Closing the digital mortgage gap

Editor's Note: National Mortgage News is proud to present the 2018 Digital Mortgage Conference Sept. 17-18 in Las Vegas. This four-part feature, from the September 2018 edition of NMN magazine, is a preview of the event, exploring key digital mortgage trends and events affecting lenders, servicers and technology developers.

It's been nearly three years since a watershed moment propelled the concept of a digital mortgage into the public consciousness and sent the industry into a frenzy of innovation and investment.

That moment, a 60-second commercial during Super Bowl 50 for Quicken Loans' Rocket Mortgage, asked the question, "What if we did for mortgages what the internet did for buying music, and plane tickets and shoes?"

"You would turn an intimidating process into an easy one."

While Rocket Mortgage was far from the industry's first foray into online lending and paperless processing, something was different this time. In the aftermath of the Great Recession, massive regulatory changes upended how business was done. New processes and tools were needed to manage these compliance requirements. Everything else was an afterthought. As a result, an industry notorious for being technology laggards found itself even further behind.

But by the time 2016 rolled around, conditions were improving. Most of the new compliance requirements had been implemented and the "new normal" had set in. Lenders, and their technology vendors, finally had the time and money to invest in improving the borrower experience.

Practically everyone understood what a seamless, digital experience would mean for the industry. Getting there was the hard part. The four-part series that follows examines key digital mortgage developments and explores the untapped opportunities that remain.

While the embrace of digital mortgages has been swift among many early adopters, questions about value proposition and operational complexities continue to vex the broader industry.

Fannie Mae and Freddie Mac's efforts to automate originations with third-party data may prove crucial as lenders continue to face pressure from rising costs and thinning margins. But while lenders may see the value of these initiatives, many are slow to commit.

Digital mortgages are great for the first 30 days of a borrower relationship, but what about the potentially 30 years after that? Or when a borrower comes on hard times? Embracing digital mortgages in servicing may prove valuable to borrowers and servicers alike.

Finally, as mortgages rapidly become more modern, compliance requirements aren't moving quite as quickly. But recent efforts by the Treasury Department may soon open the door for improved dialogue between industry practioners and their regulators.
— Austin Kilgore

Easing the growing pains
The scale and scope of implementing a digital mortgage strategy may seem insurmountable to many lenders. But success can be achieved when executives stay committed to their vision, while remaining nimble enough to overcome myriad roadblocks along the way.

The leaders at Quicken Loans and Mid America Mortgage know firsthand the challenges that come with disrupting a deep-rooted industry like mortgage lending. It hasn't been easy and their journey is far from over, but these early digital mortgage adopters have charted a course for the rest of the industry to follow.

"I got pushback internally," said Jeff Bode, CEO of Mid America, which uses the brand Click n' Close for its digital mortgage experience. "Nobody likes change. Everyone wants to come in and do their job like they did the day before."

But infusing automation into online mortgage applications and streamlining the closing process wasn't developing technology for the sake of simply having more bells and whistles. The goal was to transform not just how business is done internally, but throughout the entire loan process.

"We were also worried about the perception from the loan officers as to what our borrowers and title companies would feel about it. We did have a few title companies that were averse to trying it," Bode said. "After they did one closing, they thought it was great. They didn't have to produce a pile of documents or chase down anything from the borrowers post-closing. I wish I'd done it five years earlier."

Still, initial progress was slow.

"We didn't roll out a fully closed system right out of the gate. Initially, we had a bifurcated process where the borrower would go to the title company and sign anything that needed to be notarized in front of the closer," Bode said. "It was a clunky process where they still had some paper to deal with."

Handling the e-signed notes after closing was even more difficult.

"We found a big challenge in the execution allocation in our secondary marketing," Bode said. "We had to break what worked before, until we figured out the process, found our best execution and made sure we got the best price for our loans."

Simplifying the overall process and making it faster — while still maintaining rigorous underwriting standards — is essential to any digital mortgage strategy. Identifying which parts of the process to modernize is often best achieved by listening to borrowers.

"Importing financial information is something clients love and tell us about all the time," said Regis Hadiaris, executive director of Rocket Mortgage at Quicken Loans. "Connecting bank accounts and digitally verifying information in real time gives a lot less for the client to do and the burden of proof is lifted from them. With everything all verified upfront, it shaves a week off closing time. There's no additional manual verification and they don't have to find documents they never use."

