A Message For The CFPPB

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TME-PHhallBack in February, Steve Antonakes, the deputy director of the Consumer Financial Protection Bureau (CFPB), shocked the attendees at a mortgage servicing trade conference with a speech that painted servicers as being hostile to the needs of distressed homeowners and detrimental to the recovery of the housing market.

“I remain deeply disappointed by the lack of progress the mortgage servicing industry has made,” said the CFPB’s second banana to the surprised servicers in his audience. “We mean to end a failed process in which too many struggling homeowners have been kept in the dark about where they stand. American consumers deserve better; they are entitled to be treated with respect, dignity, and fairness.”

Well, guess what? American consumers that work with mortgage servicers are being “treated with respect, dignity, and fairness.” And how do I know this? Well, the CFPB itself confirmed this in its Consumer Response Annual Report, which was released last week.

Of course, the CFPB tried to spin this report into yet another example of its tiresome squawking of how the big, bad mortgage industry is doing running amok over the lives of homeowners. The bureau highlighted that 37% of the 163,700 complaints it received last year were related to mortgage issues, mostly on the servicing side. Of course, the fact that nearly two-thirds of the complaints received by the CFPB were not related to housing would seem to confirm that the agency is spending most of its time chasing mischief makers in non-housing industries.

Even more intriguing is that the approximately 59,000 complaints leveled against mortgage companies detail a very different picture than Antonakes’ bloviating over the “lack of progress the mortgage servicing industry has made.”

The CFPB found that 85% of the complaints it received last year were related to servicing issues – modifications, collections, escrow accounts. However, 77% of the complaints received by the CFPB regarding mortgage companies turned out to be without merit, and were closed with the consumer receiving a mere explanation of what was puzzling them. Only 2% of the total mortgage-related complaints resulted with monetary compensation for the consumer.

If that’s not enough, the CFPB received 31,000 debt collection complaints last year. Credit card loans made up 14% of the complaints, medical loans took up 8%, and payday loans were the source of 6%. Mortgage loan collections, in comparison, were a mere 2% – not exactly the epidemic of reckless behavior that Antonakes insisted in his February speech. Oddly enough, we don’t know what the majority of debt collections were for 2013: the CFPB claimed 39% of complaints fell into the “Other” category while 25% were in the “I Do Not Know” category. Wow, one-quarter of debt collection complaints were from people who had no idea what they were complaining about!

Despite the data that seemed to exonerate servicers, Antonakes has yet to admit that his sneers and jeers were unjustified. Even more disgusting is the possibility that Antonakes knew he was blowing smoke when he made that speech two months ago.

“Our nation’s mortgage servicers manage a debt portfolio of nearly $10 trillion for millions of American homeowners,” he said at the servicing conferencing, adding that the performance by mortgage servicers in charge of that portfolio represented a state of “continued sloppiness is difficult to comprehend and not acceptable.”

Unacceptable behavior that cannot be comprehended? Oh? This is coming from the number two person at a federal regulatory agency that refuses to make its meetings open to the public that finances its operations? This is coming from the second-in-command at an agency where the top executives (including Antonakes) absorb annual salaries that are higher than the annual salaries paid to Vice President Joe Biden and Supreme Court Chief Justice John Roberts?

The mortgage banking industry is being lectured on respect and dignity by the deputy director of an agency that has been charged by its own employees with racism within its personnel processes – and which refuses to explain these actions when called to testify before a hearing of the House of Representatives? And the mortgage world is being badgered on responsible behavior by the number two guy at an agency that hired the architects behind Dubai’s uber-luxurious Burj Khalifa skyscraper to redesign its headquarters?

The mortgage servicing industry was not responsible for the housing crisis that created the 2008 crash. And the men and women in the servicing world have worked long and hard to help people stay in their homes – since 2007, 6.5 million people have received loan modifications from the mortgage servicers that Antonakes badmouthed in his vile speech.

My advice to Antonakes is brief but blunt: shut up.

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The Future Of Innovation

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Over 100 mortgage executives came together to attend PROGRESS in Lending Association’s Fourth Annual Innovations Awards Event. We named the top six innovations of the past twelve months. After that event, we wondered what would happen if we brought together executives from each winning company to talk about mortgage technology innovation. Where do they see the state of innovation? And what innovation is it going to take to get our industry really going again? To get these and other questions answered, we got the winning group together. In the end, here’s what they said:

Q: Some say innovation has to be sweeping change. Others say innovation can be incremental change. How would you define innovation?

ADAM CAMPBELL: I think innovation can be either incremental or sweeping change, but I think it must result in a benefit that’s shared across an entire industry. Proprietary technology that doesn’t integrate with other software or that isn’t shared across the industry with open APIs and modern methodologies isn’t truly innovative in my opinion. Innovation has to contribute to our industry’s overall foundation of progress.

JAY COOMES:I would define innovation in the context of the value or significance of the impact its makes to those beneficiaries of the innovation, rather than the magnitude of the change.

KATHLEEN MANTYCH:While sweeping change may be the ultimate result of innovation, it is incremental change that helps maintain or improve a competitive position over time. The need for continual improvement on products with new features, adding new products and services as necessary and process improvement on service levels is critical, particularly in this chaotic climate. Creating and deploying incremental, breakthrough strategies via a well-executed plan for new customer growth and customer retention will create winning strategies, capture new growth opportunities and build lasting capability.

PAUL IMURA: My definition of innovation is not accepting the current status quo, finding a way to improve your process and opting to advance by taking risks. Innovation can be leveraged for success and is a critical component for the industry to thrive, survive and ultimately succeed. Innovation will be key to transforming the mortgage industry.

BRENT CHANDLER: If efficiency is improved, if a need is being met that was not met before, if a challenge has been overcome that seemed insurmountable at first—these are all signs of innovation. What you would call sweeping change is simply the resolution of an issue large enough to effect a lot of people. For example, a new challenge in the mortgage industry is meeting QM guidelines. Higher QC is being demanded, and more time has to be spent on each loan file. Lenders that don’t adopt a better way to process loans risk significant lost opportunities. Sometimes change is forced upon us, but everyone has a choice in how they respond. Do you innovate to succeed, or stick to what is familiar and hope it all works out?

SANDY NIETLING:Innovation starts with a step back from the traditional development or operational path. The traditional path is usually one of refinement: taking existing assumptions about a problem and user needs and building onto product concepts that are already in place. This type of refinement can make it possible for lenders to hold onto their spot, but it doesn’t move them forward, and it doesn’t position them to adapt easily to sudden or significant change. Innovation depends on a reassessment of the problems faced by mortgage lenders. Innovation creates a new perspective, and with it, new value and new opportunities for growth.

Q: How would you define the state of innovation in the mortgage industry? Is it thriving or in a state of decay?

