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Partnership Enables Efficient Home Equity Lending And LOS Integration

FirstClose, a provider of end-to-end technology solutions for refinance and home equity lenders nationwide, today announced a partnership with Pensacola, Fla.-based Pen Air Federal Credit Union. The partnership integrates FirstClose into Pen Air’s loan origination system (LOS), LoansPQ. A MeridianLink solution, LoansPQ integrates loan origination, core processing and internal banking software in almost any configuration.

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The integration with FirstClose provides the credit union access to an end-to-end refinance and home equity lending solution, as well as a vendor management system that eliminates duplicate data entry. Pen Air is able to easily order instant property reports, AVMs, desktop valuations, property condition reports and flood reports directly from its LOS. In addition, FirstClose will handle all closing and recording responsibilities on behalf of the credit union.

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“FirstClose’s unique, comprehensive solution provides an effortless way to process all home equity loans and home equity lines of credit,” said David Lancaster, VP of Lending, at Pen Air. “We pride ourselves on providing our members with the best possible service, and we’re looking forward to working closely with FirstClose to achieve this.”

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“We already value our partnership with Pen Air and look forward to helping Pen Air reduce closing times, cut costs and increase efficiencies,” said Tim Smith, co-founder and president of FirstClose. “Our goals align with Pen Air’s in that we are focused on providing the most accurate property information in an efficient and easy-to-use way.”

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Partnership Helps Home Equity Lenders

First Lenders Data, Inc., an Austin, Texas-based provider of bundled settlement service solutions to the mortgage lending industry, announced a strategic alliance with Dart Appraisal, a nationwide, independent provider of residential real estate valuation services, headquartered in Troy, Michigan.

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The strategic alliance provides home equity lenders an expanded number of appraisal vendor options when they order the patent-pending FirstClose Report, an instantaneous data delivery solution that gives lending operations title search, flood certification, valuation and property information with $500,000 of A+ XIII rated lien protection insurance – virtually everything they need for decisioning – in just 30 seconds. It offers home equity lenders a proven way to significantly shorten closing times, drastically reduce costs and decrease risk which can help them stay competitive in the wake of the current refinance boom.

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Dart Appraisal manages a nationwide panel of state licensed appraisers and is committed to providing the highest quality and efficiency of appraisal management in the industry. Dart’s appraisers typically live and work within eight miles from subject properties, which means they retain local competence while offering nationwide coverage.

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“By creating an alliance with Dart Appraisal, we’re giving our customers the ability to choose from among an even greater number of valuation service providers and add intelligence to automatically order property condition reports, desktop valuations, and other supplemental services,” said Timothy R. Smith, Chief Revenue Officer of First Lenders Data, Inc. (FirstClose). “Our participating lenders can now use Dart Appraisal’s services to improve the way they do business and gain a competitive edge.”

Home Equity Is Poised For Growth

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Nizar-HashlamonThe news surrounding mortgage applications has been largely in-flux over the past few months. One week applications are reportedly up, and the next week applications are reportedly down. The overall sentiment, however, is purchase optimism that purchase lending will remain strong in 2016. Keep in mind, though, that running multiple strategies to maintain momentum is always a good idea. Perhaps the greatest additional strategy may be the untapped home equity market.

Why home equity? As home values continue to rise, homeowners are beginning to look at their recently purchased homes as a true investment opportunity, spending more money than years prior for home renovations. In fact, home improvements are projected to increase by 4% in 2016, according to Fitch Ratings, and home equities increased nearly 15 percent last year alone, according to Accenture. Americans have not tapped into the equity in their homes as they did prior to the crash, and they may not in the years to come, though at some good level this type of lending does represent opportunity. Time to dust off your home equity go-to-market strategies and maybe even introduce a few new ones as well. Read on to learn the building blocks to a successful home equity strategy.

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First and foremost, it’s essential to formulate a plan on how to talk to potential borrowers about home equity loans. Most don’t go into their local bank asking for a home equity loan – let alone know what a home equity loan is. In fact, according to a recent Accenture survey of more than 6000 consumers, only 41% know they can use home equity loans to refinance debt. Instead, they go in needing a way to pay for their child’s college tuition or any number of major life events or debts. By marketing home equities as a solution to these life events – instead of marketing the products themselves, you are much more likely to draw in potential borrowers. Why? Solving for consumer pain points makes it relatable. Be relatable, and expect to see an uptick in inquiries.

