In mortgages, fintech is so far only skin deep

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Editor's Note: This feature from the September issue of National Mortgage News magazine is part one of a two-part series. Read part two here. NMN is proud to present the 2017 Digital Mortgage Conference Sept. 28-29 in San Francisco. Click here to read more from our digital mortgage special report.

Lenders and technology developers have made considerable progress improving the customer experience of applying for a mortgage. And after years of regulatory and business uncertainty that's depleted budgets and stifled innovation, momentum for widespread digital mortgages may finally be on their side.

But the slick user interfaces and data integrations that streamline the process of getting a borrower hooked up with a lender are only a first step. The real work lies in improving back-office functions so lenders can make the loan funding process more efficient and reliable. After all, the back office is where costs are sky-high and closing timelines can drag on for weeks.

"There have been a lot of companies that have put a lot of focus on the front-end point of sale system," said Jay Bray, CEO of Nationstar Mortgage Holdings and its recently rebranded lender and servicer, Mr. Cooper. "But I don't know that everything is connected in a seamless way today, where your point of sale talks to your loan origination system, all the way down connected to your servicing system."

Few, if any, of the fintech startups entering the mortgage arena have focused on the work that happens after a loan file reaches the hands of an underwriter, largely because it's the hardest part of the process to address. But it's where the biggest efficiency gains can be made.

"If you're a restaurant and you get a bad Yelp review, you don't just change the tablecloth and fire the hostess who has bad manners when the fundamental problem is the kitchen," said Kyle Kamrooz, co-founder and chief operating officer of the origination software startup Cloudvirga.

While there hasn't been much digital mortgage love for the mortgage back office, the lenders and vendors that crack this code will have a competitive advantage over their peers as the first wave of digital mortgage technology becomes table stakes.

'The factory is broken'

Mortgage lenders like to think of their businesses as factories, with the LOS playing the part of assembly line in the origination process. But unlike manufacturing plants that efficiently produce cars, electronics and other physical goods, mortgage production lines are often plagued by disjointed layers of workflow that result in costly redundancies and delays.

Production costs soared to nearly $9,000 per loan during the first quarter of 2017, a record high and the result of higher costs and lower volume, according to the Mortgage Bankers Association.

"The factory's broken. People know that. But I don't know that anybody knows how to solve that problem," said Michael Schreck, a former Altisource executive and the new CEO of Cloudvirga. "They just accept it and costs rise every year and we blame it on regulation as if that's the only answer."

Cloudvirga's point of sale system was borne out of internal technology development efforts at Skyline Home Loans, a nonbank lender that originates in 25 states and is headquartered in Calabasas, Calif. But the lenders willing to dedicate the necessary resources to develop in-house systems or overhaul their technology stacks with vendor platforms are an exception to general industry trends.

"A lot of mortgage banking companies are not willing to invest the hard dollars necessary to build a system like this," said Mark Greco, CEO of 360 Mortgage Group in Austin, Texas, which recently launched its own homegrown point of sale system, called NOLO, which stands for No Originating Loan Officer.

And until recently, stereotypical Silicon Valley disrupters have largely ignored the mortgage industry.

"If you're an entrepreneur, if you're 25, 26 years old, you want to build a social media thing or a consumer software business because there's just a natural inclination to work on problems that you know and understand," said Nima Ghamsari, co-founder and CEO of Blend, a San Francisco-based online point of sale system developer that's raised more than $60 million from investors since its founding in 2012.

That's changing now, as the mortgage industry finally appears ready to embrace consumer self-service applications and a more data-driven approach to originating loans. But the newfound excitement surrounding digital processes on the front end of the origination process can lead to a lack of focus on the big picture.

"Most lenders need to assess a product plan before they execute a vendor plan. We're finding that a lot of customers don't have a strategy. They don't have a, 'Here's where I need to be in five years and what are all the moving parts that I need to solve,' " Lionel Urban, CEO of PCLender, said in an interview before the LOS vendor's recent acquisition by Fiserv. "They've picked a point of sale, but how does that impact … the whole plan?"

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Digital mortgages Consumer direct Underwriting Mortgage technology LOS Data and information management Nationstar Blend Cloudvirga 360 Mortgage Group Fiserv Digital Mortgage Conference