“Fad Power” And The Rise Of The Digital Mortgage


TME-DGreenMany things we take for granted every day began as a fad. Take eight-track tapes (yes, my car had one). Eight-track players made personal music collections portable, or, at least, automobile-portable, for the first time. With a player in your car — which was a big deal at the time — you were no longer limited to the farm report on AM radio. Naysayers viewed eight tracks as a fad, thinking of them as yet another short-term novelty no one really needed. They were partially right. Eight-tracks were a fad, but portable music was not. Many music-related technologies have come and gone since the 1960s, yet listening wherever and whenever is ubiquitous.

Internet mortgage lending was seen as a fad, too, when it first appeared in 2000. Pioneering lenders jumped into this fad, giving borrowers the keys to the origination process in the form of internet portals that let them (gasp!) originate their own loans. Self-originated mortgages rapidly evolved past the fad stage as the most avant-garde lenders plied the web frontier. At first, applying online was a novelty. Then it became a convenience. Soon borrowers came to expect it. A process that had previously been tethered to a lender’s office was now available anytime and anywhere. Mortgage loans, like music, became portable.

Using the Internet for loan origination had its naysayers. Low borrower acceptance, even lower borrower knowledge, poor loan quality, increased fraud and data security were all common reasons to avoid it. Supporters claimed the opposite. Some early internet lenders experienced remarkable borrower acceptance, with more than 50% of their loan applications arriving via portal. Self-originated loan quality turned out to be every bit as high as the lender-originated variety. From fad to phenomenon, the Internet and mortgage lending became what we now call “a thing”.

The internet did more than make mortgage lending portable. While self-origination blossomed, mortgage technologists began work on the industry’s thorniest problem. The fact is that  manufacturing loans is like producing honey: no one wants to go through the sometimes painful process, but everyone wants to enjoy the results. Moving a loan from application to closing consumed hours of time, chewed through reams of paper, used gallons of white-out, involved losing the same documents multiple times, was not always objective, and generally inflicted maximum stress on all involved.

Web portal self-origination led to what also looked like another mortgage technology fad: Software as a Service (SaaS). Mortgage technology, like other tech-based functions, had always been installed in-house and deployed and managed client-server style. The SaaS approach was initially troublesome to many for some of the same reasons as was internet origination. Having the equipment and the software in-house equaled control. Having it in the “cloud” – a term not then in use – created uncertainty.

The benefits of SaaS soon became obvious. Because they were in the cloud, these systems, for the first time, became available on an anywhere/anytime basis. They became portable, just like the online application process that fostered this new technology. Homebuyers, who typically shop on weekends, were now able to apply for loans on weekends, turning on their computers and firing up their modems after being inspired by Sunday’s round of open house visits. Before SaaS-based loan origination systems, lenders would have to wait until they got to the office on Monday to view the weekend’s new loans. For the first time, lenders could watch them as they came into the pipeline.

Cloud-delivered mortgage technology brought other benefits as well. In-house IT costs decreased as infrastructures became smaller. New software versions came out regularly and were installed as soon as they were available. This quickly became a welcome feature that helped deal with the mortgage industry’s constant state of change.

With origination firmly ensconced on the web, lenders and technology providers turned to the next question: Why not combine the three to five disparate client-server lending systems into one complete, comprehensive web-based system? As was the case with Internet applications and SaaS, cloud-based platforms that were able to originate, process, underwrite, close, and fund mortgages while also including document preparation and imaging may have seemed like the next fad. Again, however, early adopters saw real efficiency gains that resulted in lower origination costs and higher profitability.

Here, too, trailblazing lenders eager to abandon paper-based processing envisioned the benefits. For the first time, all loan data was available in one place in real-time, and was accurate, as well. There was no more wasting time determining which system held the most recent loan information. Data integrity was no longer an issue.

