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The Art Of Opportunity

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The 2016 Progress in Lending Innovation Award winners are presented in this issue. As was the case in the previous six years, this year’s honorees are a mixture of well-established companies and first-time entrants. However, what is consistent in the applications is the detailed responses to the application criteria: significance, originality, positive change, intangible ROI, and hard savings ROI. And the applications get better every year. The panel of judges, comprised of members of the Progress in Lending Executive team, rely heavily on those responses and the scores are weighted based on the category. It has truly been an honor over the years to recognize some outstanding innovative solutions for the financial industry.

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Over the years, I have probably written over 100 articles on the mortgage industry. I certainly don’t consider myself a journalist and sometimes find it very challenging to find something unique to write about that hasn’t been presented many times before. My goal is to simply provide the reader the opportunity to explore ideas that might make a difference in their everyday life. I have primarily focused on how technology can be leveraged. I want the reader to be creative and innovative, to think outside the box, and avoid the limitations of a thought process that beings with, ‘We have always done it this way’. I am an avid reader and many of my story ideas come from a multitude of articles and books that are not necessarily related to our industry. In keeping with the theme Innovation, the focus of this article is the book The Art of Opportunity, by Marc Sniukas, Parker Lee and Matt Morasky. This book lays out a roadmap and a collaborative process supported by visualizations, tools, and templates, as well as many real-world samples, to direct you in developing a business growth plan for your organization. Let’s start with some excerpts from the Foreword:

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The difficulty lies not so much in developing new ideas — as in escaping from old ones. John Maynard Keynes

Our industry does not respect tradition, it only respects innovation. Satya Nadella, CEO, Microsoft

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When many of today’s leaders joined the workforce, ”innovation” was synonymous with research and development or process deficiencies—the hallmarks of traditional competitive advantage. Little did any us know then, that in our lifetime an entire occupational discipline would emerge to keep companies ”innovative” or continuously inventive….

But it did. And for good reason. The relativity short span of time in which we’ve seen some of the titans of industry displaced by ”innovative” start-ups put the entire business world on notice. And the message is clear: merely maintaining your position is no longer sufficient. New growth, the kind associated with genuine innovation, that will bring value to your customers, your business, and even the world around you is the only way to ensure survival….

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The problem is, finding and capitalizing on new growth opportunities is hard—especially for established organizations that are often hampered by outdated mindsets, legacy business models, or large scale bureaucracies. Core competencies can morph into corporate rigidities if we’re not strategically alert and careful. Under these types of circumstances, the ability to think outside the box and create new growth initiatives is difficult. But with increased urgency comes the need to find a new path to growth—one that isn’t rocket science.

Over the years there have been numerous business books on how to improve your organization’s innovation, strategy and competitive advantage. So, what makes this book stand out? Mainly, it is because the authors focused on two major points: Strategic Innovation that differs from traditional approaches by directing our focus on finding and seizing opportunities by creating value and Business Design Thinking that is defined as a collection of principles to help understand, address and develop solutions to business problems.

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Instead of simply addressing cost, pricing, and product/service differentiation with how to win, you focus on creating customer value by solving your customer’s needs better than anyone else.

Executives applying business design thinking to their way of working will develop capabilities and practices that differentiate them from their peers.

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Traditional strategic management is fixated on where to play and how to win. You determine where to play in your industry and with a specific market/product offering. You determine how to win by setting your competitive advantage to focus on a niche and by being a cost leader.

Strategic Innovation redefines where to play as finding new growth opportunities. The emphasis is on the customer, their needs, expectations, and experiences rather than the industry or competitors. Instead of simply addressing cost, pricing, and product/service differentiation with how to win, you focus on creating customer value by solving your customer’s needs better than anyone else. You create value for your firm with further opportunities. Inserted between the two is how to play, where you design the business required to seize these opportunities. Let’s examine this further.

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Where to play: This is all about finding your new growth opportunities. Research has shown that organizations develop more successful and innovative offerings by starting with their customers. Opportunities are a function of the chosen customer segment, its needs, expectations toward the solution offering, and current barriers to consumption or hurdles to a satisfactory customer experience.

How to play: This is all about crafting strategy, which includes the mixture of products, services, and the customer experience with the manner in which you operate and the activities necessary to do business. This will define where the money will come from, how you set prices, and how payment is made.

