Nov./Dec. 2022 Issue

Today’s Focused Tech Investments Will Drive Tomorrow’s Successes

It’s often said how much difference a year makes, but rarely has this statement carried more weight than in today’s mortgage industry. One year ago, most lenders were stretched to their limits and were preoccupied with having enough staff in place to meet borrower demand. Today, as a historic refi boom fades quickly into the rearview mirror, many of the same lenders have made a complete one-eighty and are letting people go left and right.

This phenomenon is hardly surprising, as most of the mortgage industry has been stuck in a hire-and-fire loop for decades. But there is a marked difference this year.

When the housing market slows during the holidays, lenders typically use this time to plan for the upcoming homebuying season. However, based on anecdotal conversations we’ve had with our clients and prospects, more lenders are making room in their plans for new cloud technologies that help them with data collection and further automation. How successful these plans will be will depend on how well lenders understand their true pain points, and whether they select the right resources to alleviate them.

A Very Different Market

During the first half of 2022, as interest rates quickly doubled, most lenders were more focused on stabilizing their businesses than investing in technologies. These stabilization efforts generally concentrated on two areas – right-sizing staff and exploring alternative loan products to keep customers coming through the door.   

In recent weeks, industry trade publications have been flush with headlines about mortgage lenders, third-party vendors and mortgage technology companies slashing their staff by 10% or more. Meanwhile, as higher rates quelled demand for homeownership, many lenders pivoted to adjustable-rate mortgages and home equity products, two areas in which we are still seeing signs of life.

According to the Mortgage Bankers Association, by mid-October, ARMs comprised 12.8% of all loan applications, the highest level since March 2008. Meanwhile, home equity lines of credit (HELOCs) increased by 5% between the second and third quarter, while total home equity loans made up 20% of all mortgages in the third quarter, according to ATTOM Data Solutions.

Now that they have completed their rightsizing and business pivots, most lenders are turning their attention to operational efficiency. Inevitably, their focus has been centered on enabling scalability through technology rather than people. Indeed, as the industry navigates through an extended lull in originations, lenders are grasping at the opportunity to leverage new automated technologies that enable them to do more with less, in preparation for when volume picks back up.

That’s smart thinking, particularly since most housing market observers expect the market to start rebounding next year. For example, according to Fannie Mae’s latest projections, home sales are expected to reach a low by the second quarter of 2023 before interest rates start to level off and a broader economic recovery takes hold. By year-end 2024, the GSE forecasts home sales will rise 18.6% over 2023’s volume.

Until that time, lenders have plenty of time to focus on evaluating, selecting and rolling out new technology to place them in position to capitalize during brighter days ahead. The question then becomes, what areas demand the most attention?

Where Innovation Needs to Happen

Until recently, most lenders’ technology initiatives were concentrated on improving the borrower experience and accelerating production. The pandemic helped pushed these efforts forward, as remote work created a greater need for borrower portals, digital permission to access borrower data during the qualification process, as well as eClosings for borrowers who could not sign their final mortgage documents in person. As a result, the industry’s level of familiarity with all these technology options has grown tremendously over the past several years.

Today, attention seems to be shifting to automating loan processing tasks, underwriting, and back-office operations, an area hit hard by industry layoffs. Fortunately, there have been significant leaps of innovation in these areas in recent years. Yet there is a knowledge curve still to climb. The level of industry awareness about the capabilities of available automated technologies is not as strong as it could be.

For instance, the vast majority of loans originated today are still being underwritten not just once but several times for quality purposes. Most loans also contain data discrepancies that may seem incredibly small, such as dash in a borrower’s name or property address, but create a substantial amount of time and effort to find and fix. Unfortunately, it has traditionally been up to a lender’s staff to catch these discrepancies and errors—a process which takes additional time and manual changes that can produce even more errors.

To solve these issues, we are seeing growing interest in machine learning-based automated document recognition (ADR) and automated data extraction (ADE) technologies, which, when combined, can perform document checks and document-to-document data comparisons without human involvement. Automated rules can also be applied to compare system data and document data, ensuring 360-degree accuracy. These tools have tremendous benefits for the secondary market as well, as they allow lenders to export and loan asset buyers to ingest complete and consistent loan file data with documents in the predefined stacking order  each investor requires.

We are also seeing a surge of interest in automated income calculation, which has been spurred in part by the growing numbers of Americans who have shifted into the gig economy, becoming business owners or self-employed workers. Because more borrowers are making money from non-traditional sources, and since their income can vary from month to month, the process of verifying and calculating a borrower’s qualifying income has become challenging and more complex. In the underwriting complexity of a purchase market, the challenge has only grown.

As a result, demand for automated income calculation technology has grown considerably over the past year and will likely expand even more in the coming year, particularly as it grows more challenging for borrowers to qualify for mortgages in a higher rate environment. New technologies provide underwriters with a better framework and understanding of how to measure income for both self-employed borrowers and wage earners, while also enabling them to create audit trails along the way. With automated income calculations, lenders can focus staff on analysis and customer service, while the scalability of technology translates variable staff costs into fixed per loan costs.

Whether the goal is to improve loan quality or underwrite loans in a most cost-effective and compliant manner, the bottom line is that lenders will need to expand their technology investments if they hope to reduce origination time, costs and their reliance on manual work. By doing so, they may be able to break free of the hire-and-fire conundrum when origination volumes rebound—or at least minimize its impacts.

I remain cautiously optimistic about what we are seeing and hearing from lenders as the new year approaches. As we head into the holidays, I look forward to seeing organizations that are openly discussing their technology plans start placing the above innovations into action. We can then witness where these investments take them in the coming year. In the meantime, our goal is to serve as catalyst for lenders who hope to not just survive the current crisis, but to move forward and then come out ahead when a healthier market returns.