual process improvement. Once that practice is part of the culture of an organization, everyone companywide makes it part of their job to find ways to improve the overall efficiency of the process. Sometimes it is just one or two steps that can be streamlined, automated through existing or new technology or potentially outsourced. Finding solutions and implementing them quickly, lenders are able to realize the immediate benefit of having everyone engaged in the process. As companies have worked through this change in culture, it has provided their employees a front-page view of how much technology plays such an essential role in supporting a very cost-effective, customerfocused process. Another approach aimed at reducing costs and increasing the use of current technology in the origination process is the consideration to outsource. Several of the more seasoned lenders, as well as some of the newer entrants into the origination space, are very experienced at dealing with the cyclical nature of the mortgage business. What is changing is the way in which they approach finding more cost-effective solutions for working through these cycles. Lenders once again realize that maintaining

LEVERAGING EXISTING TECHNOLOGY Regardless of the path lenders choose when it comes to managing operations, one thing is for certain: Leveraging existing technology is an essential component to reducing expenses. Lenders have some incredibly useful tools available but they are not always taking full advantage of the features that are offered. As an example, much of the fraud and compliance software provides lenders the opportunity to conduct those checks at various points throughout the loan application process. Some lenders believe the benefit of a slight reduction in expense associated with multiple checks far outweighs the potential risk. In fact, the opposite is often times true. Red flags or warnings presented later in the process can lead to process delays, customer service issues and the potential loss of business. Utilizing existing technologies to the fullest extent possible gives lenders a true competitive edge. Instilling a culture of continuous process improvement, conducting a careful review of outsourcing options and leveraging existing technology are strategies lenders can use to stay ahead of the competition. One other essential strategy for lenders is to invest in the future. Investments made today in technology aimed at reducing expenses and enhancing the customer experience will deliver long-term measurable results.

Naylor is executive vice president of strategic implementation at LenderLive Network Inc. She has spent 34 years in the mortgage industry in various positions in operations, sales and underwriting for companies such as GMAC Mortgage, Fidelity National and Chicago Title.


Choosing the right technology Best fit analysis key to the optimal origination engine By Don Covey There is nothing easy about mortgage origination today. In addition to the volatile environment of continuous change, mortgage lenders must work tirelessly to remain competitive and to introduce or maintain a variety of loan products that will meet the needs of a wide range of borrowers. Further complicating matters, the fluctuating housing market makes property asset value a moving target, mortgage fraud continues to run rampant, and operating margins are being squeezed. Technology and human resources are critical to navigating through this challenging work, and must be strongly integrated to enable originators to meet operating demands, but unless the technology is the best fit for the lender, it won’t effectively power the origination engine. We have worked closely with both high-volume lenders and low- to moderate-volume lenders to analyze this issue of “best fit.” While regulatory guidelines affect all mortgage originators, the complexity of the mortgage origination operation is also greatly impacted by the volume of mortgage loans processed. Of course, the mortgage originator processing under 200 loans a month faces different operating dynamics than a mortgage originator processing 5,000 or 10,000 loans a month. But what does this mean from a technology standpoint? What does it mean in terms of features and functionality needed from the origination technology, the level of automation required, the amount of human resource involvement in the process, the quality control measures needed and more? For any lender planning to replace their technology, it is more important than ever to answer these questions accurately, because there is no room for error in today’s mortgage origination environment. Not only must the loan process itself meet the highest standards, but the operating environment must be carefully calibrated to strike the balance between manual and automated processes, greater sophistication and simplicity, cost versus operating fit, and so on. So what are some of the elements that must be evaluated to determine the “best fit,” especially in an environment where a one-size technology solution emphatically does not fit all? Certainly origination technology should be able to process loans. All can produce documents. Most can tell a lender what’s in the pipeline. And all must stay in compliance.