Self-originating borrowers also benefitted. The end of the line for them in the early days was receiving their loan approval and disclosures immediately upon completing their application. While this was a huge move forward, borrowers were used to waiting more than 30 days for a loan approval before the dawn of online lending. They wanted greater portability and a faster response. Lenders taking the one-system approach, however, were now able to take the experience further for their online borrower. Regular status updates — along with flood, title and appraisal reports — became both simple and possible. These lenders were readily able to fulfill the requirement to present the borrower with their appraisal within three days of its completion.

The benefits of SaaS-based mortgage lending technologies continued to accrue as this new approach took hold. The most intrepid lenders in this groundbreaking group used the technology to create completely paperless, fully-electronic manufacturing operations. Accumulating additional savings was the original driving force. While these savings were realized, this step also paved the way for electronic closing, electronic signing and electronic delivery. Electronic closing and electronic signing further enhanced the borrower experience. Borrowers received their closing documents early, which put these lenders in position to comply more easily Know Before You Owe’s (KBYO) August 1, 2015 RESPA-TILA regulation.

This leads to compliance, yet another benefit of SaaS-based mortgage technologies. Using technology for compliance purposes may have seemed like a fad in the early 2000s, before the housing crisis. The housing crisis and global recession led to many changes in all financial services, but in the retail sector, nowhere more than in mortgage lending. 2010’s RESPA reform made technology’s role in lending compliance abundantly clear. New disclosure forms, along with the introduction of new fee classifications (each with different tolerance sets) were clear indications that doing business the traditional disparate system/client-server way would no longer work.

If RESPA reform 2010 was an indicator of the need for integrated technology, Dodd-Frank spelled out that need clearly. The Qualified Mortgage and Ability to Repay Rules (QM/ATR) added complexity to what was already a complex business. While compliance with the QM Rules was optional, the rules offered lenders a heretofore unavailable safe harbor. Taking advantage of this protection required the ability to quickly and consistently test each loan throughout the origination cycle to determine QM versus non-QM status. This was easy with the right tools, but time-consuming and challenging without them.

Compliance with the Ability to Repay rules was not optional. Here, too, the right tools in the form of a comprehensive platform populated with reliable data made compliance relatively easy. Those lenders who had the right tools at the time the rules took effect were better prepared, and made the transition more easily, than those that did not.

QM/ATR and RESPA 2010 were both warm-ups for KBYO’s RESPA-TILA chapter. Widely accepted as the single largest change in mortgage lending history, this represents much more than simply swapping three legacy forms for two new disclosures. The closing disclosure, which replaces the HUD-1, is a big change in itself. An even bigger change is the requirement that it must be delivered three days before closing. Mortgage lending is one of the original just-in-time manufacturers, with closing documents often not appearing until parties gather at the closing table. As of August 1, this is no longer permissible. This is not only a major compliance change but a significant process change as well.

There’s plenty of incentive to get RESPA-TILA right, as the penalties for non-compliance are significant. All of RESPA-TILA moves under Regulation Z which imposes greater liability than when it resided under RESPA and Regulation X.

Those lenders who jumped on what we might now call the mortgage technology SaaS fads of the early 2000s have a competitive advantage moving into 2015. Setting RESPA-TILA – the big issue of the year – aside, there is an entirely new group of borrowers who will burst on the scene at any moment. With the economy improving and rates low, the millennial generation is now forming households and buying homes. Unlike the generation who bravely used the Internet a decade and half ago to originate their own loans, millennials cannot imagine it any other way. They expect to originate their own loans. They expect the portals they use to be information-rich on the subject of mortgage finance. They plan to use that same portal for regular updates throughout their loan’s assembly. They are also expecting to sign electronically — optimally via their phone or tablet — the same way they pay for lattes and espresso at their favorite coffee shops.

Eight-track tape player technology made music portable in the 1960s. In the 1990s, technology took a major leap forward, taking music digital. Since the 2000s, the internet has revolutionized technology as a whole, making both music and mortgage origination (among many other technologies) portable. Along with digital music, we are now on the verge of the true digital mortgage, proving that one should never underestimate the power of fads.

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