Expanding Affordable Homeownership With Housing Counselor Support

It is not new news that market constraints affect minority homeownership. Rising interest rates, tightened eligibility requirements, higher prices and origination costs are converging to lower mortgage origination projections for 2018. These and other factors will have an inordinate effect on minorities and low-to-moderate income borrowers particularly in underserved markets and rural areas.

According to a recent analysis by Zillow, black and Hispanic renters are finding it more difficult to save for the required down payment for a home purchase. Essentially, Zillow determined that high rental rates are taking such a large bite out of income that it is materially affecting the ability for these groups to save money for a down payment on a home.

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Recent Home Mortgage Disclosure Act (HMDA) data show that the percentage of black applicants declined for a mortgage was at a higher-than-average rate.

Despite the lowest industry declination rate in 20 years – 9.8 percent in 2017 compared to 18.1 percent in 2007 – black applicants were turned-down to the tune of 20 percent in 2017.

Programs Abound

Despite these dismal results and pessimistic expectations, there is an abundance of affordable mortgage lending programs at the local, state and federal levels. Community Reinvestment Act (CRA) requirements provide additional stimulus for banks to participate in such programs. All of these programs require pre-purchase housing counseling and education by HUD-certified housing counselors to ensure that the applicant has a successful homeownership experience and is prepared for unanticipated life events that may disrupt the ability to pay.

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There is also an emerging trend to deploy proactive post-purchase counseling protocols for at least a year after affordable loans originate to help new homeowners when turbulence occurs.

Rather than reacting to a problem, this counseling strategy includes constant communication with the homeowner at regular intervals and continuous education about the responsibilities of homeownership. This type of assistance helps new homeowners avoid financial traps and navigate tax and insurance issues, home repair problems or homeowner association dues issues that may surprise new buyers.

Most importantly, it can help homeowners create a budget and maintain financial discipline especially, in the first year of the mortgage when all stakeholders are at the most risk.

These dynamics present a unique opportunity for lenders to embrace housing counseling and integrate the discipline into new efforts to work on a local and national basis to create best-execution models for expanding sustainable homeownership, especially in a purchase market where first-time homebuyers can play a significant role.

Fannie Mae’s HomeReady program and Freddie Mac’s Home Possible program are designed to reach low- to moderate-income (LMI) borrowers in underserved areas and feature more lenient eligibility criteria.

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For instance, under the Fannie Mae HomeReady guidelines while there is a 3 percent down payment requirement, the allowable sources are flexible including authorized down payment programs at the state and local level which will translate into zero-down from the borrower.

Both programs require proof of pre-purchase homeownership preparation. The Fannie Mae requirement may be satisfied if the borrow completes an online education course provided by Framework. However, a particular down payment assistance DPA program used for the HomeReady program may require more personalized counseling.

Fannie Mae also strongly encourages housing counseling by including it in the HomeReady guidelines: “housing counseling for prospective homebuyers effectively expands the pool of eligible homebuyers.”

Best Execution

While the competition for borrowers heats up, lenders must always look for the most cost-effective model to increase homeownership rates. However, the housing counseling component, if not managed correctly, will impose additional costs and time delays to an already costly proposition for originators.

To help make affordable lending actually “affordable,” Hope LoanPort ( offers a turnkey technology platform to originators that fully integrates HUD-certified housing counselors who provide pre-purchase and post purchase counseling.

This delivery model makes it easy for originators to work with housing counselors for any borrower nationwide to meet housing counseling eligibility requirements both before and after a loan is originated. HLP reports that by implementing a post purchase counseling process for DPA loans, early payment default rates are reduced by 30 percent. An early payment default is equally as devastating for the servicer, lender, investor and insurer as it is for the homeowner.

Social Responsibility

The mortgage banking industry has always been a strong proponent of expanding the pool of eligible borrowers especially for minorities and LMI consumers in underserved markets. The addition of personalized and consistent housing counseling and education has proved to be a major tool in supporting that admirable objective.

The current mortgage finance market is fertile ground for the industry to step up its efforts to collaborate with housing counselors and leverage their abilities to meet this common goal.

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The True Cost Of Buy Vs. Build

The age old question to build or to buy technology solutions seems to be more prominent and perplexing in the modern mortgage banking age than in past.

Once the digital revolution found its way into mortgage finance – despite valiant opposition – it has pushed technology strategy to the top of the agenda at board meetings.

Concerns run the gamut from seeking competitive advantage to regulatory compliance and everything in between. Then add the desire to improve the consumer’s experience.

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Therefore, it is no surprise that technology budgets are the fastest growing component of mortgage bankers’ expense profile during the last two years.

While much has been written about this classic dilemma, and even more money has been spent on consultants to assist in the decision-making process, there is no hard-and-fast template to guarantee the correct decision.

There are, however, some guidelines beyond the standard template that may be worth considering to ease the pain of the process and at least help management ask the right questions.

