Residential Magazine

Taking Flight

Expect smaller companies to emerge from the down cycle by using unconventional methods

By Jim Paolino

It’s down cycles like 2023 that bring forth the next wave of mortgage industry leaders. And it’s the independent innovators, forced to take on the biggest challenges, who become the leaders of the next upswing. It’s time to move past the headlines about interest rate hikes and mass layoffs. Yes, this is one of the tougher market environments the industry has seen in many years. But while the focus of some is on the unfortunate casualties of market contraction and any signs that market stability is imminent, they’re also missing something important. Somewhere, someone in the business of mortgage origination is starting to grow.

In fact, it’s even more likely that, as you read this, several or even dozens of small, previously unheard-of companies are starting to grow in spite of economic headwinds. They’re under the radar at the moment. They might be small enough to get lost in the rounding of a large company’s accounting books.

“The smallest businesses — forced to do what it takes to survive and unburdened by the expectations of stakeholders or large investors — are being forced to get creative.”

Make no mistake about it: While the larger mortgage companies are, for the most part, bound to a playbook based upon cutting expenses and hunkering down until origination volumes grow again, the smallest businesses — forced to do what it takes to survive and unburdened by the expectations of stakeholders or large investors — are being forced to get creative. They must try something new to get ahead of the competition.

It’s true that necessity is the mother of innovation. You need look no further than the amazing advances of the loan origination system or point-of-sale technology, with regard to both capabilities and adoption rates that were spurred by the Great Recession and housing meltdown.

By and large, these advances, which came to dominate the next big refinance surge, weren’t pushed forward initially by the largest lenders or brokerages. Instead, it was small and mid-cap companies that rode innovation through the market trough and onto the crest of the next wave of origination volume.

Overlooked businesses

A lot of time is spent (and not just in the mortgage industry) talking about the publicly traded titans. After all, they’re usually the best indicators for how the market as a whole is performing. They didn’t become high-revenue, high-volume businesses by pure accident. But when the performance of virtually the entire industry declines significantly, you hear a lot less about most of the big players.

In large part, that’s because the Fortune 500-sized companies are usually the first to hunker down and cut back when origination volume declines. They have the means to hold on until the wind changes. They have reserves, investment capital and adequate cash on hand to hang on until conditions improve. It’s a tried-and-true strategy.

“It makes a lot of sense, then, to forecast that the next wave of success stories in the mortgage industry will involve those who develop, improve or deploy innovative technologies and business models.”

Most small, independent businesses, on the other hand, don’t have such a lifeline. The unfortunate truth is that more than a few won’t make it to the next market upswing. But many others will, and they’ll do it by trying out tech tools, business models or strategies that have yet to become orthodox throughout the industry.

It happens in every down cycle. Many of the biggest names in the mortgage industry today, in fact, grew from their origins as small or midsized companies into industry leaders during the last period of rough market conditions. And they’re here today because they used some kind of innovation to adapt to and survive these market challenges.

These innovations, in fact, vaulted them to success. That’s happening right now too. The next big thing could make a small business into a big business.

Lingering challenges

There’s certainly room for improvement across the board in the mortgage process, even if the industry has made tremendous strides throughout the most recent digital revolution. Much of the advancement of the past five years has been concentrated at the point of sale or origination.

Lenders and originators alike can especially appreciate the leaps that point-of-sale and loan origination software technology have made, driven by significantly increased interest and investment. The benefits were particularly felt during the historic refinance boom of 2020 and 2021.

With the likelihood that the industry won’t see those origination numbers again for quite some time, especially on the refinance side, let’s look at the industry’s biggest challenges today in order to predict what the next wave of up-and-comers will have mastered. You can easily start with one of the largest thorns in the mortgage industry’s side for decades: the 50-day or more average time between the sales agreement and closing.

It’s something no originator or Realtor is proud of. It’s the most tension-fraught, anxiety-inducing stage of the entire mortgage financing experience (especially for purchase transactions). And yet it persists.

The most obvious reason the industry has yet to tame what’s been tabbed as the settlement stage of the transaction starts with the need for collaboration between multiple partners. These include the title or closing company, an appraiser or appraisal manager, the Realtor and the originator.

Whether it’s communicating a change in data important to the closing, awaiting an appraisal report or sifting through the title insurance process (e.g., homeowners association liens, curative services, federal laws), the collaboration between the different independent professionals required to bring the transaction to closing is usually carried out by means that range from fax to phone, email, digital app or online portal. And it’s almost never uniform. Sometimes, it seems that half of the 50-day average closing time is tied to missed emails or phone tag.

Additionally, it’s all too common to find that one service provider’s technology does not integrate neatly with that of the originator or another service provider. The result, more often than not, is a continued reliance on stare-and-compare, manual data-entry processes. Far too often, this is the way mortgage professionals approach gaps in technology or workflow.

Innovative approaches

It makes a lot of sense, then, to forecast that the next wave of success stories in the mortgage industry will involve those who develop, improve or deploy innovative technologies and business models that directly target the most inefficient elements of the loan process. And it’s safe to say they’ll be using increasingly advanced artificial intelligence (AI) — especially natural language processing such as ChatGPT — or robotic process automation to do so.

These innovators will likely deploy AI closer to the borrower-facing elements of the closing process. In fact, there are already settlement- side AI technologies designed to field routine client inquiries such as “When’s my closing?” or “What do I need to bring with me to closing?” This is likely to grow exponentially in the coming years. You’ll also see natural language processing software creeping into marketing, sales and other communications-heavy processes.

While the inherent ability of AI to adapt and learn on the job makes it a natural fit for communication-heavy processes, robotic process automation (commonly known as “bots”) is another underutilized but rapidly growing tool. It could soon automate many of the most manual, mundane and repetitive tasks currently trudged through by humans.

Think of all the places in the origination, underwriting or closing processes where a form has to be manually keyed, or data needs to be collected and entered into a difficult-to-access app, program or portal. Now imagine a bot doing that almost invisibly, behind the scenes, and certainly faster and more accurately.

Enhanced performance

Loan officers, independent brokers and others need not worry about being replaced by technology either. Instead, they’ll find their performance enhanced by new technology or by partners that deploy tech-enabled models. For example, it’s easy to see technology further accelerating the processes of closing disclosures and loan estimates.

These tools could further improve and accelerate an originator’s options when comparing or working with wholesale lenders. They also might help real estate agents, originators and consumers to better shop for products and providers who best fit their unique needs.

It’s undoubtedly been a tough stretch for the mortgage and real estate industries. The good news is that no down market will last forever. The better news is that tough times like these tend to open the door to new success stories, as well as new and even better ways of doing business and serving clients.

These success stories are happening throughout the industry right now. You just haven’t heard about them yet. ●


  • Jim Paolino

    Jim Paolino is CEO of LodeStar Software Solutions, which develops loan estimator, sales-management and closing-portal technologies. In this role, Paolino manages the company’s day-to-day operations, and oversees business development and long-term strategic direction. He has a decade of experience developing software solutions specifically for the mortgage and title-insurance spaces. Paolino speaks frequently about technology trends as they relate to compliance, operational efficiency and sales growth.

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