Also, don’t forget to be more targeted in your marketing efforts. Your technology solutions are a hidden gold mine when it comes to sparking new business with existing customers. Sometimes all it takes is someone to sift through the system in order to unbury hidden gold. You know which of your customers are in a financial position to potentially benefit from such a loan. When they bought their home and knowing what home values in that area are currently at should open the doors to a targeted list of customers that may want to consider taking out a home equity loan. Next step: contact those individuals, tying it back to their potential pain points.

The communication process with borrowers doesn’t end with marketing, however. Next up: education. After you get consumers interested in ways to pay for those major life events, they may still be hesitant to consider these types of loans. By taking the time to educate your customers, you will most certainly gain their trust. Talk to them about the pros and cons of each home equity product you might offer. Speak, most importantly, to the benefits: Little to no closing costs will certainly be enticing. This, coupled with your upfront marketing efforts, should result in an increase in business.

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Now that you’ve learned ways to generate more home equity customers, are you prepared to handle the potential uptick to this line of your business? The ability to support home equity loans within your existing loan origination technology platform is essential. Why? Three main reasons.

Compliance. The CFPB is taking steps to consolidate all real estate transactions under common regulation. As we all know, TRID was born from the need to educate and empower borrowers on their loans. While first and second loans were the immediate starting point, be prepared for regulations to hit open-ended loans, like home equities, as well. Your loan origination technology today should be TRID-compliant and capable of easily tackling future regulations as well. By originating home equities in this system as opposed to your consumer-focused technology, you will be able to focus on your business, letting your technology partner focus on the regulations and system updates.

Borrower satisfaction. Home equity loans are a very unique product – much different than a car loan or a first mortgage. By ensuring your technology is capable of originating mortgage products of all types – including home equities – while allowing workflow and rules custom to your business needs, you can guarantee your customers a speedier, more seamless experience. In today’s society of immediate gratification, the ability to serve your customers in such a manner will make you competitive in an already competitive and highly saturated marketplace. Another distinguishing factor? Having your products and rates posted to your borrower-facing website is no longer optional. In fact, Accenture found that 34% of borrowers in the US have completed an application digitally and 38% use the web to rate shop.

Consistency. For many years, you’ve heard mention of turning the mortgage origination process – whether firsts, seconds or home equities – into a manufacturing process. In other words, create consistent, repeatable processes to meet investor and regulatory demands as well as eliminate the risk of human error. Technology is the key to unlocking this manufacturing of mortgages. Ultimately, you will increase efficiency and utilize the same operations throughout your business regardless of the type of mortgage product. It’s time to think of your loan origination technology as a one-stop-shop.

As an industry, we have been riding the wave of positive momentum for the past several years: from the refinance boom into the record-low interest rate landscape and now into the rise of home equities. The ability to stay flexible in this transformational time by adding home equity lending to your already strong first mortgage originations will allow you to stay ahead of the competition. Putting the right sales approach in place is the first step. This will surely grow your front-end pipeline. Keep in mind, though, that having a robust pipeline without the proper tools to follow through will only create inefficiency. In order to really stay ahead of the competition, be sure you have the right back-end tools, too. The right technology solution should not only drive compliance and consistency, but also efficiency and customer satisfaction.

Now is the best time to solve for your current and future lending needs. Take advantage of these cross-sell opportunities, and follow through by delivering the loan experience your borrowers demand through efficiency, education, and compliance.