The speed and ease of other types of online commerce has raised expectations for all manner of consumer transactions. But mortgage lending is unique in how far it has to go to meet these demands.

"Consumers and their expectations are changing very rapidly. We live in a world where we expect to do anything at a touch of a button on our phones and when we can't, it seems odd. Our whole industry has to live up to that," said Hadiaris.

But speed is only part of the equation. Consumers demand certainty as well.

"First-time homebuyers want to understand what they qualify for so they can start making offers with confidence. Real estate agents want verified approval from potential homebuyers. We've learned that and leveraged the technology to roll out those things," Hadiaris said.

Universal, remote notarization is the final piece of the mortgage process awaiting full digitization. Less than one-fifth of the states permit remote notaries, but it's gradually changing across the country.

"Fully digital, remote e-closings is the thing clients want that we haven't been able to fully roll out yet. That's a state-by-state change that has to happen to enable that," Hadiaris said.

"It's crazy to think you can go online, do your research, customize your mortgage options, get approved, and lock your interest rate," he added. "Then at the closing table, here comes a stack of paper and a pen. We have a hybrid model, but where we want the whole industry to go is the fully remote online closing."

Bode agreed. "We still could do a better job on the application side. The remote notary piece through all the states needs to expand, but that unfortunately requires law changes and that's never easy."
— Paul Centopani
Finding ROI in data validation
Fannie Mae and Freddie Mac's loan data validation initiatives promise lenders faster turn times and certainty on buyback risk. But operational integration and loan officer acceptance remain impediments to a widespread embrace of these programs.

Fannie's Day 1 Certainty and Freddie's Loan Advisor Suite offer waivers on representation and warranty requirements on data points in the loan file that have been automatically validated through approved, third-party vendors.

When asked about their assessment of the initiatives, lenders view them favorably, with an average score of 7.8 on a scale of 10 in a survey conducted by industry analyst Tom LaMalfa, president of TSL Consulting.

To be sure, the group of 26 lenders, surveyed at the Mortgage Bankers Association's Secondary Market Conference earlier this year, is a small sample. But those surveyed said only 24% of their loan volume is being closed using either government-sponsored enterprise program.

"There are an awful lot of things everyone likes about them, but a surprising number haven't yet employed them for one reason or another," LaMalfa said.

One possible reason is that lenders are focusing their resources on more pressing issues, such as the TILA-RESPA integrated disclosures and Home Mortgage Disclosure Act updates.

"Lenders over the past three to four years also had to spread their technology investments and time on implementing and revising TRID and the HMDA changes, as well as digital point of sale initiatives," said Craig Focardi, senior analyst for banking at Celent.

"It's not just a business decision, but an operational decision to implement significant GSE technology. There's lots of data elements to map, integrations and workflows and processes to change," he added.

The adoption pace is similar to what happened when the GSEs first rolled out their automated underwriting systems.

"I look back to those early AU days and it took a good three to five years until there was normalization of process, and the acceptance of staff within the lending organizations that it was not going to take over their jobs, it was a tool to enhance what they do," said Randy Jones, Freddie Mac vice president of client solutions, who worked on its Loan Prospector pilot in the mid '90s.

Something similar is happening with Loan Advisor Suite, he said.

"We are currently tracking as expected," in terms of lender adoption, said Fannie Mae Director of Product Development Cindy Keith. "We've learned a lot of good lessons along the way with the support lenders need for adopting" Day 1 Certainty.

The difficulty for lenders often lies in implementing new procedures for loan officers and other staff, including tasks like ordering reports earlier in the origination process, she said.

"Those with challenges have asked us to give them some best practices," Keith said, so Fannie created additional support tools, including the ability for lenders to measure return on investment.

"The lenders themselves are not reluctant; senior management is accepting of the concept," said Michael Celenza, vice president and head of consulting at Digital Risk.

Digital Risk has a contract with Fannie to help lenders incorporate Day 1 Certainty. That work has shown that lenders lack a true understanding of the time and effort needed to incorporate the data validation programs into lenders' operations, Celenza said.

"It's significant, it's a process change; it's not necessarily a technology change," he said.

Another part of the acceptance problem, he said, is at the loan officer level. "Change is hard, but this is a struggle for them," he said. "But when they let go of the documentation and let the process work, the results are dramatic."

