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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2016

Up to the Task

Faster underwriting times are not a cause for concern — they are a reason for optimism

Up to the Task

Despite projections that there will be fewer mortgage originations this year than in 2015, many mortgage companies have an unquestioned desire to have higher volumes in 2016. To do this, these companies must stand out by offering better experiences and better service to their customers. Some of these improvements, however, can actually raise concern, particularly when they cause tasks to be done quickly.

In an industry full of risk and moving parts, the underwriting process is still one of the most complex, and no corners can be cut. To juggle so many aspects of borrowers’ histories and judge the risk inherent in their future — and to do so in just a few days, or a few hours — may seem reckless to some, but thanks to improvements made throughout the industry, it is evident these underwriters are not playing with fire.

As a result of the efforts to provide unique services that customers desire, many originators are offering reduced underwriting cycle times. A quick underwriting decision certainly satisfies lenders and borrowers, but also can cause some trepidation. Can a loan underwritten in 24 hours really be thoroughly reviewed? And if 24-hour underwriting causes discomfort, then a loan underwritten in just four hours undoubtedly raises suspicion. Though exciting to customers, these reduced cycle times may generate some flashbacks to the mortgage industry’s precrisis behavior.

Along with the short cycle times, there also are concerns over loosening underwriting guidelines. After the housing bubble burst some eight years ago, underwriting guidelines became significantly tighter. Access to credit was more difficult to obtain and requirements for a loan approval were more substantial. Companies began to do away with “stated income” as well as low- and no-documentation loans. With so many defaults and delinquencies on the books, quality became a much greater concern than quantity. Now that the housing market has nearly recovered, and underwriting guidelines are beginning to loosen once again to address evolving housing needs, many in the industry fear a return to the devastating effects of the bubble-era period.

On the surface, these factors do seem to suggest a return to the loans and behavior that nearly crashed the economy. A deeper look, however, reveals a brighter outlook — one that shows these concerns may be unfounded.

Changing technology

Historically, automation advancements in underwriting have focused on driving efficiencies in the evaluation of loan data submitted by the applicant, and were predicated on the assumption that the information submitted was accurate. Documentation collection and evaluation of critical credit documents were still done manually, if done at all.

Many loan products eliminated document collection entirely, relying on automated underwriting engines to evaluate borrower statements on key qualification elements, such as employment, income and assets. Even many “full-documentation” loans, if the credit profile was determined to be strong enough, were approved using only a verbal verification of employment to assess the borrower’s payment capacity.

The industry, however, appears to have learned its lesson. Today’s strides toward efficiencies are not centered around the idea of reducing the qualification elements reviewed, but rather are focused on increasing the efficiency of how those elements are reviewed. Rather than simply automating the review of submitted qualification documents, today’s technologies focus on streamlining the documentation-collection process.

This is a critical distinction. The technologies being adopted are not intended to cut corners in the lending-evaluation process, but instead aim to drive efficiencies in the long, cumbersome application process.

These technologies are changing the way loans are underwritten — but they are not excluding items from the underwriting-review process. Instead, these companies streamline and simplify the collection process of income and asset information, and potentially improve the quality of data used when underwriting loans. By obtaining income and asset details directly from the source of information rather than relying on the borrower, the resulting loans may actually represent less risk.

Eliminating manual touch points in the process should reduce the likelihood of misrepresentation or manipulation. Additionally, automating document collection and validation by drawing on third-party data sources and repositories, independent verification services and public records should reduce the instances of human error or negligence in the underwriting process.

In addition to improving the borrower experience, the rapidly evolving technologies could have other positive impacts on the mortgage industry. Although the exact specifics may not be clear today, it seems likely the high quality inherent in these loans will be monetized by participants throughout a mortgage’s lifecycle. To the extent that automated document collection and validation are viewed as providing greater certainty that a mortgage’s underlying data are true and accurate, large aggregators could begin to provide better execution or pricing.

Similarly, mortgages originated or audited in this manner could serve to bolster the reps and warranties provided by property owners to potential investors and insurers. The added confidence in the origination quality and accuracy of these mortgages should benefit participants throughout the industry.

Changing standards

As the industry continues to move out of the recovery phase, industry participants have started refocusing on growth. As a result of this new focus, changes in the underwriting process can only be expected as lenders seek new ways to distinguish themselves from their competitors and increase their volume. As originators seek to attract new customers, their efforts to differentiate themselves apply not only to the underwriting review process, but also to the guidelines they adhere to when underwriting loans.

In looking at how underwriting guidelines are evolving, it is important to consider the types of loans where credit standards are changing as well as the guideline changes that are being applied. Recent results from a Federal Reserve survey indicate that credit standards for subprime residential mortgages (defined as loans classified by the lender as subprime) have remained largely unchanged. Of course, the most telling statistic is that the vast majority of respondents indicated they do not originate subprime residential mortgages.

In fact, a vast majority of survey respondents said credit standards have been basically unchanged with all types of residential mortgage loan products  This data suggests that although there is some fluctuation in credit standards, there has not been a shift in standards significant enough to cause alarm.

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Industrywide changes are occurring in the way loans are underwritten, but these changes are not as foreboding as they may appear. The focus on automation to drive speed and efficiency in the mortgage origination process is a positive for the industry and does not create risk that would lead us back to precrisis behavior. Instead, the industry is learning from its mistakes of the past. Many technological advancements used today serve to strengthen the mortgage origination process while also providing a better, and substantially easier, experience for borrowers. Changes and improvements to the mortgage origination process have the potential to revitalize the industry and create a better experience for both lenders and borrowers — all without bringing unnecessary fear of another mortgage crisis.


 


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