ADAM CAMPBELL:I see examples of both thriving innovation, and decaying old methods still being used. There are many companies who seek to build upon the overall industry’s technology and those are the companies that will win out in the end. Old school technology companies that try to horde ideas or don’t play well with others will eventually be squeezed out.

JAY COOMES:I think it had been somewhat stagnant, but with the rebounding of the market and the continued regulatory pressure, this incentivizes innovation as an outcome of meeting the needs and demands of the current environment. As such, we are beginning to see a resurgence of innovation in the industry.

PAUL IMURA: Our industry is in a state of resetting against the new rules of the mortgage market, which includes cost constraints and regulatory requirements against a smaller origination market. Mortgage technology innovation is thriving because of the market opportunity for improvement and growth. In today’s market, there is an abundance of opportunities for process improvement that will drive a better consumer experience. For now, a significant focus on the compliance product development is a result of the newly mandated CFPB regulations.

KATHLEEN MANTYCH:In light of all the regulatory changes, there have been some outstanding and pioneering breakthrough technological advances to weather the storm and indeed, pave the way for continued automation and deliver true mortgage transformation yet to come. That said, the key word is transformation and an evolving need that drives the mortgage industry forward despite the current volatile market. This means the industry as a whole needs to start thinking outside the box for future technology innovation and advancements, which will propel long-term results. Emphasis on the fact that the reactionary must change to be proactive when it comes to the process of technology innovation advancement.

SANDY NIETLING:The term “innovation” is getting more airplay these days from technology providers, which is a direct reflection of momentum building in the industry itself to consider new thinking to address the mounting challenges lenders face. While it sometimes takes time for game-changing solutions to be readily recognized as such, real innovation is well underway.

BRENT CHANDLER: I definitely don’t think innovation in our industry is in a state of decay. The economic crisis was a wake-up call, and I doubt anyone out there thinks the way loans were handled before the crisis was ideal. This has led to an exhaustive review of the entire financial system, which has opened the door for innovation.

The mortgage industry is in a state of rebuilding, and there are a lot of smart entrepreneurs working on solutions to big problems. But change takes time. The larger and more regulated an industry is—and the more complex the regulatory frameworks are—the harder it is for innovations to receive acceptance. Innovation is happening, albeit slowly. Adopting new innovations requires thoughtful integration into existing workflows that must meet stringent guidelines, and sometimes that takes a mandate or government approval.

I remain encouraged. I believe we are breaking into in a new era for the mortgage industry. We are beginning to see the adoption of new innovations take place, which will form the foundation of a safer, more efficient industry for many years to come.

Q: Lastly, if there was one innovation that you would say the mortgage industry desperately needs to happen over the next twelve months, what would it be?

PAUL IMURA: One of the biggest gaps in our industry is the availability of a single data repository for origination and servicing. This innovation would increase overall efficiency by mending investor confidence, delivering life of loan transparency, reporting industry loan data trends and optimizing efficiencies. Developing a single repository will create a sense of transparency and support the industry as a whole, as well as control costs, increase productivity and increase accuracy.

JAY COOMES:Re-evaluating the life-of-loan methods of communication that we have with the borrower is critical. We are behind the times with respect to managing that conversation using mechanisms that are borrower centric and not lender centric.

ADAM CAMPBELL:There are so many excellent solutions out there, offered by a wide variety of companies. But to really make a difference in an operation, those technologies have to work together. I think the most critical innovations over the next 12 months must include a focus on open standards development so lenders can layer the options that are best for them on top of the systems they’re already using. After all, it doesn’t matter how great a new tool is if it can’t be integrated with the workflow systems in your office. That’s where the real impacts of innovation can be put to a real world test.

KATHLEEN MANTYCH:Now is the time for the industry at large to reassess their systems and products to find new ways to improve the loan life cycle from an automation standpoint and the overall customer experience by creating products for the new mortgage market environment. Very few integrate technological change in their strategic or tactical planning. That said, from a tactical standpoint, the industry needs to focus on how it can streamline all pertinent and relevant loan data to a data centric environment where true data lives throughout the loan life cycle from point of sale to post close and remain intact all the way through. This will effectively deliver not just the necessary elements for accurate, efficient and simplified automation, but will enhance the customer/consumer experience by eliminating any associated risk of inaccuracy during and after the loan cycle.

SANDY NIETLING:The next big innovations will come in response to the regulatory forces that are being applied to lenders. In order to address ongoing regulatory challenges from a position of strength, lenders can no longer rely on technology that focuses on a narrow understanding of their needs. Lenders will demand solutions-based technology and partner relationships that manage transaction risk. Innovations that address those needs will propel the mortgage industry forward.

BRENT CHANDLER: We need sweeping adoption of tools that provide access to direct source data. Technology opens gateways to new sources of information in ways that enhance the consumer experience, improve the quality of data, streamline workflows, and of course save time and money. Technology and automation contain the keys to transform our industry, for individuals and businesses alike.

The CFPB’s Next Target

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rsz_screen_shot_2014-05-15_at_110004_amIn my last column I talked about how apathy enables cyber crimes. Cyber crimes are now larger than all property crimes combined. Unfortunately this apathy leads most lenders and service providers in the mortgage industry to still believe that cyber crime might hit Target and other well know retailers but not the mortgage industry. Well, I hope these recent events may change your thinking.

Last week Ellie Mae confirmed that its recent outages, which have forced lenders to delay loan closings, resulted from a flood of service requests “characteristic of a distributed denial of service” attack.

As reported in National Mortgage News, “loan closings delayed by the attack have forced lenders to pay for rate lock extensions and hedging losses. Home closings funded by purchase mortgages have been delayed, presumably inconveniencing consumers who need to move.”

So, do you still believe that cyber criminals are not going to hit the mortgage industry? In addition to this latest attack, “The U.S. Securities and Exchange Commission is examining the exposure of stock exchanges, brokerages and other Wall Street firms to cyber attacks that have been called a threat to financial stability,” according to a Bloomberg News report published on March 26, 2014.

The article went on to say that “The SEC and the Financial Industry Regulatory Authority, which oversees broker-dealers, identified cybersecurity as a priority for compliance examinations. Criminal hacking cost financial services companies, on average, about $18.8 million in 2013, according to a study by the Ponemon Institute, a research and consulting firm. The report estimated an average cost for brokerages of $19 million and $21.9 million for investment advisers.”

“Hackers targeting broker-dealers may seek intellectual property such as trading algorithms or the source code of trading systems,” said Richard Bejtlich, chief security strategist at FireEye Inc., a Milipitas, California-based information-security consultant. “Manipulation of critical data systems probably poses the greatest risk to Wall Street companies whose buy-and-sell decisions and order routing are increasingly automated. Under a rule proposed last year, exchanges would be required to promptly disclose to their broker-dealer members any breaches of critical systems. ”

Given the Ellie Mae situation and the potential threat of more attacks to come to the mortgage industry, isn’t it just a matter of time before the CFPB follows the SEC and FINRA in identifying cyber security as a priority for compliance examinations? The bottom line is that no longer can the mortgage industry allow apathy to enable cyber crimes. The time to act is now before the regulators force your hand.