How to win: This is all about creating value for the customer, your organization, and the ecosystem. Instead of competing on low cost and/or differentiation, the winners in today’s economies focus on creating value and benefits for multiple stakeholders.

Finally, the book illustrates how the process for strategy making and execution and for building the new growth businesses is neither entirely linear nor completely iterative. It provides examples of how companies go through an iterative process with phases that favor action over analysis and planning.

What is Business Design Thinking? If strategic innovation focuses on the content of your new growth strategy and the process of crafting that strategy, business design thinking focuses on the practices that enable your team to achieve success more effectively and efficiently. These are the five principles of business design thinking: 1) Keep a human-centered focus, 2) Think visually and tell stories, 3) Work and co-create collaboratively, 4) Evolve through active iteration, and 5) Maintain a holistic perspective.

The Art of Opportunity incorporates each of the five principles to represent how an organization can change its way of working. Executives applying business design thinking to their way of working will develop capabilities and practices that differentiate them from their peers.

I would encourage everyone to read this book. We will continue this exploration next month.

About The Author

Roger Gudobba

Roger Gudobba is passionate about the importance of quality data and its role in improving the mortgage process. He is an industry thought leader and chief executive officer at PROGRESS in Lending Association. Roger has over 30 years of mortgage experience and an active participant in the Mortgage Industry Standards Maintenance Organization (MISMO) for 17 years. He was a Mortgage Banking Technology All-Star in 2005. He was the recipient of Mortgage Technology Magazine’s Steve Fraser Visionary Award in 2004 and the Lasting Impact Award in 2008. Roger can be reached at rgudobba@compliancesystems.com.

Future Lending Success

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The Mortgage Bankers Association (MBA) announced that it forecasts $1.10 trillion in purchase mortgage originations during calendar year 2017, an 11% increase from 2016. In contrast, MBA anticipates refinance originations will decrease by 40%, resulting in refinance mortgage originations of $529 billion. In total, mortgage originations are expected to decrease to $1.63 trillion in 2017 from $1.89 trillion in 2016. Further, for 2018, MBA is forecasting purchase originations of $1.18 trillion and refinance originations of $410 billion for a total of $1.59 trillion. So, we sat down with Joe Dahleen, Vice President of Consumer at Axia Home Loans, to discuss how lenders can be successful in the current mortgage market. Here’s what he shared:

Q: What do you see as the future of straight through processing?

JOE DAHLEEN: Purchase certainty is important. DSD + STP= GPC, which means direct source data plus straight through processing equals greater purchase certainty. I am doing this at the point-of-sale today. I take the path of least resistance. I do the VOE and the VOD at the point-of-sale. if I get those two data points, I can get a good idea on if I qualify and I can turn the file very quickly.

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Q: How will things like outsourcing verification and calculation of income change over time?

JOE DAHLEEN: I outsource the calculation of income. I drop it into FACTCheck, The FACTCheck tax transcript report returns the proprietary FACTCheck rules engine analysis on all income sources in a detailed, interactive report that contains both calculated qualifying income and messages of explanation and instruction. These rules are designed to test for GSE compliance, as well as a borrower’s ability to repay (ATR) under Appendix Q. In the end, underwriting doesn’t want to see it until it’s a full file. So, my POS allows the customer to submit data, upload data and consent for us to get their data electronically. Once I get that I put it into FACTCheck. I do all of that at the point-of-sale. My assumption is that more lenders will jump on that bandwagon.

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Q: How does the mortgage industry craft a process where the user experience has no friction?

JOE DAHLEEN: My next goal is to eliminate fraud when you inject the driver’s license. Using technology you can scan the driver’s license and it will pull that data and populate the 1003 electronically. For U.S. driver’s licenses, Mobile Verify put out by a company called Mitek has the ability to find and decode enhanced security features. When this feature is found, a document is 100% authentic. When a document is authenticated by Mobile Verify, it is a genuine government-issued identity document. If fraudulent, it is immediately rejected. Documents that are suspicious are returned with warnings indicating that additional checks on the consumer are required. You want to do identification verification at the point-of-sale and pre-population that data. HELOCs will be big in 2017 and we can automate all of that at the point-of-sale. You want to get rid of any ambiguity during the process.

