The computer may be your friend, but we don't believe it will be a long-term friend of the mortgage origination business. To understand why, it is important to review the exact role of a home mortgage loan originator.
The mortgage loan originator is the middleman who collects borrower data; provides consultation on underwriting, appraisal, and loan products; and prepares documentation. We believe that computers will increasingly perform these functions. As they do, the income potential of the mortgage originator will gradually decline.
Let's review in some detail how the computer will affect each of the key roles of the mortgage originator to make our theory seem more real.
The data to be collected for a home mortgage loan are primarily W-2 forms, pay stubs, tax returns, bank/broker statements, and credit reports. There is no reason why, with customer approval and appropriate security precautions, these data cannot be directly accessed from employers, financial institutions, or, in the case of tax returns, from the potential borrower's own computer.
Also, lenders are becoming more sophisticated about credit risk because of what they are learning from computer analysis, so fewer data will be collected.
Underwriting is, of course, rapidly being computerized today. Industry leaders like Countrywide and MGIC are underwriting half or more of their loans by computer.
Keep in mind that mortgage bankers don't set underwriting standards; Their job is to make sure that a loan will meet the underwriting standards of the ultimate investor in the loan. Therefore, if a mortgage broker or a real estate broker or even a borrower can access the lender's underwriting guidelines directly, the mortgage bank's role in the process becomes limited.
Fannie Mae and Freddie Mac are coming out with computerized underwriting systems this year that will give every loan originator access to automated underwriting without having to make a capital investment in hardware and systems.
Human underwriting input will always be required for "story" loans, which are from loan applicants with unusual credit histories, sources of income, and so on. Therefore, loan underwriting is a shrinking, not a disappearing, function of the loan originator.
Appraisals are in the early stages of computerization. Lenders can already access data bases of recent home sales in most parts of the country. Fannie Mae and Freddie Mac are leading the charge here and are learning how to value homes from the computer-generated comparables.
Only "story" homes will need human appraisals in the future. A story home is one with unique characteristics such as an unusual lot size or price for the neighborhood, an unusually poor condition, or a remote location.
Loan product consulting is a natural for the computer. The computer can guide a consumer through a series of financial questions (When would you like to pay off the loan? Can you manage a mortgage whose monthly payments can rise or fall by 20% over time?) to help recommend a loan product. Further, these products could be easily priced by posting a completed loan file on an electronic billboard.
We scarcely need to say that using computers saves the massive quantities of paper required to produce a mortgage loan.
So what is left for the mortgage bankers? We are confident that the mortgage lending function is headed toward this technology-delivered world. The only questions are about the speed of change and what core responsibilities are left for the mortgage banker.
We noted above that story loans and homes will always require loan originator input. Some loan applicants will also always insist on a full- service originator, just as some bank customers love their tellers.
Another responsibility of the mortgage banker that could remain is providing pricing commitments to the borrower, although portfolio lenders and Fannie Mae and Freddie Mac manage similar commitments now.
These changes are dangerous to mortgage banking companies for two reasons. First, there is no logical reason that a mortgage originator should be the one to offer the software program that will set the tone for the future.
The program could just as easily be an icon on some financial planning software. In fact, Intuit is already making some tentative moves in this direction.
Second, it is hard to see how the software program provider generates material revenue from the process. Therefore, we are increasingly skeptical that any loan originator will over the long run be able to generate much income from the loan origination process.