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Tracking Down Big Data

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According to IBM, to gain the competitive advantage that big data holds, you need to infuse analytics everywhere, make speed a differentiator, and exploit value in all types of data. This requires an infrastructure that can manage and process exploding volumes of structured and unstructured data—in motion as well as at rest—and protect data privacy and security. Big data technology must support search, development, governance and analytics services for all data types—from transaction and application data to machine and sensor data to social, image and geospatial data, and more.

Your infrastructure must capitalize on real-time information flowing through your organization. It must be optimized for analytics to respond dynamically—with automated business processes, better agility and improved economics—to the increasing demands of big data. To protect your reputation and brand, your platform must comprise stringent policies and practices around privacy and data protection, safeguarding all of the data and insights on which your business relies. The right platform instills trust, so you can act with confidence. It controls how information is created, shared, cleansed, consolidated, protected, maintained, retired and integrated within your enterprise.

To achieve economies and efficiencies, you must run certain analytics close to the data, while it is in motion. But for data you elect to store, your infrastructure must embody a defensible disposal strategy that reduces the run rate of storage, legal expense and risk. As you infuse analytics into your organization, data security becomes more central to your competitive advantage profile. Your infrastructure must have strong security measures built in to guard your organization against internal and external threats. To relieve the pressure that big data is placing on your IT infrastructure, you can host big data and analytics solutions on the cloud. Achieve the scalability, flexibility, expandability and economics that will provide competitive advantage into the future.

Do you know where to find the Big Data in your organization? The following infographic by Kapow can help you locate and identify the various types of Big Data in your organization.

Common categories of pools of data are archives, documents, media, business apps, social media, public Web, data storage, machine log data, and sensor data. The infographic also lists various data sources or types that make up those categories.

For example, archives might consist of scanned documents, statements, insurance forms, medical records, customer correspondence, paper archives, and “print stream files that contain original systems of record between organizations and their customers,” states Kapow.

To find out more about the various kinds of Big Data that might be available to your organization, check out the following infographic:

variety-of-big-data-sources-kapow-software-infographic

Walt Disney And Your Business

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TME-MHammondWhat kid doesn’t know of Mickey Mouse? What kid doesn’t love going to Disney World? Walt Disney has created so many good family memories for all of us, but we can learn even more from him. In the article “5 Magical Tips Walt Disney Can Teach Entrepreneurs About Marketing” by Adam Toren, I found out just how Disney can improve your ability to effectively market your company.

Think about it, while Disney recently made headlines with Frozentaking home the Oscar for best animated feature (a first for the 91-year-old Disney Animation Studios), the legacy left behind by Walt Disney goes far beyond the face value of his films, parks and stories. One of the things Disney was so great at was the art of marketing. His story is one of a true entrepreneur, a rags to riches tale, that lives on to inspire the generations of entrepreneurs and his own employees who have come after him. From creating the first full-length feature-animated film Snow White to inventing the multi-plane camera that helped him achieve his early film success, Disney had a brilliant mind.

Here are five of Disneyland’s best marketing tricks that every entrepreneur should study and apply to their own business.

1. It’s all about perspective. Take a close look at Sleeping Beauty’s castle and you’ll start to realize that something a little strange is going on. Disney and his team used the concept of forced perspective to design the entire park to look bigger, including the castle. How did he do this? Just like a painting, you can adjust the size of things to make them appear closer or further away. Disney and his team carried this forced perspective throughout the park. For instance, they alternated the sizing of trees and boulders on the Matterhorn, so the mountain appears bigger and in the brickwork of Sleeping Beauty’s castle. For entrepreneurs, keep in mind it is all about perception. How can you use forced perspective to convey a bigger, more impressive image to the world? You need to be a master at telling your story and putting it into a larger context. For example, talk about why your loan origination system is different.

2. Every detail counts.The next time you take a stroll down Main Street, notice the venting systems along the path by the candy shops. These machines pump out very delicate scents to help set the mood for the season. They’re reported to be vanilla candy goodness all year, except at the holidays when scents of cinnamon fill the air. For your business, remember the small details matter. Are you putting that much attention to detail in every aspect of your business? Customers are constantly looking for companies to go above and beyond to meet their needs. Everything from handwritten cards to follow-up phone calls or a top-notch return policy can make all the difference.

What does this mean for you? Don’t rely on the latest buzzword to sell your product. You need to sell your product by accurately describing everything it does, and more importantly, how all of those details better the lender’s business.

3. Accessibility with a touch of exclusivity. Disney created Disneyland for the people. He wanted guests to have an incredible experience that fostered the joyful and loving feelings he had for his hometown. However, even Disney knew that no matter how accessible the park was there should still be a slight air of exclusivity. That’s why he created Club 33, the private speakeasy hidden in the New Orleans section of the park. Not only do you have to be a member to get a reservation here but the club requires that you pay significant dues (around $25,000 for initiation plus an annual $10,000 fee) coupled with incredible wait list times to join (averaging 10 years), makes this place a hot spot.

This strategy can help with entrepreneurs from all backgrounds. Think about offering your best customers a VIP treatment or community, offering them perks and incentives for being loyal to your company. Not only is it a way to say thank you, but it creates an exclusive club people want to join. If the value and allure is there, the people will be willing to pay for it. Not every mortgage technology company or product is created equal. Some lenders want an out-of-the-box solution for example, but find that when it’s implemented they need more. So, offer them more, but for a premium.

4. Fan engagement.Getting fans to interact with brands is one of the most talked about strategies in marketing today. With all the buzz of social media, how do you really get your customers and more importantly, potential customers, active in what you’re doing?

Take a tip from Disney and start an organic buzz that makes the best “unkept” secret around. For years Disney fans have made the journey to Disneyland to enjoy the park, but there is also a subset of rabid fans who go back to the park for another “hidden” reason. All over Disneyland, the Disney team has planted “hidden Mickeys” throughout the park and for decades Disney fans have been going back to try to discover and share all the hidden Mickeys in the park.

How can you start a buzz and seed a movement for fans trying to discover your brand? Think about why your approach to Dodd-Frank compliance is better, for example. What are you doing that’s different that other companies aren’t when it comes to ensuring that lenders are fully compliant?

5. Lessons in outsourcing.How appealing would Disneyland be if you were standing in a line to ride the Matterhorn and a cockroach scurried past your foot? What if you were in the dark tunnels of the Indiana Jones ride when a mouse suddenly squeaked and ran over your toes? Not only would this totally gross out park goers, but it could cause a panic that is potentially dangerous and would most definitely damage the company’s reputation. On the flip side, spraying down the park with heavy-duty pesticides doesn’t really seem like an appealing option. Disney understood this conundrum.

