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   ARTICLE   |   From Scotsman Guide Residential Edition   |   June 2016

Digital Data Promises to End the Paper Chase

Account-linking technology is helping improve the customer experience and the efficiency of the secondary market

After a long period of financial turmoil, followed by a seemingly endless slate of regulatory changes, the mortgage market once again is on more stable footing and has the bandwidth necessary to embrace emerging technologies to help simplify and make the entire lending lifecycle more secure.

From loan origination to servicing, the push is now greater than ever to streamline operations to make procedures safer and easier for borrowers and lenders, without compromising compliance efforts. One of the newest advancements is the ability to gather mortgage-qualifying documents, such as W-2s, pay stubs and bank statements, on behalf of borrowers through account-linking technology.

Many mortgage companies have worked hard to eliminate a good deal of the paperwork from the mortgage-origination process. Even if the process is now technically paper-free to a large extent in many cases, it still remains a lot of work for borrowers. They may have the ability to directly upload documents via the internet, but they still must endure the laborious process of collecting those documents from each individual account.

An account-linking service (also known as account aggregation), however, allows borrowers to link their financial accounts. Such platforms safely accumulate the necessary documents in minutes, eliminating the painful process of tracking down each account, downloading statements, saving, renaming and then uploading or e-mailing those sensitive financial documents to an originator or other party involved with the loan-approval process. Technology providers are empowering mortgage professionals to deliver this service to all borrowers requesting a loan.

The technology itself has been around for more than a decade and has helped successfully build companies across a large swath of the financial-services world. Only recently, however, has account-aggregation technology emerged in the mortgage industry, and it has the potential to dramatically change borrower sentiment about the mortgage-application process. These services should appeal particularly to millennials, who constitute a growing portion of the real estate market. In fact, Zillow predicts that this year, for the first time, millennials — individuals in their 20s and early 30s — will represent the largest group of U.S. homebuyers.

Although it is essential to appeal to the newest group of homebuyers and provide cutting-edge technology, it is still critical to consider what happens to your loans on the back end of the process, as they are sold into the secondary market. Among the companies providing account-aggregation technology, there are key differences in approach and data sourcing that can affect the salability of loans in the secondary market.

The secondary market

The secondary mortgage market was created in the 1930s in the wake of the national mortgage crisis of the same era. The market was established, in part, to provide banks with a more stable funding source for mortgages beyond relying solely on core deposits.

Today, private-equity investors and the government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae buy loans from lenders through the secondary market, replenishing financial institutions’ funds and enabling the lenders to make more loans to additional borrowers. The purchasers then package similar types of loans into pools and sell debt instruments — called mortgage-backed securities (MBS) — that are secured and funded by those loan pools. Investors around the world, including mutual funds, pension funds, insurance companies and banks, then purchase those securities.

These MBS packagers impact daily mortgage lending activities by not only helping to keep the mortgage market liquid, but also by shaping underwriting guidelines and determining the information and documentation needed on a borrower level. A pool of loans that meets Fannie or Freddie’s guidelines, for example, can be sold in whole to one of those GSEs. If the loans do not meet Fannie or Freddie’s guidelines — because of credit scores, principal amounts, loan-to-value ratios or other reasons — they are sold to hedge funds and other private-sector investors.

Private-equity participation in the MBS market was common before the most recent financial crisis, but Fannie and Freddie have emerged as the primary buyers since the collapse and subsequent housing-market recovery. There is a push by policymakers today, however, to encourage more private-equity participation in the mortgage-financing market, with the goal of reducing government involvement.

As a result of this effort, the GSEs’ mortgage portfolios are starting to shrink. This past February, for example, Fannie’s mortgage portfolio contracted at an annual rate of 27.8 percent, and it decreased in all but four of the previous 67 months. This reduction in GSE involvement in the secondary market is significant because it helps open the door for more participation by institutional investors, whose guidelines for issuing mortgages that can be securitized are not as well publicized and not necessarily consistent across all investor types.

Requirements

New technology, such as account aggregation, allows lenders to provide consumers with a modern mortgage experience, finally removing the immense workload placed on borrowers during the application process. By linking consumer financial and employer accounts, borrower documentation can be securely gathered in minutes, stored in digital form in the cloud and later safely accessed via online portals as needed.

With most account-aggregation systems, the data remains “active” throughout the transaction, so new statements and pay stubs are automatically updated, eliminating the need to repeatedly ask borrowers for updated documents. This allows originators and their teams to spend more time acquiring new business and less time harassing customers.

In addition to enhancing the borrower’s experience and improving operational efficiencies, account-aggregation technology also impacts the secondary market. Even in an era of enhanced regulatory scrutiny and technological advancement, mortgage fraud persists, as some people still try to qualify for homes they cannot afford by providing false information on loan documents. If the fraud goes undetected, the loans are funded and sold to secondary-market investors.

Fraudulent loans subject investors to greater default risk than the MBS price reflects, and many parties along the MBS chain are exposed financially when loans default. Account linking provides originators and secondary-market investors with a greater sense of security, because pulling documents directly from financial institutions better protects the veracity of the source data and helps eliminate one of the major avenues of mortgage fraud. Once account aggregation is prevalent in mortgage lending, lenders selling mortgage pools supported by linked accounts will command a premium over similar loan pools lacking that technological edge — and the reduced fraud risk it affords.

Details

Unfortunately, not all tech firms offering account-aggregation services deliver universally accepted data with respect to secondary-market loan sales. Some providers, as a substitute for original bank statements, offer what is called “transaction-level data,” which  usually shows only the most recent 90-day transaction history for a particular account.

Although this data is pulled directly from the financial institution, it is not in the form of the actual bank statements, which have been used traditionally for loan originations. Freddie and Fannie will now accept a “transactional” verification of deposit, but many private investors, including secondary-market players, still demand original bank statements from the source institution. Therefore, to keep loans as liquid as possible, originators and others involved in the loan-approval process should work with original bank statements and ensure that their technology providers collect those documents as well.

There is a chance institutional investors will eventually alter their requirements and accept transaction-level data — if it can be proven that it will have no effect on the risk and performance of the underlying loan pools. Large industry players with a significant portion of loans available for the secondary market will help drive that change when, or if, they switch to underwriting with transactional data.

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If you are considering working with a vendor to implement a document-gathering technology with the goal of improving your customers’ experience, be sure to clarify the type of documentation that will be collected to assure it is a match for your liquidity needs. Fortunately, it is possible to improve the customers’ experience through the adoption of account aggregation, which at its best can deliver efficiently and safely the universally accepted documents that underwriters and secondary-market investors require today.


 
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