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Mortgage market sees a return to innovation

The software company Ellie Mae, which processes roughly a quarter of all U.S. mortgages, has a bird’s-eye view of the changes going on in the industry. Ellie President and Chief Executive Officer Jonathan Corr discussed with Scotsman Guide News where he thinks the industry is headed this year and beyond.

Do you get a sense that this has been a tough year for mortgage lenders?

joncorrinterviewWe are in that final transition to what I would consider a much more long-term, healthier market, a market that is driven by purchase business. Residential finance is about people buying homes for the first time or second time. Refis [refinance] should always be that extra bit of activity that depends on the rate environment. From a standpoint of margin compression, everybody is seeing that. They are definitely feeling that they have got a set of volume that doesn’t have much in the way of refi left to it. Purchase is growing, but it doesn’t grow the same way refi does and the way refi spikes based on movements in rates. So, I think a lot of [Ellie Mae’s] customers were prepared for it, some maybe not so much, but everyone is feeling the compression.

There have been layoffs and mergers this year, but some companies also seem to be aggressively expanding. What are the successful companies doing differently?

Some of the folks, our customers who we see expanding, are doing it organically, where they are just attracting some of the top production talent. Or they are expanding through acquisition, looking to add more production talent, but to find efficiencies on the back end. I think that all of the folks who are trying to expand or position themselves forward are really looking at two things. They are very much tuned in with the target customer, of whom more and more is going to be a younger population, millennials, folks who want to embrace a technology experience. We are seeing people embrace technology for all users: Borrowers, loan officers, third-party originators, Realtors. And the other thing is looking at data. A lot of folks are looking at data, and trying to use that to make themselves more efficient. Anyway you slice it, the costs are high in the industry.

There appears to be a pushback to the idea that lenders who sell to consumers directly via national online origination platforms represent “the future.” The share of loans originated through traditional brokers appears to be on the rise. Do you think that the shift to a home-purchase market, where people may want more face-to-face contact with originators, is shifting the landscape a bit?  

We saw a lot of centralized locations, consumer-direct models, in the refi world over the last seven or eight years. It has historically been true that, on the purchase side, it is a much more complicated activity. It is big. It is emotional. It is probably one of the biggest transactions many people do in their lifetime. It is different than a refi. In a refi, your rates may change a little bit. If you don’t get the loan closed in a purchase, you don’t get the home. That is a big deal.

We have done a lot of research over the last couple of years. It has held true 100 percent of the time, no matter what the demographic is — millennial, Gen-Xers, boomer: Everybody on the purchase side wants somebody involved in part of the process. It may be that certain users are willing to do more of the process online themselves, but in a dynamic where it is a real estate transaction, the vast majority [of homebuyers] are still engaging with a real estate agent. Real estate agents are still of the mindset that they want to work with somebody, along with the borrower, that they have trust in, so they know that loan is going to get done for that consumer, because it is critical for that consumer and critical to the Realtors’ commission. I don’t see that model changing dramatically.

My take is that there is going to have to be some way for some of these more centralized players to figure out how to tap into the local nature of retail-like lenders, or mortgage brokers, or some way to tie into the real estate agent, where there is a trust factor that comes into play. 

How close is the industry to achieving a truly digital mortgage?

I think about it in three pieces: the upfront experience, the [consumer] interest-to-application process. Then the application-to-close process. Then the overall closing process. Those things are following different trajectories.

The biggest centralized lenders out there, and the amount of advertising dollars being spent, [has focused on ensuring] that they have a great upfront application experience.That is where we have seen most of the movement. We have seen most of the big online lenders and some of the big national banks — lots of folks — doing stuff there.

The biggest opportunity to really drive down time and drive out costs for the consumer, a big part of that is the manufacturing process, application-to-close. This is the whole workflow and how you deal with the changes in the process between processing and underwriting and pre-close, and the back-and-forth given different requirements on the regulatory side. That is moving along as well. That is why, I think, people are using more data, and where some of the biggest impacts are going to be.

And we are finally seeing again the eClosing, the kind of work around closing collaboration, eRecording, notarization, eNotes coming back. We are starting to see a lot of people start to try things out in that category. We are very, very early. It could go quickly. We had a lot of early activity probably a decade ago, then that went sideways as we went into the meltdown, and everybody was completely consumed with underwriting quality and compliance, and regulatory change. But eClosings and that aspect of things is starting to come around again.

And I think both in that back end and eClosing aspect, we are going to see it move faster than it has in the past. The technologies are there. You still have the willingness of the different players to actually participate, whether it be investors or warehouse lenders, or title and closing. There is recording done the old-fashioned way like it has been done for 200 years in some counties. We still have limitations there, but I think we will see that move quite quickly over the next three to five years.       

Aside from the continued drop in refinancing activity, is there any other theme about this year that stands out?

To be honest with you, people are not even thinking about the next big, let’s call it, agency change. They [lenders] are thinking about investing for the future. They are looking at how they cut costs because they know there isn’t going to be any more refi juice in the foreseeable future. They are really focused on the consumer experience, how to engage more consumers. This is a new thing for a lot of these folks. Refis were flowing in before. A lot of stuff was focused on regulatory. Now people are really talking about innovation and efficiencies. We started seeing it last year, but it is something new in the last year or two.

Are you confident that the purchase market will be fairly strong; therefore, the economy will be strong for the next little while.

Yes, for the next little while, I look at what the various economists lay out there. We definitely, at some point, are going to hit a slowdown, a recession. How far out that will be, various folks out there are saying, maybe it is [2020], maybe it is further out, maybe it is a little sooner. The fundamental residential finance business, in terms of the home-purchase market, looks strong. It looks strong, even though inventory is not where it needs to be. It looks strong, even though prices are up there. It looks strong, even though rates are starting to modestly rise, which probably has little influence on people’s desire to buy. It probably affects how much they buy.  

All that is being driven by the demand side of the curve. It is the demographics. It is the millennial population coming of age, a portion of them starting to hit their early 30s. The conservative view has demand [for home-purchase mortgages] at not blow-out-the-doors growth, but continued growth of 5 to 6 percent, even in this tight market. If we start to get more inventory, that could go a little faster.  But, at some point, we will probably see a slowdown relative to some recession. We have had a long run in terms of a recovery. But, if that happens, it is possible that you will see rates go back the other way. Right now, I think everyone is focused on what looks like a pretty solid purchase market. 


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