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Equifax: Debt Climbs For First Mortgages, But Declines In Home Equity Lending

According to data from the February 2016 Equifax National Consumer Credit Trends Report, the total balance of outstanding first mortgages in January is more than $8.3 trillion, an increase of 2.1 percent from same time a year ago. Conversely, during that same period, the total outstanding balance for home equity loans has steadily declined. The changes include:

  • Home equity installment: a decrease of 5.1 percent (from $138.5 billion to $131.4 billion); and
  • Home Equity Lines of Credit (HELOCs): a decrease of 3.7 percent (from $514.2 billion to $495 billion);

“Home purchase activity accelerated in 2016 as economic conditions boosted consumer confidence,” said Amy Crews Cutts, Chief Economist atEquifax. “When first-time homebuyers move into homeownership or existing homeowners upgrade to a larger, more expensive home, new debt is created. This trend is finally dominating the accelerated amortization from borrowers paying a little extra each month or paying their mortgages in full, and foreclosure activity is also greatly diminished.”

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“With many home equity lines of credit (HELOCs) hitting their recast into amortization we are seeing increased payoffs, reducing the debt and numbers of HELOCs outstanding. About 20 to 25 percent of HELOCs active a year prior to their recast anniversary will payoff and close within the year after date. Originations of new loans are not keeping pace with the payoffs.”

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The total number of existing first mortgages is 50.1 million, an increase of 0.4 percent from January 2015-2016. In that same time, the total number of HELOCs and home equity installment loans declined 3.2 percent and 2.5 percent, respectively.

The New Subprime?

According to data from the latest Equifax National Consumer Credit Trends Report, first mortgage originations for subprime borrowers (consumers with an Equifax Risk Score of 620 or below) have shown steady growth from January to October 2015, with more than 312,000 new mortgages originated, totaling $50.7 billion. This represents an increase of 28 percent in number of first mortgage originations and a 45 percent increase in the total balances from the same time a year ago.

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“While there are many characteristics that define a subprime loan, such as the specific terms of the loan and the lender who issues it, credit standards are becoming more accommodating to meet market demand,” said Amy Crews Cutts, chief economist at Equifax. “At the same time, lenders are focusing more attention on evaluating consumers’ ability to repay. This has led to a much larger reliance on third-party data verifications that enable lenders to more accurately vet subprime borrowers much earlier in the origination process.”

The industry is also seeing an increase in subprime activity within the home equity market, with the total balance of home equity installment loans originated for subprime borrowers increasing to more than $1.4 billion, a year-over-year increase of 32.7 percent; with the total credit limits on home equity lines of credit (HELOCs) reaching $608 billion, a year-over-year increase of 6.8 percent.

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Cutts continued, “Home equity installment loans are often more suitable for consumers with credit issues, but the regulatory costs and underwriting burdens have typically made them very expensive for lenders to originate. Conversely, HELOCs are generally more popular among consumers, but less accessible to subprime borrowers. Mortgage insurance is a viable alternative for home equity loans that might be used as piggy-back financing for part of the down payment on the first mortgage and may explain why we are not seeing similar proportionate increases in subprime home equity loans.”

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Legitimizing Home Equity Lending Delinquency Concerns

Between 2004 and 2008, originations peaked thanks to low home prices and relaxed credit standards. Most of us who recall home equity lending’s fever pitch are not shocked when we hear that HELOCs opened between 2004 and 2008 account for 60 percent of today’s outstanding loans. Now, 10 years removed from origination, these loans are beginning to reset into amortization and borrowers will transition from interest-only payments to paying down the principal.

An estimated $221 billion in HELOC loans will hit the market from 2014-2018, but many borrowers are unprepared or incapable to make the higher payments, which can increase hundreds of dollars per month and include interest, principle and a balloon payment in some cases. This once-emerging threat that loomed on the horizon is now very real – delinquency rates on these lines of credit are doubling at their 10-year mark.

Thankfully, I am not the only person that is concerned with the coming waves of HELOC resets. The FDIC, OCC, Federal Reserve Board and NCUA released a financial institution letter on July 1, 2014, which is intended to promulgate risk management principles and expectations that FDIC-insured banks should adhere to as they prepare to field the incoming resets. First, I commend these agencies for proactively addressing this issue, emphasizing the importance of evaluating borrowers and measure their financial capacity to make full repayments. The waves of resetting HELOCs are already here and will have significant impacts on home equity portfolios and first-lien mortgages. The Consumer Financial Protection Bureau requires servicers to notify borrowers of a reset 120 days in advance and many lenders are open to loan modifications and may be willing to discuss this possibility in advance to prevent the borrower from collapsing into financial crisis. However, we need to know more about borrowers so that we can proactively assist those who will have a higher propensity to become delinquent.

