Last month I talked about embracing change and why we are so uncomfortable with change. We like to stay in our comfort zone. We are slow to adapt, but once we understand the proposed change and recognize the benefits, we can’t change fast enough. Let’s look at an example outside the mortgage industry.
Traffic circles have been part of the transportation system in the United States since 1905, when the Columbus Circle designed by William Phelps Eno opened in New York City. Subsequently, many large circles or rotaries were built in the United States. The prevailing designs enabled high-speed merging and weaving of vehicles. Priority was given to entering vehicles, facilitating high-speed entries. High crash experiences and congestion in the circles led to rotaries falling out of favor in America after the mid-1950’s.
The modern roundabout was developed in the United Kingdom to rectify problems associated with these traffic circles. In 1966, the United Kingdom adopted a mandatory “give-way” rule at all circular intersection, which required entering traffic to give way, or yield, to circulating traffic. This rule prevented circular intersections from locking up, by not allowing vehicles to enter the intersection until there were sufficient gaps in circulating traffic. In addition, smaller circular intersections were proposed that required adequate horizontal curvature of vehicle paths to achieve slower entry and circulating speeds. These changes improved the safety characteristics of the circular intersections by reducing the number and severity of collisions. Thus, the resultant modern roundabout is significantly different from the older style traffic circle both in how it operates and in how it is designed.
In the United States modern roundabouts emerged in the 1990s. They faced some opposition from a population mostly unaccustomed to them. Americans were confused about how to enter and especially how to exit a roundabout. By 2011, however, some 3,000 roundabouts had been established, with that number growing steadily. Surveys show that negative public opinion reverses as drivers gain experience with them. A 1998 survey of municipalities found public opinion to be 68% opposed prior to construction; changing thereafter to 73% in favor.
The fundamental principle of modern roundabouts is that entering drivers give way to traffic within the roundabout without the use of traffic signals. Traffic circles typically require circling drivers to give way to entering traffic. Generally, exiting directly from the inner lane of a multi-lane roundabout is permitted, given that the intersecting road has as many lanes as the roundabout. By contrast, exiting from the inner lane of a traffic circle is usually not permitted without first merging to the circles outside lane. Roundabouts have been proven to safely decrease traffic delays and congestion. When selected and designed correctly, roundabouts can handle a high volume of traffic, including commercial trucks and large emergency vehicles. The single greatest benefit of roundabouts is that they eliminate perpendicular/T-bone crashes. Roundabouts can cost less than traditional signalized intersections.
So, how does this relate to the mortgage industry? Let’s start by looking at a condensed view of the current loan process. It typically has been a sequential process with the next step not started until the previous step is completed. Look at it this way:
- Origination: After the loan application, we start the process of validating the information, ordering the services, such as appraisal, flood, credit report, and underwriting. We produce the appropriate disclosures and the new loan estimate. Assuming the loan is valid and approved, we move to the next step.
- Closing: We produce the appropriate legal documents, such as the note, security instrument and the new closing disclosure in collaboration with the settlement agent. We schedule the signing ceremony with the consumer(s).
- Post-closing: We record the security instrument at the county, register the note at MERS (assuming it’s an e-mortgage). Lastly, we sell the loan on the secondary market, if it is not retained in-house.
- Servicing: Set up the loan for servicing, either in-house or to an outside servicer.
I realize this is a very simplified rendition, but what stands out is the interactions between the consumer, lender, loan officer, numerous service providers, closing agents, investors, county recorders, servicing, etc. and the documents and/or data that is exchanged.
So let’s use our creativity. Imagine the loan process as a roundabout. The center could be the repository and system of record. The parties in the process would be represented as lanes connecting to the center. The road in would be the request and the road back would be the response. The lanes around the center would serve as the link between the parties.
This is very IMPORTANT. This architecture is predicated on the full use and compliance with the MISMO V3.x standards for data and documents. The data is essential for the receiving party to electronically analyze, validate and make decisions based on the result. Documents by themselves may require some manual intervention. The ultimate goal is when the data and documents are combined (SMART documents). Let’s look at the contributing parties and what might be different with this architecture.
- Consumer: Today’s consumer wants to do business online. They want the capability to research and understand the mortgage process. They want to analyze and compare the metrics of different loan options. The robustness of the lender’s offering will either ensure a loyal customer or lose him to a competitor.
- Lender: As more of the processing functions (appraisals, verifications, etc.) are automated, the lender should see a significant reduction in the time and effort to approve a loan application.
- Service Provider: The advantage of the request/response model based on the MISMO standard is that you can access multiple vendors with the same integration.
- Settlement Agent: This will be one of the most challenging areas for collaboration between the lender and settlement agent. It is imperative that they get it right.
- County Recorder: The volume of eRecordings and eNotarizations will continue to grow. 20% of the counties account for 80% of the transactions. The challenge is with the other 80% of counties. A paper process will probably be in effect for some time.
- MERS: The adoption of the earlier MISMO V1 Smart Doc has been slow due to the unique characteristics of the document compared to the other documents in the loan package. Hopefully, MERS and the GSE’s acceptance of MISMO V3 documents will improve adoption considerably.
- Servicer: They have struggled in the past with re-finances. Having a complete loan package available and a connection back to the origination process will improve that process.
- Secondary Market: The investors are anxiously awaiting the ability to get a data-laden loan package so they can independently analyze the loan before making a purchase commitment.
I did not address the LOS vendors in this scenario, but it’s conceivable the same process could be accomplished in their solutions. See what I mean? I bet you never thought to compare our business to traffic. My point in writing this is that we have to all think differently about this process if we are ever going to improve it.
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