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Q: How will the recent governmental changes impact the mortgage market in 2017 and beyond?

JOE DAHLEEN: We’ll see some loosening of regulations. We won’t see too many changes in what has been activated so far. Only 44% of the rules promised in Dodd-Frank have happened, so some of those new rules to come may be eliminated or streamlined, but we won’t get rid of the CFPB or anything that has happened so far. I do think there will be better oversight of the CFPB, though.

Q: How do you think lenders handled this year’s regulatory challenges and what key lessons can we take from those examples?

JOE DAHLEEN: Lenders have gotten better at dealing with change. Deploying additional technology has gotten better. The pace of innovation on the mortgage technology side has caught up. I’d still like to see more adoption of the e-note. Change management has gotten better because the teams have gotten more used to change. The independent mortgage bankers have done a good job of pivoting to deal with new situations. We can’t fear change.

Q: When evaluating their technology strategy, what elements should lenders keep in mind?

JOE DAHLEEN: Lenders always have to consider the customer experience. They should be thinking: What is the customer’s journey? You need to make everything easier for the consumer. You better make sure they have a good experience. If your customer has to download a document, wet sign it and get it back to you, you’ve failed. We pester the consumer all through the process and we don’t have to do it that way. You may not loose the loan this way, but that customer is not going to refer you.

Q: What is perhaps the single biggest misconception lenders believe regarding technology?

JOE DAHLEEN: Some lenders still think that one solution can do everything. There is a fallacy that there is one solution that can automate everything. Lenders spend a lot of time and energy implementing end-to-end systems, but even those systems don’t do everything. No LOS can serve every need.

Q: What do lenders need to do in 2017 to remain competitive?

JOE DAHLEEN: Lenders need to lower the cost to produce so you can lower your rates and do more loans. You can’t spend $6,000 to originate a loan. The only way you get there is by lowering cost.

Industry Predictions

Joe Dahleen thinks:

  1. The adoption of e-note will lower the cost to produce by 25%.
  2. Verification of assets and income will be done at the point-of-sale.
  3. The confluence of title and appraisal as one quoting platform will be the next big innovation.

Insider Profile

Joe Dahleen is currently Vice President of Consumer at Axia Home Loans. Prior to joining Axia, Joe was Senior Vice President of Marketing at Primary Capital Mortgage, a Resource Capital Corp. company, and Executive Vice President and Head of Mortgage Originations at Elevation Home Loans, LLC, which was a start-up residential mortgage company acquired by Resource Capital Corp. Joe is a veteran of the mortgage industry who specializes in executive management and strategic marketing. He is known for being a strong advocate of technology and an expert in leveraging the latest communication methods to support successful growth.

Has Technology Truly Helped?

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There was a time in the not so distant past when the technology in the mortgage industry consisted of a word processor, a fax machine and a perhaps a Blackberry for those individuals important enough to warrant owning one. There were even some people who did not want to give up their “trusted” Blackberry once smartphones became more prevalent. In fact, prior to the unprecedented technological growth during the last 10 years, technology was just not keeping pace with the needs of the mortgage industry.

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The change we experienced was slow and gradual, and the systems that were available were not mature nor were they sophisticated. As new technology was introduced during the last decade, such as process and workflow automation, the industry was ready to embrace it, which helped spur faster growth and the much needed added efficiencies. And when the industry participants realized the benefits of technology, the demands increased. New technology providers continually emerged, mindful though that compliance and the ever-changing regulations were top of mind for everyone involved.

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Although the technology has been available, Fannie Mae and Freddie Mac only recently modified their loan origination applications to reflect the digital age. And even this modification is a little short of an intelligent document in the Mortgage Industry Standards Maintenance Organization’s (MISMO) format.

Industry studies have shown that the cost of originating a loan during the first quarter of 2015 was $6,253 per loan, up from $5,171 per loan during the fourth quarter of 2014. Similarly, a report by Accenture in February 2012 found that the cost of servicing in 2011 was $55 per loan per year, and in 2012 the cost had risen to $208 per loan per year or more. The report also noted that it now cost four times the standard amount to service a delinquent loan compared to four years ago. These results raise several questions after 20 years of technology use in the mortgage industry.