When lenders use Fannie's property valuation tools, they save 20 days in the process, while using employment verification saved 12 days and asset verification saved six days, Keith said.

Freddie Mac's implementation approach includes having a dedicated team to help customers integrate its technology. It also teams with the vendors to assist lenders, Jones said.

Loan Advisor Suite brings in the other two "c's" of mortgage loan underwriting — collateral and capability — that were left behind when automated underwriting systems were first introduced. But the centerpiece of Freddie's program is the credit part, Loan Product Advisor, and that's where a lot of the new capabilities reside, Jones said.

This includes the capability Cloudvirga created earlier this year with Freddie that allows for a single-click submission into both Freddie's Loan Product Advisor and Fannie's Desktop Underwriter.

"That's where our whole push and direction is. It shouldn't be an either/or choice, you should have easy access to both systems so you can see that upfront," Jones said.

"The track that we're on is not surprising. When you're building things to try and provide value and help change, you always want it to happen overnight but that's not reality," he said.
— Brad Finkelstein
Digitizing default
The origination segment has garnered much of the digital mortgage attention in the industry, particularly when it comes to customer experience and satisfaction. But incorporating many of those same processes into the servicing side of the business presents an attractive opportunity to realize those same objectives, particularly for borrowers facing financial difficulties.

The industry is accelerating the pace of technology adoption to develop a more efficient process, but efforts to streamline the mortgage market haven't strayed much from the originations sector.

While lenders are deploying consumer-facing digital tools that offer streamlined processes to apply and get approved for a loan, default servicers are often relying on disjointed systems and fax machines to process loan modifications and other forms of loss mitigation.

At a time when the industry is obsessed with customer experience, it seems ironic that default — perhaps the most stressful and complex aspect a borrower encounters with a loan — has largely been an afterthought in the digital mortgage revolution.

After all, the steps involved in executing a loan modification share a striking resemblance to underwriting a new mortgage.

"Default is really the last island yet to be overtaken by the tide of new technology, and that's because it's more complex; there's a lot of dimensionality in default, a lot of different data, a lot of different participants," said Steve Horne, the former CEO of Wingspan Portfolio Advisors, a specialty servicer he founded in 2008 and operated until it declared bankruptcy in 2016.

"That being said, technology is catching up," Horne, now the CEO of consulting firm Alta Vista Advisors, said.

In the run-up to the housing bubble burst, the mortgage industry had little incentive to offer, let only streamline, loss mitigation processes. Home prices were soaring, delinquencies were low and the small volume of defaults that did exist were tolerable risks.

But after the Great Recession, an influx of loss mitigation programs and new regulations were created to address the mounting foreclosure problem. Servicers were too overwhelmed to innovate.

But today's mortgage environment, filled with a thirst for technology and far fewer delinquencies, weaves together the perfect circumstances for an overhaul of default servicing.

"The crisis took everybody there in order to manage through it, and now that the crisis is over and the default numbers are at record lows, it's time to play catch-up in that space and look at how can we provide the best consumer experience for our clients and customers that are going through a tough time," said Anne Beck, product manager at Fiserv Lending Solutions.

Vendors like Fiserv have developed loss mitigation tools, including online borrower portals, to make it easier for borrowers to apply for loan modifications. Meanwhile, Quicken Loans is applying its Rocket Mortgage approach to loss mitigation.

"It's not the sexy part of servicing; it's not the flash and bang or the thing that you go out and promote," said Nicole Beattie, vice president of servicing at Quicken Loans. "It's an underserved area of the market that we just thought differently about and said, regardless of what a client may be going through, regardless of if they're performing or not performing, they deserve the exact same respect and we should invest in our technology regardless of the client's situation."

Quicken's loss mitigation platform, called Rocket Solutions, provides responses to consumer mortgage modification requests via Rocket Mortgage's servicing website.

Servicers have now had a number of years to implement and understand the myriad new regulations on their segment of the industry. That's now making it easier to develop technology to streamline and automate compliant processes.

"I think new technology is 100% aligned with the new compliance and regulatory requirements because it's all about transparency at the end of the day, whereas older systems were about really anything but," said Horne.

Instead of being manual laborers by collecting and passing on data, default servicers can focus on overseeing processes to ensure borrowers are delivered the best possible outcomes for their situations.

"It will rework everything in the industry, and if you look at the new wave of technology coming into the financial services space, it has completely redone unsecured lending, consumer lending and even made strides on mortgage origination, which is changing all of the roles," Horne said.

