The Three-Day Mortgage?
As the market shifts away from refinances to more first mortgages, the loan process will become more labor intensive, as first mortgages are more complex, require more documentation, etc. However, the market is also more competitive so more lenders are looking to technology to further shrink the process, but the question is can technology streamline the loan cycle further or is that just a fantasy?
Doug Duncan, chief economist at the Mortgage Bankers Association, thinks that there is more efficiency to be gained. "In 1993, it took nine months to process a loan and in 2003 it took 90 days," he said. "So, the mortgage industry was processing triple the volume in a third of the time."
Mr. Duncan stated that the ability to electronically handle re-amortization, tailor loan products to the borrower, create yield paths to match loan products, automated underwriting and the notion of creating a fully automated end-to-end loan process has contributed to the gains in productivity that the mortgage industry has experienced over that 10-year period. Looking into the future he believes that there are even more efficiencies left to realize and that over the next 10 years the industry should be able to process a loan in just three days.
Lenders like Mountlake Terrace, Wash.-based MILA believe that 10 years is too long. MILA has plans to be able to process a loan in one day over the next two years.
"In order to get there you have to eliminate all of the third-party interactions that cause the time delays today," said Layne Sapp, MILA founder and chief executive officer. "Anything that results in you relying on a third-party to deliver you a document to deliver a lending decision has to be automated.
"From there, to render the decision and draw docs doesn't take over three days today. You need electronic title, eliminating appraisals, and electronic review of things like W2s. I think 10 years is too long. Within 12 to 18 months I'll be able to close within a day, with nothing but an online app provided by the consumer to us. Those that take 10 years to get there will be out of business."
GTE Federal Credit Union, Tampa, Fla., agrees and is taking steps to do as Mr. Sapp advises, eliminate third-party interactions. "A three-day mortgage should be the goal," noted Kim Yarnelli, VP of mortgage lending with GTE. "We're averaging nine days from product to funding and seven from funding to closing.
"Some of the reason that the process is pushed out is because of the need for notarization. If there was a streamlined form that didn't have to be notarized you could do it in three days right now. As it is right now, we might have the paperwork ready on a Tuesday but they might not be to the branch for signing and notarizing until Friday. You need to have instant approval, eliminate title and do an impairment policy instead."
But is the technology there to automate these middle steps? "The technology is there today," answered Roger Gudobba, a senior principal at Wolters Kluwer Financial Services, Minneapolis. "If you think about the mortgage process, there are really three key components. First, you have the property and the value of that asset. You have to have clear title and appraisal that takes into account local market conditions.
"If you think about it automated underwriting has done a great job in shrinking that part of the loan cycle, but it can't handle 100% of the loans.
"However, if you can only deal with the exceptions, that's a huge uptake. The second issue in the mortgage process is assessing the borrower. FICO makes credit easy but you have to validate things like W2s, employment history, etc. In this case there might be exceptions that have to be cleared like if there's a divorce you may have to see who holds claim.
"The third factor is the investor. Documentation has to get leaner. The technology is there, it's just a matter of identifying the exceptions because not every loan is clean."
Mr. Gudobba is also optimistic and certainly thinks the process will be accomplished in three days within the next 10 years or less. "It will absolutely be three days in 10 years or less," he said. "You can buy a car or a boat in three days or under so why not a house? As title companies streamline the process and make more data available, the process will get smoother.
"The first thing the lender has to do to get there is to take stock of his current process and look at where he can make improvements," Mr. Gudobba advised. "If the lender has an understanding of where things are going then he should be able to decide where to invest in order to streamline. Web services, service-oriented architecture and MISMO are what's going to improve the process because it will give the lender the ability to plug and play different processes as he needs them.
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