The first new mortgage origination technologies created in response to Fannie Mae’s Loan Quality Initiative are starting to appear on the market, giving lenders the ability to access new Fannie Mae services conveniently through existing loan origination systems.
In late September, Fannie Mae released EarlyCheck, one of the first steps of the LQI. EarlyCheck lets lenders run mortgage documents through Fannie Mae’s data verification platform before the loan is funded and closed, giving lenders the opportunity to correct errors earlier in the origination process.
The service is available for free to approved Fannie Mae sellers that use Desktop Underwriter, Fannie’s automated underwriting platform that reviews and approves eligible lender-submitted loan documents.
Fannie provides a Web-based interface for lenders to connect to EarlyCheck. Users upload loan documents to the browser-based service and run the check process. But since the EarlyCheck announcement, LOS developers began building what developers call “service-based integrations” to EarlyCheck—creating a direct connection to the service within the LOS environment, eliminating the extra steps of exporting loan docs and logging onto Fannie’s Web interface.
Avista Solutions is among the first developers to add a service-based integration to EarlyCheck within its Avista Agile LOS. Mark Phlieger, CEO of Charleston, S.C.-based Avista, compared service-based integrations to smartphone applications. If Avista Agile is the iPhone operating system, the new integration is Urbanspoon—directly connecting and interacting with Web content via a specialized user-friendly interface rather than through a Web browser.
EarlyCheck can be used at multiple times throughout the mortgage origination process, ensuring that data remains consistent and accurate and Avista is recommending its lender clients run checks during underwriting and again before the final loan documents are pulled.
“By having this validation, any problem that we can push to the front of the process can be fixed before the money’s left the office,” Phlieger said. “Knowing those data checks are correct upfront is going to improve loan quality.”
Ellie Mae chief strategy officer Jonathan Corr said the Pleasanton, Calif.-based developer is creating an EarlyCheck integration for its Encompass360 LOS. He added that these interfaces are commonly used to connect to compliance, fraud detection and other services in the origination process.
“It really pushes us more and more toward using technology that will ultimately get us to the place where the rest of the market players have comfort and confidence that the information is there and valid,” Corr said.
Fannie and Freddie Mac are both stepping up efforts to require lenders to buy back delinquent or defaulted mortgages that did not meet initial underwriting and eligibility standards. A Fitch Ratings report by analysts Tom Abruzzo and Christopher Wolfe estimates that through the first half of 2010, the “Big Four Banks”—Bank of America, Citi, JPMorgan Chase and Wells Fargo—received pending repurchase requests totaling $19.1 billion. The report adds that in the worst-case scenario, the Big Four could be on the hook for as much as $180 billion in total buy backs.
Those banks collective service approximately 50% of the GSE portfolio and $10.7 billion of the 1H10 buybacks were the result of GSE requests. The August report estimated the value of Fannie and Freddie’s combined delinquent mortgages and real estate owned at $354.5 billion. Abruzzo and Wolfe project the GSEs could successfully require the Big Four to repurchase 25% to 50% of that pool, at a value of $17 billion to $42 billion.
“To put these figures in perspective, these institutions had annualized preprovision net revenues and net income of $164 billion and $54 billion, respectively, in aggregate and $391 billion of tangible common equity,” the report said.
The LQI is a broad series of initiatives to overhaul GSE eligibility, underwriting and loan delivery policies to improve loan quality and prevent future mass buybacks. Along with EarlyCheck, the LQI includes plans to require electronic submission and collection of valuation information.