Disney outsourced this dirty problem by having local felines roam the park at night and take care of the mice and bugs. That tradition continues today along with other creative pest control ideas like releasing ladybugs at night.

Perhaps outsourcing could solve a common problem you’re facing and provide work for someone else better suited to handle your issue? Look at all the unique and unusual solutions in your set of resources. From a marketing standpoint, this can be getting help pertaining to your campaign, social media strategy or how to approach publicity.

Is Disney going to solve all of your problems? Of course not, but learning from someone who built a successful empire out of nothing can be very telling. We should all take every opportunity to learn from others that we can.

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Lenders Need To Know: Know Before You Owe

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rsz_john-levonickFifteen months from now three documents at the very core of the mortgage process are being supplanted by two completely new documents. Mandated by Dodd-Frank and designed by the Consumer Finance Protection Bureau (CFPB), these two seemingly innocuous disclosures bring monumental changes to every corner of the mortgage process as well as every participant.

Think August 1, 2015 is far in the future? Think again. To be fully prepared for Know Before You Owe, the time to start is now.

Lessons Learned

The mortgage industry is no stranger to compliance-driven changes to lending processes. The Qualified Mortgage/Ability to Repay (QM/ATR) Rules (Rules) are now five months old. While tangentially related to Know Before You Owe (KBYO) through Dodd-Frank, the lessons the industry learned in implementing QM/ATR are instructive.

First, we found out that time was not on our side. QM/ATR changed the way lenders approach lending from the perspective of borrower eligibility as well as investor acceptability. Resolving this alone took months of individual policy debate.

Another equally important lesson was the challenge of implementing the tests necessary to determine classification and eligibility. A third lesson was the need for staff training and borrower education. And, fourth, the implementation of QM/ATR underscored the need for technology to unify compliance initiatives. There is simply too much at stake, given the complexity of the Rules and Know Before You Owe, to rely on subjective, manual processes.

Lenders who were prepared for the Qualified Mortgage/Ability to Repay Rules were those that addressed all four areas of concern long before January 10, 2014. Those that prepare for KBYO — starting now — have the best chance of being ready for it.

Technology: the Unifying Factor

Lenders cannot afford to assume their current mortgage lending technologies will automatically meet KBYO demands. What looks like a simple change — substituting two disclosures for three — is actually far from easy. The problem is not the documents themselves but what they represent. New calculations combined with completely new presentations present major technical challenges. Many systems were designed around the HUD-1, which is replaced under the regulation by the Closing Disclosure.

This is no simple replacement, however. HUD line numbers, relied on by virtually all systems and lenders, are replaced throughout by new numbers and new terms. Retiring the HUD-1, therefore, presents time consuming, expensive, and for some, impossible technical challenges.

What’s a lender to do? Being ready on August 1, 2015 is not good enough for many reasons. The first step is to gain commitment now from mortgage technology providers for early delivery. Understand their detailed Know Before You Owe plans as well as their timelines for deployment. Lending teams must understand the plans of their technology providers since reliance on them is essential to their own plans. Making sure KBYO capabilities are in place several months before the effective date is essential to a successful, fully compliant roll-out.

A second step is investigating in new systems. Enhanced ease of compliance is a strong incentive for lenders that have been contemplating technology upgrades to take action. The disparate, quasi-integrated system model long employed by mortgage lenders presents data integrity challenges, especially where disclosures and documents are concerned. Know Before You Owe leaves no margin for error. Lenders may have been complacent about managing multiple data sets for the same loan, but comprehensive systems that begin with the point of sale and end with closing documents deal with this problem once and for all.

People: Education is Essential

Change is hard. Wholesale changes that tamper with the very traditions upon which mortgage lending was founded are even harder. Know Before You Owe combines the initial Truth-in-Lending (TIL) and Good Faith Estimate (GFE) disclosures into the Loan Estimate document. The Closing Disclosure replaces the final TIL and the HUD-1.

The TIL, GFE and HUD-1 have been in continuous use for more than 30 years. Known to everyone in the industry — lenders, borrowers, and investors — they are relied upon as they represent the very essence of the loan itself. With a quick glance at these three documents every lender in every lending discipline can quickly decipher a mortgage.

Lending teams must be ready to do the same using the Loan Estimate and the Closing Disclosure before August 1, 2015. Developing training plans now that teach loan originators, processors, underwriters, closers and funders how to read these documents as quickly and as easily as they read the legacy packages is essential to maintaining an efficient, borrower friendly process. As with the other initiatives, now is the time to start developing these plans.

Maintaining a borrower-friendly process is essential. The purchase market is heating up now in various geographies and is expected to be in full swing for the 2015 season. Purchase loans cannot wait. Borrowers will not understand, nor tolerate, closing delays.

Know Before You Owe affects borrowers, too. First-time buyers will be relatively easy to educate since they are less likely to have expectations about the process or the forms they will encounter. Repeat borrowers, however, will expect the GFE, TIL and HUD-1. They, too, must be educated about the new forms and the changes in process they represent.

Maintaining an acceptable borrower experience is the paramount reason for educating lending teams now. There is another important reason to do so: Under the regulations, lenders have an affirmative obligation to educate consumers. During examinations examining teams will likely want to review training materials and sales scripts, if your organization uses them. In the end, though, the best test of this obligation will be borrower satisfaction. After all, there’s no truer test of understanding than being able to teach and train another. A well-educated borrower is a happy borrower.

Process: Driven by Regulation, Enabled through Technology

Today’s lenders face a two-pronged process redesign conundrum. What may prove to have been the longest refinance cycle in the history of mortgage lending has come to a close. Refinance lending as a percentage of the overall market continues to decline, a trend that is expected to continue for some years to come.

Meanwhile purchase money lending, a more complex, time-consuming and expensive form of lending, takes the place of refinance lending. Purchase money lending requires different processes that effectively bring the real estate and the mortgage transaction to closure at precisely the same time. Redesigned processes that take these factors into account while maximizing efficiency are priorities for every lender; borrowers demand efficiency, and profitability requires it.

Know Before You Owe requires process changes as well, starting with pre-qualification/pre-approval and continuing all the way through closing. As discussed earlier, the Loan Estimate replaces the initial TIL and the GFE in the initial disclosure package. Like the initial TIL and the GFE, it must be provided within three days of application. The Closing Disclosure, which replaces the HUD-1 and the final TIL, presents a new wrinkle. It must be provided to the borrower three business days prior to closing. This is a significant change since most HUD-1’s today are drawn just prior to closing; borrowers see them for the first time at the closing table. Under KBYO, all lending processes will have to be redesigned and backed up at least three days to meet the Closing Disclosure timing requirement.