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>> Why is the cost of doing business on a steady rise?

>> Does this mean that technology has not been completely adopted by the industry?

>> Is technology not capable of reducing costs in the mortgage industry?

In order to get to the bottom of this, we need to look at this from all three points of view. Let’s first consider what the industry would look like without the use of technology. The loan origination process would be much longer and require significantly more time. To obtain a loan from a bank could take weeks or even possibly months without automation. This in turn would significantly decrease the productivity while increasing the cost of origination.

Loan servicing would also experience similar scenarios involving much more manual processing. Again – lower productivity – higher costs. Delinquent loans are another area that would suffer as tracking those loans would be more difficult and the chances of assisting the borrowers via early intervention programs would be very hard if not impossible.

Although less talked about, loan transfers among servicers would face similar challenges and inevitably be almost impossible to ensure a smooth transaction. By having just a small glimpse into the industry you can determine without a doubt that technology is definitely capable of reducing costs. So then why haven’t the costs gone down? Maybe the answer to this question lies in not at looking at technology adoption as a whole but to take a look at the industry from a completely different perspective. The additional demands that have forced lenders and servicers to update their technology could be the reason costs are not being reduced. Those demands include the costs of attracting millennials to the home buying market as well as the cost to be compliant with the ever-changing mortgage regulations. Two things easier said than done.

In today’s market, Generation Xers and millennials ready to purchase a property and join the ranks of home owners are a rapidly growing population. According to data from the National Association of Realtors (NAR) in late 2015, the aforementioned groups comprised 68 percent of the first-time homebuyer market. This market is, however, underserved as they currently only have a 34 percent homeownership rate. And as time goes on this number will only continue to increase because more of that generation will become eligible.

These generations are accustomed to technology that revolves around them. They expect to have the same seamless user experience as shopping on Amazon; quick and easy with no hassles and no need for actual conversation. Many of this demographic do most, if not all, of their activities, whether it is business-related or pleasure, online without ever interacting with a “live” person. That is just the way they are used to doing business, and it is a fact we must accept. Any company that wants to conduct business with and attract these groups has adapted their technology very effectively.

In the mortgage industry, obtaining a loan via the internet without ever interacting with a loan officer is absolutely possible. Think about QuickenLoans.com or LendingTree.com. Sadly, there are still many banks that do not have these capabilities. Mortgage companies today are building new portals with specific requirements to meet the needs of this generation. These portals are not inexpensive and can run into millions of dollars to develop. Big banks that have the capital to spare would be able to build them from scratch, but the other smaller institutions will use an outside vendor’s applications. Whichever the case may be, the banks will have to pass the cost of such investments on to their customers or just absorb it in order to remain in the minds of these generations.

Industry regulations exponentially grew after the financial crisis of 2008. Prior to that regulations were not really a major cost factor in the industry. Technology costs since then have continued to escalate on originations and servicing to support all of these changes in regulation.

According to Continuity’s Banking Compliance Index, the compliance cost per bank for the last two years is more than quarter of a million dollars. Lenders and servicers alike have to pass some of this cost on to customers. The interesting or ironic twist here is that lenders and servicers have unfortunately not totally adopted technology as it relates to compliance. Large banks have been able to build compliance systems that can help them avoid penalties and fines. However, small- and medium-sized banks have yet to adopt technology by in large with many of them continuing to use spreadsheets and more manual systems to manage compliance. Fines such as the $10.1 million Prospect Mortgage paid in November 2015 could be avoided with the use of robust technology.

The mortgage industry has adopted enough technology to enjoy some efficiencies in several areas. Until the industry fully embraces all the many facets that technology offers in every area, the costs of using it will continue to lose money. On a brighter note, I think it is just matter of time before the industry embraces a complete solution to cater to the Generation Xers and millennials; one that will help all companies in their compliance efforts. That is when the mortgage industry will be able to maximize profits and benefit fully from the use of technology.

About The Author

Pramod Karachur

Pramod Karachur is project manager at IndiSoft, a technology company that specializes in systems for the financial industry. In his six years at IndiSoft, Karachur has implemented various grant programs, worked with multiple servicers such as Wells Fargo and Bank of America and thousands of non-profit and for-profit counseling agencies. He can be reached at pramod.karachur@indisoft.us.