The Future of Funding

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Alan-HarrisIn the last few years, changes in the real estate finance industry have been fast and furious. Since the Great Recession or meltdown as the period has been affectionately named, guidance from government agencies mandated a ‘New Mortgage Order’. Many of these changes are needed, some are viewed as overkill. While we debate the impact, severity and complexity, at the end of the day, these changes are adding more rigor around our workflow streams and have an adverse impact on loan costs. The Mortgage Bankers Association Quarterly Mortgage Bankers Performance Report, reflected cost on each loan originated was $897 in the fourth quarter of 2014, up from $744 per loan in the third quarter of 2014.

Opportunity knocks. Companies that embrace, innovate and adapt to the New Mortgage Order, will develop new work flows, leverage automation, best practices and stronger operational efficiencies. Likely becoming more successful with both process, people, (be it associates or customers), and management.

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These changes, have positive impacts, the most significant is the wider adoption of ‘e’. ‘e’ has been sitting on the bench for years, carrying the water since 2000, ‘e’ is now on the field and ready to go fourth and long.

We know what benefits ‘e’ brings, they are numerous, verifiable, sustainable, and will redefine the process of mortgage loan origination, from point of sale to securitization. ‘e’ will call into review all the traditional processes and channels currently subscribed to in the industry.

We are already witnessing that impact today with the introduction of ‘e’ closing process. No longer will a lender offering ‘e’ disclosures, be considered innovative or leaders, that all goes away with the implementation of the TILA-RESPA Integrated Disclosure, (TRID) requirements.

What is clear today is that innovators are now looking to the full ‘e’ process and are thinking how can I leverage the necessary process changes to my company’s competitive advantage. The New Mortgage Order is going to require retooling technologies, supply chain vendors and delivery systems to gain higher efficiencies to reduce cost in order to capture the most savings possible. Now the lender can remain profitable, even with spikes in rates, and volumes, given the cost associated with innovation and raising the compliance bar.

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Astute lenders and providers are well on the way of recognizing and deploying solutions to meet the challenge. Leveraging technology to mitigate the cost of compliance and reporting.

This is a good time to revisit funding methodology, specifically Correspondent and Warehouse lending models.

Practices of warehouse and correspondent lending were developed in the eighties and fundamentally have not changed, albeit with the exception of improvements rendered through technology, in 30 years. Simply put:

>> Correspondent lenders have an array of products from different sponsors, and act as an extension for those larger lenders. The correspondent charges a ‘fee’ in terms of basis points on loan amount and will generally receive some amount from the investor for the value of the servicing.

>> Warehouse lenders provide a line of credit to smaller lenders who rely on that credit line to finance their operations.  They pay back the lines when loans are sold, and give a cut to the warehouse lender for each sold loan, based on volume or outstanding balances.

Think about the work stream. The lender originates the loan, runs it through the myriad of fraud, underwriting and compliance engines supplied by the Loan Origination System (LOS) or affiliated providers. Once that is complete, everything is then revalidated by the document providers and then sent to the correspondent. The correspondent then runs the loan through their regime of validation products, (many are the same as the originating lender) ultimately delivering the loan to the investor, In many cases the investor is using the same tools to evaluate risk, fraud and price as a correspondent or warehouse lender. The process exudes redundancy, inefficiency and unnecessary costs. Checking the checker never is a good way to keep cost lower, especially if they all are using the same systems to do the checking. If there is a fundamental flaw in one they are not going to catch it.

In both cases the originating lender incurs cost to deliver the loan to the investor who will service and package the loan for the secondary market. In today’s environment this process is not sustainable. If a lender could deliver loans directly to the end investor how much would cost to originate improve?

What would happen in the New Mortgage Order if the lender was able to send the package directly to investor and eliminate the additional steps, delays and cost associated with the current model? Investor Direct Funding.

When the loan is purchased by the investor on the day of closing, depending on the time of closing the loan; a lender can receive the funds that day. Lenders save money through this direct placement by not having to incur fees or charges put in place by the correspondent or warehouse lender and additional funding delays

How would an ‘Investor Direct’, funding model work?

First the loan has to be ‘e’ from soup to nuts. A full ‘e’ process from origination to funding. The reasons are obvious, delivery will be faster, the documents follow the data, all changes to data is archived for audit purposes and would have considerable less errors or omissions..

Second the data needs to be managed in a standard nonproprietary format. The newest version of MISMO, (v3.3) will map to the Uniform Closing Dataset (UCD), which is required for loan deliveries second quarter 2017. This further integrates the various processes involved with originating a loan.

Third, the model would require a data file from the lender. This data could come from the LOS or the document provider. These files need to be aggregated in order to provide a reliable and efficient delivery process to the investor. The provider of this service would be able to parse out the specific data elements required by the investor for pricing. The delivery could be single loan or bulk transactions. Additionally any required data elements for passing the servicing component on to the investor or servicer would be completed at this point.

A fee would be charged in the aggregation and delivery of these data sets, the model supports a fee based on number of transactions and not loan amount. This allows the lender to manage cost more effectively on a fixed basis as opposed to the variability of basis points.

Last the document and data set needs to be delivered to a secure eVault where all parties involved in the transaction can be authenticated for access. Simultaneously once the loan file is delivered to the eVault the data file would be pushed to the respective investor. The eVault can be ‘owned’ by the lender, the document provider or the investor. Provide the consumer login credentials and the process is complete.

Certainly there will be fallout, this occurs in the existing model, however these loans will be more fully vetted so the repurchase risk is mitigated or possibly eliminated. Further reducing the cost to the lender.

The New Mortgage Order will require obsoleting processes and practices currently based on paper processes and evolving existing work streams to distill out best practices. Embrace and understand the benefits of the ‘Order’, there are efficiencies and cost savings to be reconciled. A full ’e’ process has been recognized by the industry for years and has just sat on the bench. It is time to assess each challenge and opportunity it provides.

About The Author

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Alan Harris is the founder of IRIS Corporation and is a designated Certified Mortgage Banker, (CMB), with 25+ years’ experience in the real estate finance industry. He started in loan origination, servicing operations and system administration. Subsequently moving to Change Management, Process Re-engineering, System Integration and ‘e’ Implementation. Alan has ‘backend’ and/or User Interface ‘hands-on’ experience with the many Loan Origination and leading Servicing systems, managing integration or implementation of those platforms.