Closing disclosure timing is one variable driving process change. Preparation of the disclosure itself is another. HUD-1’s are typically completed by the settlement agent. Closing disclosures can also be completed by the agent; however, they become the lender’s sole responsibility. While delegation of the duty is permissible under the regulation, careful thought must be given to the prudence of doing so.

The sweeping process changes necessary as a result of Know Before You Owe and the purchase market switch emphasize the importance of technology. Mortgage lending has never been as complex or expensive as it is today, or as it will become leading up to August 1, 2015. Comprehensive, inclusive lending technologies are essential to needed process efficiency.

Time is of the Essence

The phrase ‘Time is of the Essence’ is found in every real estate contract. The meaning is obvious: closing the contemplated transaction as soon as possible is in all parties’ best interests. Its very appearance is a reminder of the duty to act swiftly. The phrase is also applicable to the effort of being ready when Know Before You Owe takes effect on August 1, 2015. Technology upgrades, people education — for both mortgage personnel and consumers — and process modifications are the key items for every lender’s KBYO action plan. Those who realize that time is of the essence — and take action now — will be best prepared on August 1, 2015.

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It’s About The Consumer, Pt. 1

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TME-RGudobbaThe nature of business is to go through up and down cycles. This is certainly driven by the overall status of the economy in general, but also by some factors that are out of their control. Being from Detroit, it was only natural that I wrote some articles, about 5 years ago, comparing the automobile and mortgage industries. I thought it was appropriate to re-visit this and see how each industry has responded.

The automotive industry has changed dramatically over the last 50 years. The big 3: GM, Ford and Chrysler faced difficulties in getting new products to market because of the long development lead time. In addition they had to master the skill of controlling costs and quality. Enter the foreign manufacturers! From there, the Big 3 and the foreign manufacturers got caught up in the same kind of euphoria that everything would only get better. They kept building new plants, adding new dealerships and generally saturating the marketplace. They all offered a large number of different models under multiple sub-brands. As the inventory grew, they were forced to offer huge discounts to entice buyers. This was certainly a short-term strategy, which haunts them still today.

If you think about it, the mortgage industry faced similar challenges. The biggest mistake was the thought that real estate values would always appreciate. In an effort to offer loan products beyond the 30-year fixed, we created a conundrum where only a few borrowers understood the intricacies of the different offerings. In the drive for more applications, we relaxed underwriting standards, created very exotic loan products and put borrowers in homes where they had no realistic chance of meeting that obligation. The borrower took this opportunity to buy a bigger house or to take out any existing equity. They treated their home as giant ATM machines. In the end, many lost their homes.

Reality hit hard. Both industries had a wake-up call. Both required government assistance to continue. Both need to reinvent themselves.

The automotive industry has re-focused. In operations, they eliminated brands, Plymouth and Pontiac for example, and reduced the number of models. They reuse a chassis and other components across models. The assembly line is now a series of lines to final assembly rather than a long continuous line. Robots now perform some of the tasks that human autoworkers formerly were asked to perform. All of these changes have significantly reduced costs and time to market. The use of technology has also increased dramatically. Today’s cars have more USB ports than cigarette lighter sockets, and full touch screens for navigation. Many of the new cars today have a type of “black box” in them, along with the dozens of computers that are onboard. That means the black box can know exactly where you are, how fast you’re driving, and many other details of your driving habits. Who owns that data? The insurance company? The auto manufacturer? The driver? This could have some serious legal ramifications. Just like the “black box” on a plane, this could possibly determine if the driver was impaired or the automobile malfunctioned in some manner. Finally, the concentration on the consumer has been single-minded, to improve the safety, comfort and interaction with the driver. Let’s look at this further.

I believe it all starts with the perceived quality of the product offering. Lemon laws provide a remedy for consumers in order to compensate for products that repeatedly fail to meet standards of quality and performance. Although there may be defective products for all sorts of products, the term “lemon” is generally thought of as applying to defective vehicles. Federal Motor Vehicle Safety Standards (FMVSS) are U.S. federal regulations specifying design, construction, performance, and durability requirements for motor vehicles and regulated safety-related components, systems, and design features.

The “Corporate Average Fuel Economy,” or CAFE standards, will require automakers to nearly double the average gas mileage of all new cars and trucks they sell by 2025.Think of one of the safety enhancements in the automobile industry. In a 2010 report, the Department of Transportation’s (DOT) National Highway Traffic Safety Administration (NHTSA) said that each year 210 people die and 15,000 are injured in light-vehicle backup incidents, with about 31% of the deaths among kids under age 5 and 26% adults over 70. Congress passed a law ordering the DOT to have a rule in place by 2011 to require cameras or other backup warning devices on all new cars and light trucks. The original goal was for them to be required on all light vehicles by the 2014 model year. Until this year, however, there have been multiple delays over the details. The National Highway Traffic Safety Administration issued a proposed rule in March, 2014 requiring all new light vehicles — including cars, SUVs, trucks and vans — to have “rear-view visibility systems,” in effect, requiring backup cameras. The rule — which would be final in 60 days — would start phasing in on May 1, 2016 models and be at 100% by May 1, 2018. The rule follows an outcry from consumer groups and by families touched by tragic back-over accidents, especially those involving children. They have pushed hard against more delays in the rule.

In the future, automobile sensors may usher in self-driving cars. Automobile sensors can be classified into three basic areas: drive-train and vehicle control, driver safety/comfort/information and emissions. They are used to monitor temperature, gases, voltages/currents, vacuum and torque to name a few. Twenty years ago, the typical automobile had approximately five sensors, today, it has over fifty. Motor-vehicle accidents are the leading cause of death of 13- to 29-year-olds in the United States. According to Sebastian Thrun, an engineer at Google and the director of the Stanford Artificial Intelligence Laboratory, almost all of these accidents are the result of human error rather than machine error, and he believes that machines can prevent some of these accidents.

“We could change the capacity of highways by a factor of two or three if we didn’t rely on human precision for staying in the lane and [instead] depended on robotic precision,” says Thrun. “[We could] thereby drive a little bit closer together in a little bit narrower lanes and do away with all traffic jams on highways.” Although we are not close yet to a fully autonomous vehicle, the technology, including the sensor platform of radar, ultrasonic sensors, and cameras, is available in today’s intelligent vehicle. (see car image)

Automobile sensors

Starting next month, we will look at how this conversation relates to the mortgage industry.

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Finding Hidden Talent

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Photography by: ©Michael B. Lloydrsz_barbara-perinoOne of the most complex facets of a mortgage lending operation is the people within. Prudential Home Mortgage is one good example of having the right people in the right places makes all the difference. During the ten-year period of their existence, the people at all levels of the organization were there because of their unique talents and skill sets. In most cases, it wasn’t just about selecting the person with the most experience or based on their track record in other companies, it was the combination of personality, intelligence and character that made the company great.

