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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2017

Mortgages Enter the 21st Century

Automated verifications can help attract millennial borrowers

Mortgages Enter the 21st Century

AmeriCatalyst, a peer-to-peer think tank focused on the housing ecosystem, held its annual gathering in Austin, Texas, this past October. The topic was Fast Forward: What Happens Next in Housing Finance and Single-Family Rental. An interesting group of experts from around the world came in to discuss topics as diverse as the impact of Brexit on the world economy, the silent liquidity crisis and the technological forces that are shaping the future of real estate.

A frequently recurring theme at this year’s AmeriCatalyst event was the impact of millennials on the housing market. This often-misunderstood generation has been the subject of numerous studies that attempt to label them and make them easier to understand, but one over-riding theme is their ready acceptance of mobile technology and technological solutions. Millennials definitely live in the 21st century.

As most housing professionals know, the mortgage industry typically has been slow to innovate. That has been an issue in terms of dealing a with a generation that lives on their phones and the internet.

In that light, the recent announcement of the addition of automated income, asset and employment verification to Fannie Mae’s Desktop Underwriter (DU) platform is a welcome change to the way we process mortgage loans. It feels as if the mortgage industry is finally entering the 21st century as well. 

Before discussing how automated verifications can help open up the millennial market, it is important to try to better understand why millennials are so important to the housing market today.

The impact of millennials

As a group, 18- to 34-year-old Americans, or millennials, have surpassed the baby-boom generation in terms of living members. Not only are they the largest generational group, these young adults are in their family-building prime, and borrowers in this age range historically have driven a large part of the first-time homebuyer market.

This is a critical role in the market, because without first-time homebuyers, sellers with older homes and growing families can’t move up to newer, bigger homes. This also means that sellers of newer, bigger homes who want to downsize can’t sell either, and the whole cycle grinds to a near halt.

Millennials are breaking the mold of previous generations. Many of them are delaying marriage, childbearing and homeownership. Although many surveys show that this gener-ation eventually wants to buy homes and settle down, they seem to be in no hurry to do so at the moment. Some of their reluctance to put down permanent roots stems from first-hand experience of being displaced by foreclosure during the mortgage meltdown. A traumatic event like that would make anyone cautious about jumping into homeownership.

Another factor that is possibly depressing millennial participation in the housing market is student-loan debt. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the subsequent creation of the Qualified Mortgage and ability-to-repay regulations, mortgage originators often are left with “plain vanilla” loan products and strict limits on debt-to-income (DTI) and loan-to-value (LTV) ratios.

Student debt often can be the straw that breaks the camel’s back when it comes to DTI, especially in an economy where wages are stagnating. With rents rising rapidly in many hot job markets over the past few years, millennials’ ability to save up for downpayments, closing costs and required liquid reserves has become increasingly difficult.

The good news, according to a recent report by the National Association of Realtors, is that millennials may be ready to go on a home-buying spree in the near future. Originators who are willing to embrace advances in technology and consider new forms of financing can position themselves to benefit when millennials finally enter the housing market in droves.

The advent of automation

The announcement of Fannie Mae’s Day 1 Certainty initiative at the Mortgage Bankers Association’s annual conference this past October represents good news for the industry’s ability to reach millennials. The government-sponsored enterprise (GSE) unveiled this program to give mortgage companies and lenders who use the service — available through DU — the ability to verify income as well as asset- and employment-data directly from the custodians of those records.

Using automated verification, originators will be able to qualify borrowers in seconds and share that information with the GSE, which will use the data to determine whether its seller guidelines have been met. Assuming the loan is otherwise acceptable, once Fannie Mae validates the borrower’s verification data, lenders will receive immediate representations and warranties relief for the validated components of the loan.

Once lenders and mortgage companies sign up for the service, they have access to best-of-breed tools that can provide the type of instant verification that most millennials take for granted in all other aspects of their lives. The service is easy to enroll in and easy to use.

The most important advantage for lenders and originators is that they know for certain that the data they use to qualify borrowers is accurate. The big advantage, other than speed, for borrowers is that they no longer must pull together paper copies of payroll and bank statements, which sometimes can occur multiple times during loan processing.

Addressing reluctance

Some lending professionals may be reluctant to use direct-verification services — for asset verification in particular — because they may believe their borrowers will be unwilling to submit their account credentials through a computer or smart phone. This may have been true several years ago, but the number of borrowers of all ages who utilize online and mobile-banking services has exploded in recent years.

Millennials, especially, are digital natives, who often learned to use computers while they still had pacifiers in their mouths. They routinely text friends who are in the same room with them, and live in a push-button world where anything that can’t be done instantaneously is viewed with disdain.

Not convinced yet? Here are answers to some of the common misperceptions that mortgage professionals have voiced about verification services:

  • Investors still want to see bank statements. Fannie Mae and other large investors already accept asset verifications in lieu of bank statements. And why wouldn’t they? It takes unnecessary time for borrowers to collect bank statements, copy them and deliver them to the lender — a grating inconvenience when this data already exists in digital form. This painful process may have to be repeated if borrowers don’t include all the pages of a given statement or if documents get lost or misplaced. Automated-verification services eliminate these issues.
  • Automated-asset verification data is error-prone. Technologies that rely on direct-access data and immediately place that data in a secure cyber vault eliminate the opportunity for human error when handling data. Plus, the asset information in the vault is an exact duplicate of the reporting financial institution’s records, so verification services eliminate fraud as well.
  • Automated verification is expensive to implement. Most verification services are cloud-based, which enables borrowers to do everything from their smart phones, tablets or personal computers, any time of the day or night, 365 days per year. Mortgage companies don’t need to install any hardware and can be up and running in days.
  • It’s too invasive — borrowers won’t share their bank credentials. Borrowers never like to see their data used without permission, but they seem to appreciate having the opportunity to explicitly “opt in” to sharing their data electronically and with minimal effort on their part. Further-more, asset-verification systems do not read or store borrower passwords. They pass on login credentials to the bank or financial institution in encrypted format, and any personally identifiable information that is retrieved with the asset data is destroyed after validation is completed.

•  •  •

The bottom line is this: Millennials are coming into the housing market, and savvy originators will want to make it easy for them to do business with their companies. Automated-verification systems are simple, smart and secure, increase loan-origination efficiencies by speeding up the process and eliminating human error and lead to a better customer experience. That is what every borrower — not just millennials — is looking for in the 21st century.  


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