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Five Stages of Decision Making

In a recent conversation with the COO of a top 50 residential mortgage lender, he likened the decision making process of whether to develop proprietary technology for pre-funding QA and post-closing QC to the five stages of grief; denial, anger, bargaining, depression and acceptance. His honesty was as refreshing as it was revealing as he concluded, “Since we are now in the acceptance stage, you may expect an RFP in three months.”

It was a tortuous process to first recognize a technology solution was needed and then to finally conclude that for their particular situation, buy, not build, was the answer.

The COO went on to explain that one of the lessons he has learned over time regarding technology strategies is that changes in the business environment are often misinterpreted as temporary instead of longer-term solutions, Band-Aids are applied. For example, when the Dodd-Frank legislation passed in 2010, many companies did not appreciate the gravity of the change in federal regulatory oversight. In turn, these companies did not realize the need for technology from a strategic perspective to help with the implementation of Dodd-Frank rules as they should have.

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So, while some people may argue that exigency forced Excel spreadsheets, Access databases and other end-user programs to be deployed, their salve was temporary. The solution was temporary because it delayed a more strategic decision like purchasing software specifically designed for compliance.

Now, even eight years later, many companies are struggling again with decisions to build, buy or outsource regulatory compliance solutions, which go beyond federal to state, agency and investor.

Few of us with any experience in the industry have not been involved in these herculean struggles regarding the choice of a technology solution. And haven’t we all enjoyed providing evidence for the axiom that the time to make a decision is inversely proportional to the desired implementation timeline?

“Hurry up and wait” and “It must be in production by yesterday” are often-heard during group commiseration time.

We all have seen the various formulaic approaches to the buy/build question, which are a necessary part of a complete analysis: ROI, TCO and other metrics that live and die by the assumption.

So where is the edge? What could be done differently in addition to the normal analyses and decision making that will increase the probability of success?

What’s Mine is Mine and What’s Yours is Mine?

Notwithstanding the ROI on building proprietary solutions, a frequent variable that may get overvalued is retaining intellectual property and its corollary, establishing a competitive advantage. However, when it comes to cost in direct expenses and time associated with such an undertaking, companies have historically, and wildly, underestimated these projections.

Many times the build decision is driven by CTO zeal and not the discipline and self-awareness needed to make the best decision. Sometimes it simply comes down to an identity crisis: are we a technology company or a lender?

The CEO of a large correspondent lender explained the issue in the context of retaining and enhancing a legacy LOS or seeking an outside solution. “We have a stellar tech team that is capable of developing just about anything and if given the budget, they will.”

Outside of analytics that everyone uses, these leadership decisions are probably the most critical. It is incumbent upon business leadership to force the issue and really determine the need for proprietary compared to off-the shelf solutions despite the sometimes strong push from internal IT to build.

While IQ (intelligent quotient) is indispensable; EQ (emotional quotient) may be the final differentiator between a boondoggle and a successful initiative.

Key Considerations: Pluses and Minuses

Here are some key factors to consider when developing a strategy to implement new technology:

Third-Party Tech Solution

Plus: These systems are typically written by the vendor with domain expertise in the product they have built.

Plus: Release updates allows all uses to take advantage of ideas from other customers that would be beneficial to all.

Plus: Spread the costs of regulatory items across the entire customer base.

Plus: With multiple customers using the same core package, there is a better chance of one customer finding a bug (not all systems have bugs) that can be fixed.

Plus: Typically, there is a dedicated budget to enhance the system.

Minus: Could be a challenge getting your secret sauce request prioritized because the company must consider its entire customer base for prioritization of enhancements.

Minus: Once installed, the vendor could raise prices, and it could sometimes be difficult to change the application if your company has other pressing needs.

Home Grown

Plus: Typically, any enhancements can be implemented faster

Plus: Your great ideas can remain proprietary to your company and not shared across the industry; however, this is a factor that is only valuable for true differentiators. For example, there is no advantage to having the best bankruptcy solution because the same laws/process apply to everyone.

Minus: If in a highly regulated environment, the company must spend money to stay current with regulations and do so without the help from a third party.

Minus: As organization change occurs, budget allocations can change overtime and if a company does not invest in its homegrown application, it can become an inhibitor over time.

More Cooks in the Kitchen

Another common approach to turn the dichotomy into a trichotomy is to consider using multiple technology providers to deliver a solution. While this presents its own set of headaches, including two integration points that must be maintained and increased operational risk. There may be some benefits to different functional areas having more independence and the ability to apply a domain-specific platform to their world. The mortgage servicing industry is a classic example of this approach especially in the default servicing area where many companies have specialized in technology to assist with non-performing loans and there is now a market with mature products to assist servicers.

This trend is continuing where not only are there more specialized services for residential mortgage servicers available but, third-party service providers have developed enabling technologies to increase benefits. And this trend has gone beyond default servicing and includes other business activities that service bureaus could not provide and developing proprietary technology would be impractical.

For instance, some third-party providers in insurance tracking, loss-draft processing and performing loans that offer such services as bank reconciliation, investor reporting and billing have added technology to their services to bring additional benefits and cost saving to the servicers.

In the end, no matter where you land in determining whether to buy or build, your decision will only be as good as the questions you ask and the leadership strength you exert to coax out the best result.

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