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   ARTICLE   |   From Scotsman Guide Residential Edition   |   October 2016

Will A Machine Replace You?

The future of mortgage origination hangs in the balance

Will A Machine Replace You?

As innovators rapidly enter the mortgage industry, there is a question that lingers in the minds of many originators, processors and underwriters: “Will a machine replace me?” Many of the Silicon Valley mortgage startups that splash The Wall Street Journal headlines believe that loan officers, processors and underwriters will disappear.

Finance company SoFi, for example, has proudly proclaimed that their entire mortgage process can be completed without speaking to anyone and that it no longer relies on FICO credit scores to underwrite a mortgage. Venture capitalists have eagerly lined up behind this vision, pouring over $1 billion of additional capital into the company in 2015 to drive its expansion.

Although SoFi may be the most vocal proponent of the originator-free mortgage process, other industry startups — including LendingHome, Lenda, Clara and Eave — also are hoping to develop a fully digitized and highly automated approach to getting a mortgage loan. In their vision of the future, a computer is sufficient for completing and servicing a mortgage, similar to the role computers play now when individuals invest funds through Wealthfront or buy a used car through Vroom.

For professionals on the front lines of origination, that future reality seems fuzzy at best. Homebuyers, particularly first-time homebuyers, often need coaching while researching the myriad product and pricing options. The complexity of the mortgage process itself — from documentation requirements to underwriting conditions and disclosures — benefits from an experienced human touch to avoid pitfalls.

Guidelines from the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and other entities that purchase mortgages, along with lender overlay requirements and the potential for compliance audits, only add to the complexity of approving a loan for funding. In addition, real estate agents rely on partners they trust to drive their transactions to a successful closing before the contract date.

Ultimately, loan originators realize that real estate is a relationship- driven business. Redfin was not successful by disrupting the world of the real estate agent; in fact, the company employs more than 1,000 Realtors. It was successful by enabling those agents to do their jobs better through a powerful technology infrastructure. Similarly, in the complex and deadline-driven mortgage process, a professional counselor is a necessity. Wells Fargo, which recently began working with Pavaso to provide eClosings, also recently admitted that 73 percent of homebuyers wanted assurances that they could speak with a real person throughout the process.

Empowering people

In response to the question of whether robots will eat jobs, Peter Thiel, PayPal co-founder and Silicon Valley billionaire, wrote in his book “Zero to One”: “Computers are complements for humans, not substitutes. The most valuable businesses of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.”

Thiel cites PayPal and Palantir as examples. At PayPal, fraud was only successfully solved when Max Levchin’s algorithms were paired with human analysts. Palantir strives to make it easier for human analysts to deduce patterns from disparate data sources — not to deduce the patterns automatically. A machine makes professionals more productive and more efficient.

As futurists who understand the burden of reality in the mortgage business, we must adjust our presuppositions. A toaster is far better than a gas oven at browning bread. That means you are out the door faster in the morning, but a toaster doesn’t mean you can skip breakfast altogether. Like a toaster, computers and software are simply better tools for humans. Mortgage companies will win by betting on the augmentation of human ability and not on the eradication of human involvement.

The answer, therefore, is not to dismiss the innovation that is happening in the mortgage industry today. An unfortunate trait of the industry is that it is slow to invest in and adapt to technological advances. So important is the advance of technology in the name of efficiency that even the Consumer Financial Protection Bureau (CFPB), Fannie Mae and other government bodies have expounded on the need to invest. Fannie Mae, for example, is building a new capability through its Desktop Underwriter program to help mortgage companies more efficiently serve borrowers who do not have a traditional credit history.

Richard Cordray, CFPB director, went so far as to scold mortgage servicers for hiding behind their bad computer systems or outdated technology. “There are no excuses for not following federal rules,” he said. “Mortgage servicers and their service providers must step up and make the investments necessary to do their jobs properly and legally.”

Automating efficiency

To begin down this path toward using technology to augment the ability of mortgage originators to do their jobs more efficiently, there are three immediate areas where all institutions should take action:

  • Digitizing documentation: This step alone, if done at the point of origination, can dramatically reduce turnaround time on documentation requests and help eliminate error and fraud by accessing borrower data directly from the authenticated source. Both GSEs, as well as many investors, continue to take steps to accept digitally sourced documentation as authentic. Instead of requiring a borrower to provide copies of pay stubs or other documents to verify income, Fannie Mae allows originators to validate income with data provided by third parties. Similar capabilities are available for asset verification and taxes.
  • Automating error-prone manual tasks: Instant data analysis and flagging, image clean-up and document-type identification are all examples of tasks to improve the accuracy of loan files and minimize manual data entry. What’s more, burdening front-line originators with manual tasks reduces the amount of time they have to do what they have been hired for: sales.
  • Centralizing communication: Gallup recently reported that 28 percent of borrowers were asked to provide documentation they had already supplied. A 2015 J.D. Power survey puts this number at 49 percent. In these situations, customer satisfaction understandably declines. Streamlining the number of point solutions — from secure messaging tools and file-sharing portals — and also consolidating communication channels, from e-mail to text messages, will not only make customers happier, but improve the efficiency of loan originators and processors.

•  •  •

The power of a mortgage business is in its people. Nevertheless, if you spend any time reading about what is happening in the world of science and technology, including the significant leaps in artificial intelligence and machine learning, you start to see a lot of signs hinting that work as we currently know it will be fundamentally altered in the coming years.

In the midst of innovation in the mortgage industry, and even with many venture capitalists and entrepreneurs betting on the demise of the human touch, unlocking the potential of your business lies not in avoiding technology, but in embracing it as a means to unlock human potential and take your people to the next level.

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