But here are a few of the differences in lending environments and how they impact the optimal technology decision. The more sophisticated the technology, the more personnel and overhead the lender must maintain to support the platform. However, because most small to mid-sized lending operations are able to manage a greater level of manual involvement from their origination team, the level of sophistication required from the technology is not as high, helping to reduce technology complexity and cost. While the “best fit” origination technology for a lower volume lender many not have as many bells and whistles, such as automated workflow management or automatic loan validation, the day-to-day realities of this origination operation don’t require it. Origination professionals use their system to select the loan they are working on, perform the needed function, then move on to the next step. The technology enables the process, but does not automate every function. The less sophisticated the technology, the lower the requirement for investment in system support. However, for larger lending operations, it is far too difficult to manage high volumes without increased sophistication from the origination technology. Workflow management, paperless processing, data validation, and automated checklists are a requirement to running the operation efficiently and to the ability to automate as many steps as possible — including exception processing — without having to touch every loan. The level of flexibility and sophistication required is much higher, but the larger operation also has the support and infrastructure in place to effectively manage the more demanding operating environment required to process high loan volumes. Today’s originators are continually looking to do more with less. They are part of the new frontier of mortgage lending and they are at the forefront of the evolution of the origination process meeting new challenges every day. Technology continues to be an integral enabler of a high quality, compliant origination process. Not every origination system is the “best fit” for every lender. A lower volume originator needs to look at the amount of sophistication it is willing to support (and pay for) while the higher volume lender needs to make sure technology investments produce the right level of automation to be cost effective. As with everything else across the entire mortgage origination continuum, the careful selection of technology is imperative to the outcome.

Covey is the managing director of origination technology at Lender Processing Services, responsible for the Empower loan origination system and the Customer Relationship Management platform.


Lenders need consistent review process Reading between the lines of the new interagency guidelines

REMAINING CONSISTENT I have read the interagency guidelines extensively, on numerous occasions, and one thing always seems to stand out to me: the repeated references to consistency. While there isn’t one obvious, bullet-pointed statement mandating consistency, it is referenced on dozens of occasions. Consistency seems to be is a major component in what the authors believe to be sound valuation practices. To extend that into practical day-to-day life, I imagine if consistency is important enough to reference over 30 times, it would be important enough to monitor once the guidelines went into effect. So how do lenders become consistent? In valuations, there are several layers of consistency. First, there’s consistency between the valuation product and the loan to which it relates. In simple terms, that means you need to make sure you’re using the right valuation method for the loan type. Garcia is the chief operating officer of PLATINUMdata Solutions.

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When it comes to great literature, there’s more than meets the eye. There’s the story, then there’s the theme. And they’re usually two different things. One way themes can be established is through repetitive mention of certain symbols. For example, in the Great Gatsby, author F. Scott Fitzgerald makes repeated mention of a green light at the end of a dock across the bay from the main character’s home. There’s a lot of speculation as to what that green light represents. Whatever its ultimate message, it’s unlikely that the author would make frequent reference to this symbol if it had no meaning. It’s the same in real life. Matters of importance are often repeated. The issue is, as with some great literature, you have to pay attention to catch the repetition and you have to understand what it means in order for it to have any value. Normally I wouldn’t think that there would be any parallels between classic literature and the mortgage industry, but there’s actually an interesting similarity in the way a theme is presented in the new Interagency Appraisal and Evaluation Guidelines. Most lenders, appraisal management companies and appraisers are well aware of the new interagency guidelines. Some of them have actually read all 45 pages. Even so, all I seem to hear about are the obvious categories, like the ones focused on appraisal reviews, the use of automated valuation models and appraiser independence. Of course, those are very important issues. But what I found by reading between the lines is also of major importance. The only problem is that not everyone catches thematic references. And in this case, that could be putting lenders at risk of violating the guidelines.

