The recent focus on improving the mortgage loan origination process is finally paying off. After more than three years of regulatory requirements, some of which involved the implementation of technology, the moment that the origination industry has been waiting for has arrived.
On Sep 11, 2012, the government-sponsored enterprises released an update to their long-standing “representations and warranties” loan acquisition framework. The update states that mortgage “sellers,” under certain conditions and timeframes, would be relieved from buying back loans that perform. Originators of all sizes have been requesting this change from the GSEs for years. From 2008 to 2012, it is estimated that secondary mortgage investors requested the repurchase of more than $80 billion worth of loans. Originators argued that the buyback process was broken and needed to be fixed. At the same time, investors have been asking lenders to improve their data quality processes and include additional loan data during loan delivery.
To get to this announcement stage, industry forces have been working together to address the lack of confidence and transparency in the lending process. Both the administration and the industry have acknowledged the need for private investors to get back into the secondary market and for lenders and investors to loosen tight credit conditions. The overhaul of the rep and warrant framework presents a huge opportunity for originators. Regardless of size, channel, geography, and organizational structure, the lenders now have reduced buy-back risk. That is, as long as the loan is made with quality processes and the loan data passes the increased, automated inspections with all the additional required data mentioned in the announcement.
In order for the GSEs to offer this limited relief, they need to have some assurances. In the past, investors performed only basic loan inspections at acquisition time, but they now have policies, processes and tools to mitigate some of that risk. Lenders should expect increased inspections and data rejections at acquisition time.
The benefit for lenders is that the loan defect may be discovered days after the loan closes, rather than months or years later when the loan becomes delinquent. With early detection, lenders have a better opportunity to correct problems. Better yet, lenders should strive to eliminate all data defects by correcting them before the loan is created and delivered for sale to the investor.
One loan data quality issue that has been hard for lenders to address is related to closing activities. Our nation’s real estate transaction and land ownership structures require up-to-date data and expertise at the local level. That includes data on taxes and title liens, as well as personnel who are knowledgeable about recording procedures and state and local regulations. While the data and expertise are typically provided by the title search and closing processes, today’s manual processes can make it difficult for lenders to maintain end-to-end loan production quality.
While lenders have implemented sophisticated loan underwriting and pre-and post-closing reviews, ensuring loan compliance with investor guidelines throughout the closing process has remained challenging. Changes that happen at the closing table may not only delay the transaction, but may also impact the lender’s ability to trade that loan to the secondary market.
A lender’s internal operations often depend on different data sets. For example, the secondary department builds a loan-selling pipeline based on pre-closing data. Because the lender often needs to make final adjustments to the loan data based on findings discovered at the post-closing review, there is increased risk of data defects. Wouldn’t it make more sense if the actual closing data were used across the board?
Put simply, lenders need the title search and closing processes to address both state and local regulations, including up-to-the-minute closing data and lien status—and it needs to comply with investors’ program guidelines.
The answer to this challenge lies in better end-to-end collaboration through trusted technology and the lenders’ ability to deploy policies to their solutions providers. The traditional electronic exchange mechanisms that were created to improve electronic ordering are actually keeping lenders isolated from their vendors while giving the exchange—a seemingly uninterested stakeholder—tremendous control. The loan closing process is a collaborative activity that, when performed with the right lender solutions, will yield tremendous benefits for housing finance.