There’s no getting around it: It’s increasingly likely that 2021 will be a much different year for the mortgage industry. The Federal Housing Finance Agency’s confirmation of an “adverse-market refinance fee” on loans sold to Fannie Mae and Freddie Mac, the possibility of higher interest rates and an uncertain U.S. economic outlook all point to a year during which, at some point, refinance demand will decline. But there still are opportunities for originators.
Fannie Mae’s forecast this past December anticipated that total origination volume of $4.29 trillion by the end of 2020 would give way to a volume of $3.47 trillion in 2021. Much of this decline is expected to come at the expense of refinance volume.
At the same time, the forecast by the Mortgage Bankers Association (MBA) as of January 2021 predicts record purchase activity in the coming few years. For starters, MBA is predicting $1.57 trillion in purchase mortgage origination volume in 2021, an increase from the $1.42 trillion anticipated by the end of 2020.
By many accounts, 2021 will still be a good year but only for those willing and able to succeed in the purchase market. It’s fairly well-established that a refinance mortgage is faster, cheaper and less troublesome to bring to closing than a purchase mortgage. In a traditional purchase-oriented market, a lender’s expenses rise and per-loan profits decline.
Although traditional marketing and sales positioning for a purchase-dominated market includes ramping up sales efforts and networking with local real estate brokerages, there’s another important element that often gets overlooked: production efficiency. Too many lenders over-look the potential cost savings in process improvement, especially for a purchase market. It’s an omission that’s likely costing them significantly. Originators will want to work with lenders that understand this concept.
It’s elementary: Purchase mortgages simply cost more and take longer to process, cutting into profit margins. While the industry is to be lauded for its massive effort to automate and improve the origination process, the vast majority of these efforts to date have focused on the sales, application and underwriting process. Whatever is lumped into the operations category is left running through a hodgepodge of proprietary, ad hoc technologies or good old-fashioned shoe leather — replete with voicemails, emails and even faxes.
The reasons for increased costs and slower closing times in a purchase transaction are nothing new. In a typical refinance, the only true parties are the borrower and the lender. In essence, it’s a two-way conversation with a streamlined process. But in a typical purchase transaction, there also is a seller, one or two real estate agents, an appraiser, a home inspector and a title company. (Lenders usually have a go-to title agency for refinances, while for purchase mortgages, the buyer, seller or even the Realtor will have some say.) Any one of these parties can quickly derail or stall a pending purchase transaction for any number of reasons — be it an unexpectedly low appraisal, inspection concerns or even the cancellation of a sales contract.
The introduction of this often unexpected delta factor is generally compounded by a lack of the most basic requirement for an efficient process: communication (more precisely, effective communication). The various parties to a purchase transaction are almost never interconnected by a single, closed system for data exchange and communication. Instead, it’s usually a random mix of email, text, voicemail, fax, or multiple stand-alone apps or “solutions.” As a result, a delay in a title search can lead to a few voicemails between the on-the-go agent and the title company, followed by an email or two before the communication effectively occurs. Sometimes, this can translate into days of delay.
Although there are several solutions available for these scenarios, many fail to truly bring all of the parties into the same communication channel — often because one or more of the parties is unwilling or unable to use it. This lack of secure, efficient, common communication also leads to additional costs and delays when it comes to an exchange of data.
Often, a purchase mortgage transaction incurs a delay when a loan processor, who could be using their time and energy to process more loans, is forced to hunt down a driver’s license or appraisal report. They might even hunt for it in an email inbox or a folder of incoming faxes.
This nonstandardized process also increases the potential for much greater costs in the form of fraud or defect. With multiple actors involved, multiple points of entry and, often, no single place for anyone to comprehensively track what’s going on at all times, it’s painfully easy for fraudsters to enter the picture or for bad data to become part of the record.
Oftentimes, a lender can’t even convince some of its own originators — notorious for using homemade hacks, workarounds, and third-party apps or solutions — to use its adopted solution.
Mortgage originators aren’t the only ones responsible for fixing the flaws, gaps and inefficiencies in the purchase loan production process. A lender can’t always force a title agency to make a costly investment into a more global solution for these challenges. Oftentimes, a lender can’t even convince some of its own originators — notorious for using homemade hacks, work-arounds, and third-party apps or solutions — to use its adopted solution.
It all starts at the strategic level. Without an understanding between all parties affecting the transaction that email, fax and voicemail are not efficient ways to share (much less catalog) estimated fees, borrower data or transaction status, the parties will continue to rely on what they’ve always done. So, a true solution has to be adopted and buy-in must be won.
This solution needs to be easily incorporated or embedded into other systems used regularly by these parties. How many times have you seen a solution that only works effectively if it is the “alpha” technology? The end result is another silo, rather than anything remotely resembling the well-worn cliché of an end-to-end solution.
The solution also doesn’t need to be global. Start by identifying the most manual processes and automating them. The curative process for title searches, for example, is notoriously labor-intensive. The fee-determination process for the TILA-RESPA Integrated Disclosure (TRID) mandated loan estimate can be much easier than having to make phone calls or send emails.
Many of the biggest pain points in the purchase transaction process have digital solutions available. Just be sure it doesn’t create a new silo. Choose the solution that collaborates most easily with the other systems and processes it touches most frequently. And always try to make the decision with the global process in mind.
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There is a terrific opportunity in the upcoming purchase market. Inevitably, some lenders will complain about the return of margin compression as refinances dry up (which happened in 2018). The solution begins with mindset and strategy.
Instead of adopting patchwork, silo-creating solutions based upon cost alone, proactive lenders and originators will investigate more global solutions that include other parties to the transaction — whether this comes through integration or simply demanding better from their tech-stack providers. The companies willing to attack the long-standing and fairly obvious flaws in the production and closing processes will not only find themselves more profitable than the competition but will likely gain market share as these efficiencies improve consumer-experience branding. ●