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By Arturo Garcia For example, you can only use automated valuation models on loans valued at $250,000 or less, and those automated valuation model must include a condition report. Second, lenders need to have consistent appraisal processes. Let’s say a lender handles numerous types of loans, like purchases, refinances, home equity lines of credit, and reverse mortgages, to name a few. Those loans will use different valuation products, but the process should be consistent. Lenders should also have a set protocol for who handles what. Let’s say a lender uses one staff member to order AVMs and another to order traditional appraisals. Or that any number of staff members are reviewing appraisals. There is no consistency, and therefore, the process is at risk of errors, oversights and possibly even fraud. The same goes if the process cycle differs from valuation type to valuation type. MINIMIZE RISK WITH AUTOMATION Reviewing is a big topic in the interagency guidelines. No one needs to read between the lines to figure that out. But within this major topic is, once again, the issue of consistency. Lenders need consistent review processes. Using too many different people or having a process that isn’t set in stone can considerably increase the lender’s risk. In order to protect itself, each lender should have formal policies in the way valuations are handled. Who orders valuations? When do they get ordered? What happens when they come in? Who reviews them? The lender is also wise to leverage automation, particularly for intricate tasks like appraisal reviews. Automation minimizes the risk of human error. Appraisals are detailed. There are a lot of fields to review. Automation isn’t going to get tired or distracted the way a human might. Automation performs the same way on Monday as it does on Friday. You can rely on it to check appraisals against the uniform standards of professional appraisal practice guidelines the same way, every time. Plus, automation can search for errors, inconsistencies, incompleteness and —assuming you use a technology that’s configurable — virtually any other variable you specify far faster and more accurately than a human ever could. There are a lot of changes occurring in the appraisal segment and lenders will need to make adjustments in order to stay compliant in their valuation processes. Consistency may be referenced as subtext in the interagency guidelines, but it still is written in black and white. The guidelines may not be classic literature, but the authors are still trying to convey a message. Lenders are wise to not only take note but also take action.


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Enterprise-wide LOS necessary New loan origination system a window into heart of deal

Detwiler is chief executive officer of Mortgage Cadence, a Denver-based mortgage technology firm.

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Back in ’05, I warned that the loan origination systems of the day would soon be relics. Anyone in the lending business for that long knows I hit the mark. Those early loan origination systems were replaced by an array of tools that provided a variety of functionality. For a while, it wasn’t clear what the loan origination systems of the future would look like. Perhaps, many thought, it would be different for each lender. As most of the dust has settled from the financial crash and the government takes steps to avert a repeat, the requirements for loan origination systems of the future are finally becoming clear. The platforms that survived the financial meltdown and stand ready to be deployed in a wake of regulatory changes brought by the Dodd-Frank Act are different from legacy systems in a number of ways. The new loan origination system is no longer just a central database of record. It is a compliance window into the very heart of the deal. The new system is a fully connected nexus at the center of an enterprise lending system that extends beyond the corporate walls to interface with partners and other service providers. In many cases, it provides web-based functionality that gives borrowers an online doorway to the transaction. More than a software application to originate a loan, the new LOS has become the place originators go to do their work — in their office, in the borrower’s home or at the beach. The need for a truly end-to-end system that will allow an enterprise-wide set of automation tools to streamline processes, limit the cost of operations and increase profitability is obvious. The traditional process for originating a loan is manual and task-based. This is not suitable when compliance requirements impact every step of the process. The traditional loan origination system is tailored to that manual process; therefore, it incorporates manual processes into the product design instead of automating these activities. And the cost of failure here is very high. The loan origination system of the future makes it possible to track compliance concerns throughout the loan origination process and halt an automated process immediately should a concern arise. They can do this because they were designed to interact in this way initially. But even more important is that the loan origination system of the future can make data available directly to government regulators when and how they want it. This will become increasingly important, as the Consumer Financial Protection Bureau ramps up to speed.

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By Michael Detwiler The industry now has access to an enterprise-wide set of automation tools that can streamline processes, squeeze costs out of operations and increase profitability. Enterprise resource planning and supply-chain management revolutionized the business of manufacturing years ago. Over the last few years, that intelligence has made its way into mortgage lending, where, at the end of the day, we are just manufacturing mortgages. Just like manufacturing of any other product, the loans we write require certain raw materials (data) and suppliers (settlement service providers) to that make up the supply chain required to build a mortgage. If we are just a different kind of manufacturing operation, can the mortgage lending industry reach an enterprise-wide set of automation tools that streamline processes, squeeze costs out of operations and increase profitability? Of course, we can and we have, with the loan origination system of the future standing as the perfect example. These new systems help us eliminate paper from the origination processes, reduce manual data entry and provide significant efficiency gains and reduced compliance risk. The nation’s largest lenders already embrace enterprise-lending solutions and the tools are trickling down to the mid-tier. In the past, lenders were forced to reach out to third parties for functionality to connect them to partners through electronic networks. The new loan origination system contains most of this functionality, allowing the lender to reach out as needed in a secure manner, capturing data and logging it securely into the database without manual intervention. It is likely the CFPB will require more transparency between lender and borrower. Today’s loan origination systems make it easier to share information in a secure way with the borrowers they serve. In many ways it’s an extension of the built-in partner networks with slightly different roles and permissions. Critically important to today’s lenders is the new system’s ability to help fight fraud at the point of sale. With loan quality high on the list of investor requirements, lenders need to know about problems as close to the point of sale as possible. Finally, the loan origination system of the future is different because it was designed to be flexible and used across the enterprise. Niche-based tools of the past can no longer keep pace with the rapid change in the industry. Only systems specifically designed to change easily will survive. Because there are so many requirements being placed on the loan origination technology of the future, expect to see more smaller systems leaving the stage in the months ahead and more enterprise-wide systems moving down from the nation’s top lender tier into the mid-tier.