Evaluating borrower credit risk is incredibly critical in this process, but can mitigate the end-of-draw exposure within HELOC portfolios when properly executed. Today, there is a sea of comprehensive data, such as property and credit information, that lenders can leverage to pre-approve borrowers who do have the ability to pay. Still, there are many profile specifics, such as employment and income, which are difficult to assess without some degree of borrower involvement. This is where exceptional customer service must be provided. Why make a borrower provide all of the documentation to prove ability to repay, such as paystubs, W-2’s, tax returns when all of this documentation can be secured by the lender with the borrower’s consent? Customer satisfaction is the lender’s life support and is critical to remaining competitive in this market. Borrowers want an easy process and if you don’t provide that, they will go to someone who does.

I encourage all lenders to work to increase communication and transparency, while making sure that they are leveraging the most updated FICO scores, credit attributes, debt-to-income information and other vital data. These attributes empower lenders to better understand their risk exposure and develop modification strategies if necessary.

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Executive Spotlight: Rick Seehausen of LenderLive Network Inc.

Rick-SeehausenWhen we talk about the state of mortgage lending, you don’t hear much about up-and-coming areas, but there are some rising sectors. To this end, this week, our spotlight is focused on the subject of home equity lending, and our expert on the subject is Rick Seehausen, CEO of Glendale, Colo.-based LenderLive Network Inc. Here’s what he had to say on this subject:

Q: What evidence do you see for a growing demand in home equity lending?

Rick Seehausen: It’s still early for a major come back in home equity lending, but the stage is set for it to happen. Black Knight’s latest numbers show home equity in 2013 was the strongest it has been since 2006 (though the overall levels are still way down). The growth, according to Black Knight, is being fueled by super-prime borrowers with credit scores in the high 700’s. By in large, these are the same borrowers who have taken advantage of the low first mortgage rates and are now locked into generationally low interest rates.

CoreLogic’s chief economist, Mark Fleming, recently made the same point a different way in his blog. He noted: “As borrowers regain their equity and interest rates continue to increase over the next few years, the incentive to stay in one’s existing home and finance home improvements will increase relative to purchasing a new home or refinancing with cash out. This is good news for the home improvement industry and mortgage lenders who focus on home equity lending, as both will benefit from the resurgent consumer demand.”

Having said that, not every lender is going to want to ramp up. Many of the largest money center banks have suffered from home equity losses, and a lot of the HELOCs, originated pre-crash, are just coming into their amortization stage, which could cause payment shock and additional losses.

But banks, community banks and credit unions will want to offer home equity products to serve their customers, protect relationships and replace some of the refinance mortgage volume that’s dwindling. The question is, can they offer these “no cost” products safely and profitably?

That’s the big question, given the new compliance rules for certain products, like fixed seconds, and the move to more expensive valuations options.

Q: Many homeowners were badly burned when home values plummeted following the 2008 crash. Do you believe that these experiences will scare people away from pursuing home equity loans?

Rick Seehausen: If you’re asking, do I think that homeowners have realized their homes aren’t ATM machines? The answer is, yes. But home values are increasing again and more and more borrowers are back in the black, in terms of equity. Also, prudent lenders are going to cap the amount of total CLTV that they will allow, probably around 90%. This will protect both lenders and borrowers in the future.

According to CoreLogic, more than half of all the mortgages in the country now have interest rates below 4.5% – that’s nearly 20 million homeowners. CoreLogic says these owners now have a “significant disincentive to either move or refinance in the future when interest rates are higher.”

So what are they going to do when they need more room, have to pay a $40,000 tuition bill or want to invest in other real estate? If they have the credit, the income and the equity, they’re going to consider tapping their home equity.
Q: How are home equity loans being used today versus pre-2008. And are the loan amounts the same as before or smaller?

