"There are oodles and oodles of new disclosures coming down the pike, so our loans are going to look very different going forward as to how they're documented,"� says Loretta Salzano, an attorney who specializes in banking at the Atlanta firm of Franzen and Salzano.
With demands coming from three sides—to clean up existing loans, to handle incoming volume, and comply with new regulations—response is a balancing act, with most lenders facing both staffing and technology shortfalls. "The new Fannie Mae requirements, followed by expected similar requirements by Freddie Mac, will cause the rate of change to accelerate at a pace already quickened by new and increasing regulatory requirements,"� says Dain Ehring, CEO, Dorado Corp., a lending technology vendor. "And no matter how efficient the origination system and internal handling processes, the cost of originating a loan will undoubtedly rise. The question is how much can the bank contain these increasing requirements, costs and potentially longer production times in closing a loan while mitigating negative effects on the customer, and maintain profits?"
A big question. Here's a look at three areas of mortgage lending—origination risk, default management, and impending regulations—and some of the answers on the table today.
ORIGINATIONS
Who's That Borrower?
Contrary to the blog and cable news-driven milieu of the market collapse, mortgage lenders have never been able get by with hastily drawn loan documentation riddled with mistakes, shoddy reporting or sloppy application-to-sale processing. But the crash did bring into question whether lenders had enough risk and underwriting technology in place to ensure the that a borrower's application was honest-which has become a new onus on lenders in the wake of new regulatory and market realities, according to Lloyd Booth, president of loan technology firm Blueberry Systems.
"[The industry] is breaking new ground here," he says. "Loan processing systems have traditionally been dealing with data accuracy or ensuring complete data." Now, lenders have to make sure "the info is truthful," says Booth, whose firm recently helped retail lender Cherry Creek Mortgage automate a variety of loan diligence processes into the institution's workflow.
One worry is that many lenders won't be able to handle the IT management burden or staffing expense required for the amount and pace of changes. That will open up the field for tech suppliers battling to win contracts to integrate, redesign or replace systems that vet borrowers for fraud while ensuring accurate loan pricing and approval. "What has really changed is the way that originators who took shortcuts to try to cut down approval time on loans, or to slide past policies, are now struggling to automate processes to improve application turnaround times," says Christine Pratt, a senior analyst at Aite Group.
In Cherry Creek's case, Blueberry is melding the lender's data reports and loan-info accuracy checks into the lender's processing system, saving it the necessity of hiring more people to handle the "excess" diligence. "The environment has changed fairly rapidly, and it has created issues, especially from a manpower basis," says Mike Hole, CIO of Cherry Creek Mortgage.
The lender works with a number of vendors to weigh borrower data against checklists involving income accuracy, employment, credit grades, assessments of future income sustainability and other factors than can change the borrower's financial profile before a rate lock-in and closing. An information gap can cause a loan to be priced inaccurately, effecting default risk and hampering the loan's ability to be sold to Fannie Mae, Freddie Mac or other investors.
"You're checking for undisclosed liabilities," says Jerry Kaplan, vp of capital markets for Cherry Creek, one of the nation's 50 largest retail lenders. "If a borrower applied for a mortgage at another company, or if they took on new credit between the application and the closing date, that would come up [in an alert or report]."
Blueberry integrates vendor reports, including data from firms such as Equifax, MERS, or CoreLogic, into a lender's workflow to generate automated reports that indicate potential corrective action on a borrower's application during processing. In the past month, the lender locked $530 million in automated production which can be managed by a staff of three Cherry Creek employees. "To do that manually, I would have had to hire ten people," says Kaplan.
In the battle to ensure borrower data quality, innovation will come from a variety of fronts-including Veri-tax, which has recently developed technology used by two of the four largest lenders to verify income and identity directly with the IRS and Social Security Administration; and Aklero, which is automating loan file control audits to meet new GSE requirements. Other firms such as LexisNexis, Equifax and LPS Analytics are battling to provide current and accessible data, frequent updates and testing.
To meet the new challenges, a number of lenders, particularly smaller institutions, will be looking to SaaS, cloud and other hosted systems-a move many were reluctant to make in the past over issues of control-to contain IT and human resource costs. "For all but the largest tier-one banks and some of the largest tier-two banks, the switch will be to a hosted platform with less customization," says Craig Focardi, a research director for TowerGroup.
As lenders take a new look at SaaS, cloud, hosting and other outsourced arrangements, firms such as Mortgage Cadence-which has dozens of clients on its SaaS-based mortgage lending system, Wipro Gallagher and Dorado-which has a cloud-based loan origination system, will hope to snap up clients wishing to add processing heft while controlling resource costs.
Jonathan Corr, chief strategy officer of Ellie Mae-a mortgage tech firm who's LOS technology is used by a wide swath of the industry-says in the past 12 months, a majority of its customers have embraced SaaS versions of its solutions. Beyond staffing costs, Corr says fast deployment is proving to be another attraction of SaaS as RESPA/TILA and GSE regs and requirements evolve quickly.
