Mortgage Auld Lang Syne

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TME-DGreenAs we start the new year there’s no disputing we’ve sung our last Auld Lang Syne for at least eleven months. But there’s something about the song that bears thinking about.

First penned by Scottish poet Robert Burns in 1788, it asks, “Should old acquaintance be forgot?” Should we forget the past and the people from our past? Being rhetorical, we don’t have to answer, or do we?

So much of mortgage lending’s future hinges on its history. Sure, most of us would have preferred a clean slate these past few year-ends with the option to simply look forward. But circumstances didn’t allow. However, times have changed and 2014 is different.

Delinquencies and foreclosures are declining. Home prices are slowly rising. The employment picture is improving with all signs pointing to the return to a more normal economy and a steadier and potentially growing purchase money market. Assuming the next twelve months proves this, why look back when we have so much to look forward to? Because some of the answers to future success predate the housing crisis.

Getting borrowers more involved in the mortgage process to the point of enabling them to self-serve online dates back to the turn of the century. The first to finance their homes using the Internet found it a novelty. Today’s borrowers expect it. A recent survey by Accenture reveals sales of mortgages via the Internet increased 75% while sales at branches fell 16%. It’s clear: borrowers meet their mortgages and their lenders in the digital, rather than the physical world.

It is also no secret borrowers are a fickle lot. Long in the habit of changing lenders mid-stream, they do so for at least two reasons. The first is obvious. This is an intensely competitive business where every loan counts. More production is better; going all out for every loan separates winning lenders from all others. Borrowers, for their part, often do not know how to compare one loan from the next. Switching in the middle of the mortgage process, therefore, is often due more to perceived rather than real advantage.

Today’s borrowers are more emboldened than those from the early days of Internet lending. The housing crisis made real estate information ubiquitous. Borrowers, therefore, are savvier than they were and they now have a better idea how to compare loans and lenders. This is partially thanks to technology as well. Consumers increasingly live in the digital world. Always available information makes learning new subjects much easier and comparing options much simpler than it was even 10 years ago.

Fickle and emboldened, those financing homes this year and beyond also have greater expectations than their predecessors. All consumers, regardless of the good or service they are pursuing, want all possible information immediately, available wherever they happen to be on whatever device they have in their pocket, briefcase, backpack or purse.  A home loan is no different. If borrower allegiance were in question prior to 2007, no doubt today’s fickle, emboldened borrower is likely to be even less loyal.

Good to know, but what’s a thriving lender to do? Adapt to borrower behavior and aggressively convert applications to closed loans at much higher than historical rates. How? Transparency throughout the entire mortgage process that provides regular pro-active borrower contact from origination through closing.

Today’s compliance environment, too, has its origins in the housing crisis. On January 10 the industry awakens to lending under the Ability to Repay (ATR) and Qualified Mortgage (QM) Rules. Ability to Repay is the law; compliance is mandatory. Qualified Mortgages are optional. Lenders are free to lend outside the QM Rules. While there are implications to doing so, the reason to consider this move is opportunity.

Mortgage volume is projected to drop by more than $575 billion in 2014. Estimates of the percent of non-Qualified Mortgages being made today range from a low of 25% to as much as 60%. Using the lower-end estimates for the sake of argument, non-QM lending could help offset market contraction. Looked at another way, if the market shrinks by one-third and non-QM loans account for another 25% of market volume, what lender can afford to see its lending activity decrease by 55%? Non-QM lending bears serious consideration.

The Know Before You Owe (KBYO) Rules, too, go way back. When disclosure requirements changed in 2010, the lending community knew additional changes were coming. They arrived on November 21, and while they do not take effect until August 1, 2015, a good deal of work throughout the industry by all players will be required between now and then

Efficiency, and its analog cost-to-originate, is a subject that is as old as mortgage lending itself. It is also very much in the news as all lenders know. Costs have been rising steadily for many reasons since 2007. It is safe to say there’s general agreement that the time to rein efficiency in is now.

Returning to the fundamentals is one of the ways to do so. Successful lenders will cast their mortgage operations in a manufacturing light, building efficiencies by focusing on objective, repeatable processes. Unit-based measures become essential for both management and comparative purposes.

Loans have no concept of their size though the industry tends to focus more on dollar than unit volume. Total production in 2014 will be roughly 5.7 million units, the level at which the market is predicted to settle through 2015. Not only is overall volume lower, more than 60% of these loans will be for the purchase of a home, an almost exact swap with refinance from the year before.

Fewer, harder loans. Purchase transactions are more complex in that they typically involve more parties, often requiring more documentation and taking longer to close, all which conspires to drive down efficiency while increasing costs. Successful lenders, consequently, will diligently measure and track unit-based efficiencies, squeezing every possible improvement from tightly controlled loan manufacturing processes. The one metric to watch: closed loans per employee. The higher it rises, the lower cost to close typically falls.

These concepts are not new. They alone are a very good reminder of why forgetting the past is a poor idea. With last decade’s dawn of Internet lending came a renewed emphasis on measuring performance. This happened partially because it became easier with technology of all kinds spreading throughout the industry. It also happened because, for a brief time, the numbers got very good for those lenders that not only used the technology to its highest and best purposes, but also adapted strategy to take full advantage of their new tools. Then they paid relentless attention to performance, attentions that had to be diverted for obvious reasons. The time is now to study these lessons of the past and put them back into practice.

Technology, the newest of it, had its origins in the early 2000s as well. It is safe to say that in the space of less than 10 years, more tools were thrown at the mortgage lending process than in the previous five or six decades. Just as it’s time to focus on efficiency, it is also time to re-focus on technology. Winning lenders will likely be those who employ single, comprehensive systems that manage the mortgage origination process from application through closing. One system to rule them all – origination, processing, imaging, underwriting, papering, closing, funding and secondary marketing – is likely to drive efficiencies as well as aid compliance. This should reduce the cost-to-close as well; managing one system has its advantages.

Should auld acquaintance be forgot and never brought to mind? In the mortgage industry as in life, it is simply not possible. Simply looking at all the lessons learned from the past and drawing from them to enhance future performance is good enough of a reason to remember. Burns and the folksingers who begat the song knew that, too, though it is good to be reminded at least once a year, as we have, each year since 1788.

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