This is not always easy today. Many of the really good people that spent time in this industry have left. The industry itself has changed significantly in many ways.  Restrictions from both a regulatory, secondary and operational perspective demand that members of a company have a wide-ranging knowledge set but be very focused and functional in their area of expertise. Technology, once the special priority of the IT department has become an enterprise wide opportunity and responsibility.

IT departments and technology companies that support the industry have special challenges finding people suited to, and happy with, positions that spend the majority of the time working in front of a computer screen to find problems, or who are willing to focus entirely on developing effective user manuals. These are the individuals that make sure the programs are running correctly; that the reports are accurate and that regulations are met. They are dogged in their focus and pay attention to the tiniest detail. These folks often work very quietly behind the scenes, not seeking recognition because they enjoy the work they do. They are perfect for testing software programs, working in functions that are detail oriented and spend their time concentrating on the work that needs done, not the office social or political agenda. These are the staff that are content to remain in positions that are extremely detail oriented yet are so critical to the overall functioning of the company.  But where do you find people like this?

Another issue that is constantly being managed and overseen by regulators and advocacy groups is the diversity of a company’s workforce. The days of personnel being channeled into specific jobs based on race, gender and ethnicity is far behind us and industries are making strides in placing people in positions regardless of this. Although individuals with disabilities are not quite as far along in being recognized as good employees, there are companies that have hired handicapped staff and provide them with ramps or special workstations. Yet there are other out there that have the capacity to work hard, handle numerous tasks and assist the companies that hire them to achieve their goals. So where does one find individuals that have a higher education, are eager to learn more, and like to focus on specific tasks? Well, several employers, including Freddie Mac, have found such people, hired them and are very satisfied with the work they do. Who are these individuals that have disabilities yet are found to be good, even great, employees? These individuals are those affected by autism.

So what is autism and more importantly what is the Autism Spectrum? About 1% of the population in the U.S., or some 3 million people, are thought to have an autism-spectrum disorder. Furthermore this number is growing. Autism is one of the most prevailing disorders in children and the CDC has now claimed that autism actually affects one in 45 boys in general according to the Huffington Post. Estimates range that from 58% to 68% of children have been identified with some type of autism spectrum disorder. Since this issue has a range of severity, those on the higher end, typically are those identified as having Asperger’s Syndrome (AS). These individuals are high functioning and are at the highest levels within the spectrum of autism. The companies that have placed these individuals in positions that meld their disabilities with the work to be performed, have found that it is not as much a disability but rather an asset in the workplace. They commonly use the disabilities associated with Asperger’s Syndrome as a means to excel in their chosen profession. These individuals most often have very strong visual skills such as identifying inconsistencies in data, as well as in music, math and art. These skills take advantage of the individual’s ability to eliminate the box that frequently surrounds most employees’ ideas or concepts and by doing so they are able to identify unique approaches to problems. As a result, they can be better analytical workers than the average adult because they find errors that a typical mind would not and see things that other similar employees might skip over. They find user material anomalies that we don’t catch. In fact, companies that employed these individuals have found their productivity is better than other “normal” employees and their mistakes are rare. It is not uncommon to find that they have a 98% accuracy rate when conducting testing or working on detailed projects.

One of the most beneficial attributes of this disorder is their amazing ability to hyper-focus on an assigned task. This hyper-focus attention span plays out in their ability to pay great attention to detail. As a result, this makes especially well suited as software testers, User Acceptance Testers or debuggers. You will often find that these individuals spend many non-work hours either playing computer games or solving other types of puzzles.

Another attribute of individuals suffering from Asperger’s Syndrome is that they can spend hours in front of a computer screen without being bored or frustrated. It is during these long periods of time that the patterns and/or problems that are associated with performance of the technology can be identified. Other employees may not be equipped to see these issues as easily and may miss some of the most minuet issues that in the end can be the difference between success and failure of a product.

One area in which AS personnel are superior is in writing manuals to give clients or users very precise instructions on how to work on different software programs. They excel by going step by step without skipping details that others may miss. They also excel when working in the procurement process in such areas as preparing detailed invoices or managing the supply chain.

These employees typically have a very structured nature. They like continuity and consistency. They tend to be extremely loyal employees and are uninterested in office politics or the current office gossip that will distract others and disrupt the train of thought necessary for good product debugging or completion of a detailed task.

Many of these individuals have a higher education and are well qualified for these jobs. In addition, once hired they are very loyal employees and are generally not interested in changing or jumping to a competing company. Once hired it is not uncommon to find that they are working remotely. This situation allows them to avoid the stress of a daily commute or a noisy and social work environment.

However, there are some down sides to be considered when hiring individuals with Asperger’s Syndrome. While these individuals are at the highest end of the autism spectrum they still have many of the difficulties associated with the disability. One reason that many of these individuals are not hired is that they never make it past the interview since one of the most persistent difficulties they face is that of social interactions. This along with issues in communicating with others tends to result in interviews that are not successful.

The issues that emerge for people diagnosed with Asperger’s are related specifically to social and communication skills. While not apparent in younger children, these skills become significant as people get older and need to negotiate complex social situations. Individuals with Asperger’s Syndrome have a set of characteristics that may make social interaction particularly difficult.The most significant of these is difficulty with social communication. This includes things such things as eye contact, conversation and the ability to empathize with another person’s perspective.

Once hired the challenge is that they need to be managed differently. Because they have difficulty with social interaction it may require extra effort to initiate work on a specific task as these individuals require more than general directions on how tasks are to be accomplished. It is not uncommon for these individuals to react strongly to negative reactions and comments made by others. They have difficulty just ignoring problems or situations that reflect, in their perspective, negatively on them or that disrupt their work environment. They are sometimes considered “obsessive” or “fanatical” but in actuality they see this as being very interested in one specific topic. All of these tendencies may result in making it harder to coalesce a team that has been charged with a big project.

Despite these difficulties, those companies that have added AS affected people to their workforce are glad they have done so. For companies that have positions that seem to have a revolving employee base due to what has been labeled boring, tedious or just too detailed, this may be the answer you are looking for.

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A New World

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TME-TGarritanoThe mystery surrounding what exactly happened at Ellie Mae to cause its system to go down continues to unravel. What Ellie Mae initially labeled “a distributed denial of service (DDoS) attack” is now being called an outage that was “triggered by a confluence of factors involving network, hardware, software and demand for service.” Regardless of what happened, lenders deserve better. So, I went out to another LOS to see how they would handle this situation if it happened to the.

“Ellie Mae is a strong competitor,” said Keven Smith, President and CEO at Mortgage Builder. “We compete with them in almost every deal. We feel badly for the impacted lenders, but we also want to reach out to talk about our strategy. These attacks are nothing new. We’ve had attacks in the past and we’ve prevented them from disrupting our clients’ business.”