Rick Seehausen: Probably the biggest difference today versus five years ago is that we aren’t seeing the origination of “piggy-back” first and second liens anywhere near the levels they were pre-2008. That was a popular, and in retrospect risky, solution to get around mortgage insurance. It definitely contributed to the mortgage crisis and the negative equity situation that we’ve all been dealing with these past five years.

The other major difference, I believe, will be the amount of total debt that banks will be willing to lend on a property. Today, the rule of thumb seems to be a 90% CLTV. It might go up a little for very good customers, but probably not to the 100%-120% LTVs of 2006-2007. And you can be sure that the collateral value will be verified.

But, aside from circumventing MI, the uses for home equity lending will most likely be the same: home improvement, debt consolidation, and dealing with lifecycle events, such as college, weddings, caring for parents, etc. Hopefully, there will be fewer boats and RVs, but who’s to say. Interestingly, we’re hearing about more sophisticated, higher income borrowers using home equity for short-term investments in other real estate (rentals and second homes) because the terms and rates may be more attractive than traditional second-home mortgages.

Q: What advice would you give to lenders that currently do not offer home equity loans, but might want to explore that product?

Rick Seehausen: Actually it is the same advice that we’d give to banks and lenders that do offer home equity loans, but haven’t been very active in this segment lately. Done right, these are safe, profitable assets that can build customer relationships. Moreover, home equity lending is one of the very few ways that you can offset the drop in your first mortgage volume.

But the rules have changed. For example, fixed seconds now fall under the Qualified Mortgage (QM) rule, and lenders are going to have to demonstrate that they have assessed ability to repay (ATR). This is a big difference and will add both expense and risk.

In addition to new underwriting processes, lenders need to make sure that they have the latest docs – for both origination and servicing. Our GuardianDocs unit has always been a leader in home equity. Today, our library of home equity docs covers home equity lending by both state and by type of institution, and there are lots of subtle differences that need to be observed. What a servicer can charge for a late payment or bounced check, for example, “penalties” varies both by jurisdiction and by what kind of license you have.

How to value home equity has also become a moving target. Five years ago, AVMs were the valuation tool of choice for HELOCs, but now there are a wide range of new products in the marketplace, and nearly as many opinions on their appropriateness.

Finally, you need to be efficient in your selection of title products, closing agents, etc., which is one of the reasons we’ve invested in our own title/settlement services company.

But some things haven’t changed: customers expect home equity lines and loans to be “no cost”, fast and relatively hassle free. This presents its own set of challenges to banks and lenders, particularly as the business begins to ramp up.

LenderLive Network is online at www.lenderlive.com.

As Home Equity Lending Returns, Lenders Must Prepare

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rsz_anne-politisHome equity lending has returned, and while we would not call it a boom, the industry is starting to heat up. The vanishing refinance market is causing many lenders to turn to home equity lending. Some are reporting volume increases greater than 100 percent from Q4 2012 to Q4 2013. Industry insiders report that the secondary market demand for second liens far exceeds the supply, with higher demand driving stronger pricing.

Increasing Demand for Home Equity Loans

Before the financial crisis, home equity lending was a robust market, both on a standalone basis and as a counter-cyclical product to the refinance market. Home equity lending took a back seat during the financial crisis as home values declined, equity weakened and credit standards became more restrictive. As a result, equity loans were almost non-existent until recently. Today, the environment is much different with several factors driving increased demand:

  • More homes in a positive equity position;
  • Rising interest rates driving down refinance demand; and
  • A wave of existing, maturing home equity lines over the next three years.

Estimates are that more than 4 million homes returned to positive equity in 2013. The appreciating market has created more than $5 trillion in untapped equity and that number is growing. Increased equity has improved the risk profile for home equity loans and in response; credit standards have seen some easing. With both increasing equity and easing credit standards, more borrowers are eligible to borrow on a home equity loan or line of credit.

Interest rates also play a critical role and must be favorable for home equity lending. As rates increase, borrowers are prompted to leave the existing first mortgage in place to maintain the already low rate, making a home equity loan or line of credit a better loan product to provide access to equity than a first mortgage.

