WE’RE HEARING the unlikely duo of counseling and technology may be useful in reducing lender costs in the light of the qualified mortgage.
Last week, I began sharing my ideas with you about the long-awaited QM rule issued by the CFPB a week or so ago. The rule, as you may recall, focused on the consumer’s “ability to repay” and how that would impact the underwriting standards for the industry.
So, how could the residential mortgage industry leverage budgeting as part of the review of a consumer’s ability to pay? Is it practical to do such an analysis and would the cost exceed the benefits of this approach?
At Stratmor, we spend a lot of time with lenders trying to reduce their costs, and we know that any approach that increases costs or decreases productivity is going to face a challenge being adopted.
Here are a couple of ideas that may be worth exploring. First, I am not advocating eliminating gross income DTI analysis. I am rather saying that innovative lenders should pursue options.
In fact, the QM rule seems to have good options for conforming mortgages through leveraging agency underwriting engines (DU and LP). But the opportunity for cash flow analysis may be appropriate for nonconforming borrowers who need the more robust review of their financials. But how could the process work?
I think the answer may be in a combination of counseling and technology.
The counseling approach involves having experts on family budgeting review the personal expenses and income of a borrower and create a personal budget. There are nonprofit agencies that perform this function for those that get into debt trouble, and they do this for a fairly low cost, far below the typically cost of a loan officer.
It involves training, and could leverage statistical models that have the borrower answer a series of questions about their expenditures or household situation, e.g., marital status, children, ages, other dependents, etc., which could guide the budget process.
This past week, I received emails and blog responses about how QM could kill the broker business. Perhaps a broker budget tool could be a great way for brokers to demonstrate their value proposition and ability to work through this cash-flow analysis to qualify potential borrowers.
And technology may offer an even slicker option in the form of online tools to automatically create a budget based on real time analysis of a borrower’s existing accounts.
In fact, if you are an experienced user of online banking, there is a good chance that you may already have access to some of this technology. Many banks leverage tools for account aggregation, where an account holder can view his bank accounts, and bank accounts from other institutions with a single login.
Well, that same technology could be leveraged to aggregate the accounts into a view that shows how much a potential borrower could afford. In fact, an example of such a technology from PowerWallet was discussed late last year at the SourceMedia Mortgage Technology Conference in Florida.
DTI is an important metric and it will likely always be in our industry. It’s easy to calculate which is a good thing. But it’s really a calculation that can be defined as “divide some of your expenses into an income that is more than you receive…”
When phrased that way, it may not truly reflect a borrower’s ability to pay, and there should be room in our industry to determine an alternative method based on cash flow, by analyzing the true net income and the true expenses of a borrower. The lenders that come up with such approaches may see significant opportunity in gaining market share and profits over time.
Garth Graham is a partner with Stratmor Group, and has over 25 years of mortgage experience, from Fortune 500 companies to startups, including management of two of the most successful mortgage e-commerce platforms. He was formerly with Chase Manhattan Mortgage and ABN Amro, where he was a senior executive during the sale of its mortgage group to Citigroup.