"You don't have to worry about updating or upgrading your software on your own to [respond to fast-changing]," he says. "That can become a big burden on a mortgage lender. If you are in partnership with a mortgage and tech services provider that has a true SaaS architecture that can deploy effectively, you don't have to worry about these things and you can focus on doing what you need to do well in this market." -John Adams
DEFAULT MANAGEMENT
Keep 'Em Current
For most of the past two years, banks have strained to cope with the wave of delinquencies and foreclosures touched off by the financial crisis, worsened by the recession, and extended by a sluggish recovery. But some banks, having worked through the initial flood of troubled loans, are now trying to seize the initiative by identifying loans that are performing but are at risk of becoming delinquent.
The thinking is that the sooner a bank can identify a potential problem the better the chance to stop it. "There are a lot of banks headed in this direction," says Ghazale Johnston, senior executive and mortgage servicing expert in Accenture's banking practice. "Banks no longer want the initial conversation to be after the first delinquent payment. They need to flag customers who are current but are high risk."
For example, she says, in markets where many customers are underwater on their mortgages and might strategically default, banks have an incentive to reduce interest rates or principle to entice customers to stay current.
Pratt, the senior analyst at Aite, agrees. "If you learn about potential problems ahead of time, you can reach out to the customer and get ahead of the problem." But there's another critical element to this analysis, she says. "Is this a customer and relationship that can be profitable down the line? Is it a customer worth keeping?" Making this decision now and helping those customers you want to keep long term will help a bank grow in the future, she explains. "It's an opportunity to build some loyalty and feeling of brand."
Several vendors-including Lender Processing Services (LPS), ALI Solutions and Fiserv-have rolled out solutions to help banks make these modification judgments. Modified loans have suffered some bad press given their high re-default rates, but most modified loans so far were already in default, says Tom Miller, CEO of ALI, which offers banks a solution called Action Optimizer. "Most of these are non-performing loans, and that's a big deal. If they're three to four payments past, it's probably way too late to save the consumer. If someone is so far gone even reducing payments by 20 to 30 percent is not going to make a difference. ...The earlier the bank can make an assessment that the person is at risk, the better the relationship will be, the easier it will be to get in touch with that customer and the more open that customer will be to offers," he says.
Although definitive results are not available, Miller says one bank client is pleased that 43 percent of customers it preemptively contacted responded to the bank's outreach and have remained current with their payments. Action Optimizer starts by tapping better income information from the borrower and from third-party sources to more accurately calculate default rates, Miller says. "We triangulate the income," he says, "to understand the personal P&L of the individual." Once a default rate is determined, Action Optimizer calculates how that default rate will be affected by various loan modifications. He calls this the default effect. "The default-effect curve shows how much you need to reduce payments to have a meaningful reduction in the probability of default." The solution makes loan modification recommendations involving the interest rate, term of the loan and principal.
A similar solution is called OptiMod from LPS. Mark Milner, vp at LPS, explains that OptiMod uses default models fed by LPS's wealth of data accumulated as a mortgage servicer. For instance, OptiMod can see all the liens on a property-something many standard solutions do not. "We run models against a portfolio of loans and pull out those with a high probability of delinquency and default." Sometimes the mortgage is eligible for the federal government's Home Affordable Modification Program (HAMP), but often times it is not and the bank must decide whether to offer a modification of its own. Using that default score, OptiMod generates an optimal loan modification involving the term of the loan, interest rate or principle balance.
In a theoretical example, OptiMod might analyze a loan with a 7 percent interest rate, with 27 years left on the term, an outstanding balance of $250,000, and a 50 percent chance of default within 12 months. A hypothetical solution to reduce the chance of default to 10 percent might be to offer a 2 percent loan for five years that then moves up 1 percent per year to market rate, extend the term from 27 years to 40 years, and offer principal forbearance for $20,000.
Thomas Gorman, president, Loan Servicing Solutions, Fiserv, notes that transparency and efficient workflow can be the difference between keeping a customer current and not. HAMP is a complicated program, he explains, and many borrowers do not qualify. Often, when a customer doesn't qualify for HAMP modification, their information hits a dead end. With Fiserv's Loan Portfolio Management Center, intelligent workflow makes sure that borrowers' information is passed along to the right department to be reviewed for internal modification programs. "It's about eliminating the points of failure," Gorman says. -Michael Sisk
REGULATION
Ready, Set, Wait and See?
The most dire estimates predict that when the regulators are finally through a few years from now, the net-net of Dodd-Frank will be somewhere in the neighborhood of 500 new rules that bankers have to comply with. Rules relate to businesses processes, and there's nary a business process that isn't somehow tied to technology when it comes to financial services. Exactly which parts of the lending business those rules will remake is still an open question, but banks don't really have time to `wait and see' Pratt says. "It's going to be a couple of years before all this shakes out, but I don't think banks can hold off" upgrading their lending technology, she says. Areas that are likely to require refresh: everything to do with LOS, fraud, reporting, loan officer certification and compensation, "There's a lot of dynamics going on, and I think tech plays a big role there," says Ehring of Dorado.