As a result of the interest rate increase that began in mid-2013, home equity lending has become a more attractive option compared to refinancing. More than 6 million homeowners refinanced in 2012. As rates creep up to the 5 percent range toward the latter half of 2014, forecasts predict that the refinance market will drop by 70 percent from the 2012 high, removing more than 4 million borrowers from the refinance market. The most cost effective option for tapping equity will be home equity lines of credit for the next several years.

The final factor driving demand is the wave of home equity lines of credit is the number of existing home equity lines of credit that will reach the repayment stage over the next few years, upwards of $176 billion. Home equity lines of credit written from 2004 through 2007 are reaching the end of their interest-only period and borrowers will soon begin repaying principal. Borrowers accustomed to low rate, interest-only payments are headed for big payment shock as these loans reach maturity. In fact, this “after-shock” of the financial crisis is a big concern for banks and the regulators providing lenders with guidance to develop plans for managing these loans. Modifying the terms is one option, but refinancing into another equity loan is also an option. As borrowers search for the most favorable option, additional opportunities for equity lending will naturally be created.

Differentiating in a Growing Market

As demand grows, the competition will increase. Lenders will need to differentiate by streamlining processes while remaining compliant as well as improving customer service. Technology and services investments will be required to save time and lower costs.

Perhaps the most significant challenge in a growing market is managing capacity. As the latest refinance wave has shown, staffing up in a cyclical business can be very painful in a downturn. Building capacity through business process outsourcing (BPO) should be a key focus, not just to increase capacity but to create a competitive advantage. BPO can include a single process or the entire process from origination through funding.

The need to build capacity will be coupled with pressure on margins. As the market improves, competition will increase. The temptation to reduce rates to edge out the competition will squeeze margins and the increasing cost to implement regulatory requirements will drive margins further down. It has become a mandate for lenders to look at ways to optimize cost. Many turn to BPO to help drive that improvement.

However, if you think BPO is simply about cost and capacity, think again. The BPO industry is more than 20 years old and the days of using outsourcing as a pure labor arbitrage are over. When BPO was first beginning, processes were shifted from the U.S. to low cost locations around the world. Most of the time, these processes were moved without change, so the result was the same process, good or bad, for less money. As the industry began to attain critical mass and the landscape became more competitive, BPO evolved and BPO providers began to differentiate through process improvements that drove incremental improvements in process and cost.

Today, these BPO providers still exist, but a new breed of “specialty” providers has emerged. The ability to execute a process is table stakes in the BPO industry. Successful BPO providers are defined by the value they deliver to their clients. These “specialty” providers have invested heavily in domain expertise and they differentiate through the transformation they deliver to create a competitive advantage for the client.

As the regulatory environment has reinforced, the mortgage industry is not for amateurs. The ability to transform a business model requires expertise and building expertise requires investment. In the case of mortgage, many times simply executing the process requires licensing. Specialty providers typically have both domestic and global presence because of the regulatory environment and the level of expertise required to manage the business. The domestic presence brings highly experienced U.S. based talent while the global presence provides a cost and time advantage.

Outsourcing with a specialty provider has become the “go to” strategy for both originators and servicers to cope with today’s market. Solutions are highly collaborative and focused on strategic business outcomes such as:

  • Increasing customer retention;
  • Improving cycle times;
  • Expanding operational capacity;
  • Optimizing working capital;
  • Creating new business capabilities;
  • Improving quality and compliance;
  • Enhanced change management capabilities; and
  • Transforming cost models.

Specialty providers use data and analytics across processes, including disparate processes, to develop recommendations and drive improvement. For example, in the effort to reduce lock to fund cycle times, the data gathered downstream can be used to make improvements at the time of origination to avoid cost and time consuming delays. Specialty providers use technology, often in the form of business process management (BPM) technology, to drive the process and to capture the data necessary to identify improvement areas.

The mortgage industry is not only dynamic, but complex with extensive oversight. While many lenders will (and already have) exited, others are adapting to the change and thriving. Home equity products are in demand and a great counter-cyclical product to the refinance market. The lessons that we have learned through the last refinance wave should drive the strategy to manage the growing demand for home equity loans. Outsourcing is a very effective strategy to manage not only the capacity needs and cost pressure, but to transform a business model to be more competitive.

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