Mobility, metrics and turn times Handheld devices boosting speed of appraisals By Loren Cooke Turnaround time is always a problem for origination professionals. Given the choice, most originators would have a process from application to closing that looks more like an automobile purchase transaction than what they have to contend with today. That is completely understandable since closings and paydays are inexorably related, and Realtors and borrowers feel much the same way. The timing fly in the ointment is very often the appraisal, but technology is having a significant effect on how long it takes to get an appraisal and is doing so from at least two directions. Bear in mind that appraising is all about experience and judgment, not technology. While there has been a technology component for some time, particularly in the research and data part of the process, appraising real estate has long been a science heavily infused with art. In addition, the average age of appraisers has been creeping upward, as the baby boomer generation ages. This was made more evident with the mortgage crisis. The business lost much of its long-term allure for the younger generation as volumes fell, but the long established professionals tended to remain. Handheld devices and appraising are a match made in heaven, so this is an obvious area where technology is helping the process. Look at an iPad and what does it resemble? A clipboard with a pad of paper, much like the one old school appraisers used to hold their Form 1004s and graph paper. They have been using laptops loaded with appraisal software for some time now, but the new devices lend themselves far better to the appraiser’s craft. They can fill out the forms more easily, add photos quickly and upload everything in seconds if need be. They can also be receiving data swiftly, checking out comparables, receiving instructions and handling other tasks on the fly, making their schedules and workflows more efficient. Laptops are cumbersome, though useful; handheld devices are liberating and tailor-made for field services. Apps are improving all the time, too, and the devices provide a meaningful link between appraisers and appraisal management companies. Collectively they have the potential to reduce appraisal turnaround time for the benefit of originators and all other stakeholders in the loan creation process. Lenders and investors also benefit from the evolving technology of the appraisal scene, both before and after the

appraiser delivers the valuation. Managing appraisal quality is improving all the time, as technology-savvy AMCs employ advanced platforms that help clients track their appraisal results. The point is the same — improving turnaround time — but with the added dimension of tracking quality and completeness of the work from all appraisers being utilized. On the ordering side of the equation, the best platforms allow management to steer work to valuation professionals who regularly provide reports promptly and whose work is challenged less often. The benefits here are substantial, particularly as the origination business enters the era of the Uniform Mortgage Data Program. Starting Sept. 1, the UMDP requires appraisals be submitted for review at least 24 hours prior to loan delivery to the GSEs, and leads to pre-screening designed to improve quality while limiting repurchases. If there are problems with the appraisal, there will be problems with delivery to Freddie Mac and Fannie Mae, and that means problems for originators. Technology that helps lenders manage the overall appraisal effort for quality and UMDP-tripping errors will result in fewer headaches for loan officers, their borrowers and their Realtors. Metrics produced by the appraisal management platform can do more than weed out the less capable, too; they provide easily understood reports on the originating lender’s grasp of the valuation’s importance and aid in the lender/investor relationship. As the UMDP leads the industry closer to the true emortgage, we will see non-technology approaches in many aspects of origination disappear. We are already originating loans that are almost completely digital, and this is a very positive thing for the longterm health of the market. Investors want human judgment in the fine aspects of decision-making, but they also want digital precision in the data that results. Data can be analyzed for trends, warning signs, matched against other metrics and made reassuring for those with funds at risk. Confidence from the capital markets means a steady source of funding, which in turn leads to faster turnaround time and product offering consistency. As we continue to evolve in the post-meltdown reality of granting credit to only the most risk-worthy, it is important to serve those customers with speed and accuracy. Technology is helping us get there, in the appraisal side and in every other aspect of origination.