In the wake of this disaster, Mortgage Builder decided to be proactive and inform their clients about what would happen if Mortgage Builder found itself in Ellie Mae’s shoes. Can Mortgage Builder fend off what Ellie Mae called a distributed denial of service (DDoS) attack? I obtained that letter. Here’s some of what Mortgage Builder said to explain to its clients what Mortgage Builder is doing to ensure their system doesn’t experience the same outage as Ellie Mae’s Encompass did:

“Based on this event we have had a handful of clients this week reach out to ask “can this happen to us” as a Mortgage Builder client. Although it does not entirely mitigate all the risks associated with doing Internet business, we already have in place system functionality and IT infrastructure that should put our customers at ease. We have two types of deployed LOS systems at Mortgage Builder:

>> Client Hosted – these are clients that host MB at their office locations or at a Co-Location facility of their choice. For these clients the software and data would not be affected by a DDoS attack on our MB hosting facility. One important differentiator between MB and most other LOS’s is that document preparation is embedded into the MB system and all interfaces are built directly to the vendor or provider of service and do not route through any middleware product hosted by MB. So in short, an MB DDoS occurrence would not affect a self-hosted MB customer in any way.

>> Mortgage Builder Hosted – These clients are hosted in one of our MB Co-Location facilities.  The Mortgage Builder environment provides multiple redundancies to provide constant uptime in the case of a DDoS attack. There are 5 Internet connections from multiple providers and an engineered routing policy to analyze, react, and mitigate Internet traffic in the event of a DDoS attack. When our Co-Location detects an abnormal spike or malicious network traffic directed at the target host (MB server), the mitigation routing policy is deployed and automatically routes the target’s IP address upstream to prevent saturation of the MB connection. The network returns to normal when the network event is over and the malicious packet stream has subsided. This DDoS defense is protecting our entire network (all products). With its protection your network will remain up, even during a dangerous network event.”

Let’s face it, lenders have been so focused on lowering volume and increased regulation, lenders don’t want to worry about technology. Lenders want to be on browser-based solutions in the cloud or fully Web-based systems and they don’t want to worry about it. That’s fine, but there are things that lenders have to look for in an LOS to make sure that their business is secure.

“We have clients paying per closed loan in a SaaS environment that opt to host the data themselves,” explained Smith. “We can also host the data on our servers as well. Our strategy is such that if our servers are down, the customer is still protected. Also, all of our interfaces go direct to the vendor, not through a platform like the Ellie Mae Network or another third party.”

Mortgage Builder touts that it can also transition clients from one model to another over just a weekend. “We can transition clients to a hosted model or they can transition back to a client-server environment if they feel more secure with that strategy given what happened with Ellie Mae. We can also offer disaster recovery solutions to those lenders that want to self host, but still want that security.”

And it’s not just LOS vendors that need to be prepared to transact in an Internet-based world. As the industry moves to a Web-based, Software as a Service model, these situations will persist. In a Web-based environment the vendor has to work overtime to protect sensitive information and fend off all kinds of issues that may cause the system to go down. The strongest vendors have mastered this skill. In fact, DocMagic, Inc. has said that its customers are expressing concern with the reliability of their mission critical technology systems and are asking for more information about system uptime from their vendors. Here’s what DocMagic tells its clients:

DocMagic has maintained these stats for its own company for many years and publishes its status, including uptime, processing time and bandwidth, in real time, on its website at: https://www.docmagic.com/webservices/status/main.jsp.

“We’ve always shared our uptime record with our customers because it’s just so important,” said Dominic Iannitti, CEO of DocMagic. “With uptime typically between 99.99 and 99.999%, our clients never have to worry about having access to the documents and compliance tools they need to close their loans. This type of uptime is not only possible, it’s critical to the fundamentals of mortgage lending. Companies that take customer service seriously do a good job of achieving the 99.99%+ uptime metric”

Iannitti pointed out that guaranteeing reliability involves investment in infrastructure, superior staff training, constant monitoring and an unwavering commitment to the task. He adds than any lender who has suffered through a service interruption knows exactly how important it is.

At DocMagic, uptime means that all company services are functional and available to its customers. It’s not just a measure of when the servers are turned on. To test this, DocMagic developed a proprietary system that sends complete transaction requests of all types through the system continuously, 24 hours a day, 7 days a week. As these requests flow through the system, company technicians monitor over 1,000 data points that impact service delivery and quality. Any potential problems are identified and addressed before they can escalate and pose a risk to the entire system.

Measuring uptime with any method that does not include the actual delivery of the company’s service results in a meaningless metric that will not contribute to high service availability standards. Customers should require service providers to provide uptime information.

“Reliability is one of the most important qualities in a service provider,” Iannitti said. “DocMagic is fully transparent when it comes to service delivery uptime. Achieving the high level of uptime that we do is a major accomplishment, of which our entire organization is very proud. It means we are absolutely the best at what we do and we prove it to our clients every day.”

In the end every vendor is vulnerable to DDoS attacks and other issues, but the better vendors do everything possible to make sure their clients are not impacted.

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Lost In Translation

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rsz_michael-simmonsIn 2003, Francis Ford Coppola’s daughter Sophia Coppola directed her second film, Lost in Translation. It was a comedy-drama starring Bill Murray and Scarlett Johansson. It received 4 Academy Award nominations, made a tidy little pile of money and was generally greeted favorably by those who like that particular genre.

I never saw it.

While there’s no direct connection to the movie, I would suggest that any relationship—personal or business—suffers when communication is missing. Let’s start with something obvious; language. Have you ever noticed that, regardless of what part of the realm we occupy, all of us employ our own language. I sometimes think that this ‘secret language’ is designed to create and protect the power of our respective roles. We build it around a kaleidoscope of acronyms: TILA, GFE, OCC, FHFA, FDIC, SARS, UAD, XML, FNMA, MAI, NMLS … and a thousand more just as jaw tightening. They serve to erect walls between lenders, investors, regulators, mortgage brokers, real estate agents, AMCs and their appraisers, and consumers. The net result can inhibit real understanding. And that’s important, because it’s the ‘knowing’ that we’re all really after.

Your most important role: Delivering information

Early on in my own career, first in real estate and then in lending, I learned an important truth; that my role was to deliver information. As a real estate agent, it wasn’t to sell homes, it was to help my clients understand the market and to guide them through the process of buying a home. As a lender, I never sold rates; I provided information and solutions to my clients so they were able to make informed decisions. In both instances it was still the noble and important profession of sales, but it was always oriented to serve the consumer by helping them to understand. It’s what most successful loan officers and Realtors do, they deliver information and help their clients understand how things worked.