This shift also helps servicers make better use of their employees.

"We don't need as many team members making the decision. We've now put them as part of the defense and said, 'Now you're going to audit to make sure that the product that we're delivering is 100% the right decision for the client,'" said Beattie.

While the originations segment is leading by example in its pursuit of a completely digital mortgage, it's unrealistic to think that the default servicing sector will ever be fully automated, which is probably for the best, according to Beck.

"You cannot really manage through a modification process, or a short sale, or a deed in lieu, without having physically spoken to your servicer," she said. "But it's taking those first steps and taking the process of getting the documentation and understanding the process better that's helpful. So much of servicing still relies upon getting a faxed document."
— Elina Tarkazikis
Statue of Alexander Hamilton in front of the United States Department of Treasury, Washington, D.C.
A new era for compliance
The Treasury Department's recent report on how to regulate nonbanks drew praise from tech startups and mortgage industry insiders alike. In addition to recommendations for a new federal fintech charter and that regulators pull back from payday lending rules, the report contained a section that might be music to a mortgage banker's ears, including support for the industry's automation efforts and another call to soften the use of the False Claims Act against lenders.

The report discussed ways to accelerate adoption of electronic promissory notes — or eNotes — in federal mortgage programs, as well as automated appraisals. Regulations notoriously lag the pace of new innovations, so industry experts are hopeful the Treasury report will facilitate an ongoing dialogue about establishing a regulatory framework that reflects the realities of a modernized mortgage market.

"My sense right now is that the industry is really at a tipping point in terms of adoption of digital mortgage or e-mortgage technologies," said Michael Fratantoni, chief economist for the Mortgage Bankers Association. "The technology is there, the industry desire is there, but there are some regulatory hurdles and the Treasury report identified some of them."

Treasury endorsed the use of electronic promissory notes at Ginnie Mae, the Federal Housing Administration and the Federal Home Loan banks, noting that the FHA would first need the budget to do so. The department still uses an older mainframe-based operating system, and officials have emphasized the desperate need for technology upgrades.

But one challenge is that while Fannie and Freddie accept e-mortgages, Ginnie Mae does not, although it has outlined a plan to eventually adopt the technology.

The Home Loan banks also do not currently lend against eNotes, and Treasury recommended that they work toward a goal of "accepting eNotes on collateral pledged to secure advances."

The department also encouraged the FHA to develop enhanced automated property appraisals to "improve origination quality."

Industry representatives welcomed the Treasury report's recognition of the FHA's need for technology upgrades. "CHLA supports recommendations in the Treasury Report to fully fund FHA IT needs, to improve their automated appraisal capabilities and to provide more clarity on the False Claims Act," said Scott Olson, executive director of the Community Home Lenders Association.

In a February report, Moody's warned that alternatives to traditional property appraisals could weaken the credit quality of residential mortgage-backed securities if risks are not mitigated.

In its report, Treasury suggested that property appraisal programs explore offering targeted appraisal waivers where a high degree of property standardization and information about credit risk exists to support automated valuation.

"Treasury recommends FHA and other government loan programs develop enhanced automated appraisal capabilities to improve origination quality and mitigate the credit risk of overvaluation," the report said.

Regardless of whether the FHA moves forward with automated appraisals, new alternatives to the process are emerging and continue to make the practice simpler, said Rob Zimmer, head of external communications for the Community Mortgage Lenders of America. "On appraisals, we'll see what happens," he said. Regulators and agencies "will continue to find ways to streamline the appraisal process."

In a move sure to please lenders that have shied away from working with the FHA because of rigid False Claims Act standards, Treasury also recommended that the Department of Housing and Urban Development establish transparent standards to determine which violations it considers to be most harmful in order to help the Justice Department decide which abuses to prosecute.

"Enforcement of the False Claims Act is critical to ensuring integrity of any federal program and protecting it against knowing violations," Treasury said. "At the same time, FCA enforcement actions can impose significant costs on a defendant both in terms of financial and reputational damages."

MBA members are "very, very happy" that the administration appears to be recognizing and validating the concerns lenders have about working under the False Claims Act, Fratantoni said. "This has really been a constraint and it's impacting access to credit and it's impacting the FHA program as a whole because they have had a number of both large and midsize lenders back away from the program because of this risk."
— Hannah Lang