Cooke is executive vice president for sales and marketing at Solidifi, which provides collateral valuation, risk management and data analytic services to the North American mortgage industry.


ESREVER Big banks pull out of reverse mortgages as other issues take precedence

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BY JA SON PH I LYAW

AS IF THE DEARTH of homebuyers wasn’t enough to slow mortgage origination, many large lenders decided to stop offering reverse mortgages this year, as well. Wells Fargo and Bank of America — the No. 1 and No. 2 home loan originators in the country — exited reverse mortgage lending. In February, Bank of America discontinued writing reverse mortgages “due to competing demands and priorities that require investments and resources be focused on other key areas,” according to Doug Jones, consumer sales and institutional mortgage services executive for the banking giant’s home loan division. In June, Wells Fargo shuttered its reverse loan origination citing unpredictable home values and restrictions on the loans. A reverse mortgage is offered to homeowners at least 62 years old, uses a portion of the  property’s equity as collateral and allows the borrower to receive an income stream or line of credit. This type of home loan generally doesn’t have to be repaid until the last surviving homeowner dies or moves out of the property. According to the Texas Mortgage Bankers Association, there are more than 72,000 reverse mortgages outstanding in the country. Lenders tout the loans as a way to help senior citizens struggling under the rising cost of living. But a reverse mortgage isn’t without risk and some consider the loan inappropriate and a form of predatory lending. Former Florida Attorney General Bill McCollum warned senior citizens in 2008 about several scams targeting them, in which mortgage lenders engaged in deceptive practices and use high-pressure sales tactics to steer borrowers into a reverse mortgage. In 2010, reverse mortgages totaled roughly 2.2% of Wells Fargo’s $392.5 billion mortgage volume. The bank will continue to service existing reverse mortgages, but new rules made it difficult to determine a seniors’ ability to meet the obligations of the loan, such as making property tax payments and homeowners’ insurance, according to Wells Fargo The only reverse mortgage insured by the federal government is the home equity conversion mortgage, or

HECM, available through lenders approved by the Federal Housing Administration. “The government’s HECM or reverse mortgage program was designed in a different economic time,” Wells Fargo said when it decided to exit the business. Back in February, BofA’s Jones said the bank simply chose to focus origination operations elsewhere. “We made the strategic decision to exit the reverse business due to competing demands and priorities that require investments and resources be focused on other key areas of our business,” Jones said then. Bank of Americas entered reverse mortgages in 2006 and expanded its footprint when it acquired Reverse Mortgage of America in 2007 and Countrywide Financial Corp. a year later. But with the sale of Balboa Insurance Co., a unit of Countrywide, and the creation of another subsidiary dedicated to servicing legacy nonperforming mortgages, the bank has moved away from what was once a core business for these acquisitions. In mid-June, the National Reverse Mortgage Lenders Association said Wells Fargo’s decision to end exit reverse mortgages won’t be the death knell for the product. “Demand for HECM loans remains strong. In fact, the HECM program has evolved to meet the changing economic times with the recent introduction of the HECM saver, a new product that reduces costs and increases consumer protections,” according to Peter Bell, president of the trade group. The lenders association worked with the Department of Housing and Urban Development to develop procedures to evaluate borrower income and insure the ability to pay taxes and insurance on the property after the reverse mortgage deal closes. “It is anticipated (HUD) will be issuing a rule change in the future to provide HECM lenders with the discretion to make these necessary underwriting changes,” the NRMLA said. So, with large lenders ceasing to write reverse mortgages due to an inability to accurately gauge risk and a desire to focus operations elsewhere, there’s a hole in the financing of these loans. Maybe that’s a niche innovative technology can fill.


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HW Focus: Origination  

Mortgage rates are at historical lows. But Americans aren't buying homes. Many current homeowners are unable to refinance existing mortgages...

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