Why is all this “understanding” so important? Isn’t it sufficient that all of us simply perform our appointed functions? That’s a very good question. By way of an answer, let’s look at a not so atypical transaction as a case in point.

A real world, very common example

Take a young family buying their first home. They get a referral from friends for a real estate agent who loves to work with first time homebuyers. She in turn refers them to a mortgage banker she’s worked with and sends them to get pre-approved. They get thoroughly prequalified, understand their borrowing capacity and even have some gift funds to get to that magical 20% down payment. Armed with all that information, the couple venture forth into the world of open houses. They encounter a market with limited inventory, but their Realtor reassures them there’s something wonderful waiting out there just for them.

So far, so good. Informed and prepared, they visit open houses and peruse the new listings that their Realtor provides them. And then it happens; the house they’ve been looking for shows up on their agent’s MLS. They schedule an appointment that evening to write an offer. Their agent knows there will be multiple offers—and surely over the asking price given the limited inventory—so they’ll have to make their highest and strongest offer if they hope to prevail.

Lo and behold, the offer’s accepted and everyone is ecstatic. The Realtor feels validated that her advice on price won the day. The loan officer springs into action and immediately requests updated paystubs and bank statements, warns his borrowers not to use their credit cards, checks to insure that rates are still good (they are) and says ‘closing in 30 days is do-able’. The only thing left is to order an appraisal. Once that’s completed, it’s on to the closing table.

The lender orders the appraisal through one of their AMCs and an experienced local appraiser schedules an appointment to meet the Realtor at the property to perform the inspection. Because the Agent knows how quickly the market is moving, she brings closed sales and listings for the appraiser and makes sure he knows that there were 5 offers over asking. The appraiser thanks her for her professionalism and suggests the report should be done in about 3 to 4 days.

And then it happens. The appraisal comes in and it doesn’t support the contract price! The Realtor explodes at the loan officer. Obviously the lender engaged an appraiser who didn’t understand the market and who ignored the fact that 5 other people made offers in excess of the list price. How could the value not come in? The Realtor warns the loan officer that he’d better get this fixed right now or there won’t be any future referrals.

The loan officer is angry and embarrassed. He tells his borrowers that he doesn’t have any control over whom his company selects as an AMC and nobody can choose the appraiser, so sometimes they get stuck with a bad one who brings in a low value. Meanwhile, the borrowers are devastated and confused. Their Realtor told them this was what the house was worth, yet it didn’t appraise. Their loan officer is blaming his company for making him use that AMC, and the best the lender can do is suggest the borrowers appeal the value decision or try to find some material error in the appraisal so they can declare it flawed and safely order a new appraisal.

Before we get to the end of this story, let me play a recent, actual interchange with a seasoned mortgage banker that addresses the underlying issue here.

Banker: Hi Michael, what percentage ofappraisals come in low? Refis vs Purchases?

AMC:Interesting questions. The smart aleck answer is none. But here are some additional thoughts:

What’s the basis for determining an appraisal coming in ‘low’ on a refinance? Good appraisals come at value; sometimes expectations don’t match up with that. That doesn’t indicate that the value is wrong or low or anything else. There is a process to reconsider an appraiser’s conclusion. We get requests on about 2% of the files we manage. Of those, some 28-30% result in a changed value.

All of the above is pertinent to purchase appraisals toowith one addition: the worth versus value issue. I co-authored an article in Mortgage Banking Magazine last summer that might help to shed light on this topic. I’ll attach it. … after a short interval,

Banker: Thanks. Refis I get because most people think their property is worth more than it is. It’s the purchases that are perplexing, especially in such a competitive market. To me, purchases indicate next month’s value vs last month’s value. I’m not sure this is taken into

AMC:Ok, do me a favor then. Go to your secondary marketing person and tell them you want them to fund a loan based on an appraisal with next month’s value and then call me back and tell me what they said.

Banker:Good one … thanks for the education.

So, something had gotten lost in translation for the above exchange to have taken place. This was a seasoned mortgage banker with many years of experience and his questions mirrored the issues of our previous story. And he’s not alone. There’s a reason that transactions can devolve into open warfare even with experienced professionals who are guided by the best of intentions. It’s about ‘knowing’ or, perhaps more accurately, not knowing.

Giving borrowers the right information

How does one know those things that are critical to prosecuting one’s responsibilities? Here are a few ways lenders can be ready to share the right information with borrowers:

>> Choose AMCs who work WITH you: Work with an AMC vendor who fosters a culture of learning. Choose an AMC who believes that working with a lender’s sales team, their broker or correspondent customer base, and their Realtor partners represents a real opportunity to advance understanding and better serve borrowers.

>> Use AMCs with great appraiser relationships: Work with an AMC who builds their vendor partnerships around a commitment to finding ways to translate what’s important to know. Choose an AMC that spends their time and resources to deliver information to those most in need; much as good lenders do who hold seminars for those first time buyers.

>> Consider an appraisal expert on staff:If you recognize that appraisals are a critical component of the lending process, you can hire an appraiser as part of your staff to help translate appraisal issues.

Explaining tough situations to borrowers

Let’s go back for a moment to our young family who were trying to buy their first home. According to their Realtor and loan officer, the appraisal came in low. The truth is, appraisals don’t come in low, they come in at value. Now the question of whether a report is good or bad may be a fair question, but there are ways to determine that answer. Multiple offers can set off a bidding competition with the net result that the issue shifts from a property’s value being based on existing closed sales, to what someone is willing to pay for it, i.e., what someone feels it’s worth to them. It’s in part why auctions can sometimes be so effective a sales tool. The bidding doesn’t stop when the price reaches market value, it stops when someone wins by offering the most money because that’s what it’s worth to them. Markets can become distorted when there are limited sales and demand outstrips supply. The problem for the appraiser is finding data that supports the new expanding price points. The problem for everyone else in our transaction is that they didn’t know any of this. They didn’t understand the distinction and thus all were left disappointed and betrayed by a system that failed them.

Can we better define what we should know? I think so. I think lenders need to have the right AMC relationships and have someone with appraisal experience on their staff. The risk of not being fully prepared to explain to their own team and their clients what constitutes good appraisal practice is too great with every transaction being so precious. The most successful lenders make a commitment to invest in those people who can foster that understanding. And the smartest lenders ‘invest’ in working with AMC vendor-partners that focus on being a resource to help bridge better understanding among all the actors in the play.

More understanding results in more business

When presented with a clear understanding of collateral valuation, borrowers will understand the appraisal’s role in their transaction and why it has such a great impact on lending decisions. The right information will save your relationship with the borrower, and positions your company as trusted experts they can rely upon. If the lender sticks with the old “my hands are tied and the appraisal came in too low” explanation, the borrower will have a bad impression of you rather than knowing you can guide them in the future. Lost in Translation needs to stay a movie – and not define one’s business model.

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