Special to American Banker
Armed with Internet technology and computerized analytical capability, the mortgage industry is pushing toward an elusive goal: the one-week mortgage.
Industry executives say the most sophisticated providers can approve loans within minutes and close them in a couple of weeks. Countrywide Home Loans refunds $250 to the consumer if the process takes longer than 10 days.
But some envision an even quicker process, in which only a week elapses between the customer's first inquiry to the sale of his or her loan in the secondary market.
"Every step in the origination process - appraisals, credit reports, titles, bid/asks on mortgage pricing - is going to be electronic," said John Hummer, president and chief operating officer of IMX Exchange, an electronic exchange for pricing mortgages in San Ramon, Calif. "It's definitely within the realm of possibility to have this go down to a week within five years.
"If you take the issue of 'going electronic' to its logical conclusion," he said, "it's reasonable to assume that within five years the consumer will deal directly with a Wall Street buyer who is purchasing his loan. It's conceivable, but a lot still has to happen."
Whether or not that goal can be reached, the automation of every part of the origination process, including sale in the secondary market, is well under way.
The key component is using the Internet as a portal to transmit information not only among consumers, brokers, and lenders, but also among third-party vendors such as appraisers, real estate agents, title companies, and flood inspectors. Though the list of participants in the process seems endless, bringing all these parties together could take seconds.
The key is introducing technology at the first stage of the lending process.
"Point-of-sale technology is the key to making this possible," said Mike Williams, senior vice president of electronic commerce strategy at Fannie Mae. "You see this both through the Internet and through a loan officer working with a laptop, either out of a consumer's or Realtor's office. Clearly already there are lenders who are able to originate and close a loan in two weeks. I'd like to see us all at a point soon where everything - everything - in this origination process is electronic. I want to see lenders leveraging their capabilities, cutting costs, making the origination process easier. I think we're on the right track."
But harnessing technology and the Internet is only half the battle.Perhaps more important, the industry is reinventing the entire origination and processing paradigm - the way it does business. "The power of technology now is to change or re-engineer the mortgage process, not to automate the existing one," said Richard Beidl, senior analyst with Tower Group in Newton, Mass.
Lenders are asking, if someone wants to buy a home or refinance a loan, are 35 or more pages of documentation really required? Many are concluding that the research and file work can be reduced substantially.
Some are focusing on whether some software providers are trying to "go electronic" with processes - "bits of information" - that will no longer be relevant in a year or two. For example, electronic signatures are not accepted by a number of parties involved in the origination process. Will that be a relevant question if a customer walks into a branch to complete a transaction, even after using the Internet to initiate it?
Another question is whether electronic verification of income directly from the Internal Revenue Service will be relevant. A bank may decide that it doesn't need confirmation if it already has a long-standing relationship with a customer looking to refinance who has met his or her bill payments on time for years - or who has recorded assets of importance at that financial institution.
Bob Meceda, a partner at Stratmor Group, a bank consulting firm in San Francisco, agrees. Stratmor is working on a streamlining program with the Mortgage Bankers Association in Washington "In the old days, in order to obtain a mortgage you had to create an inch-thick file of information. Now, if you've got somebody with substantial assets or disposable income, the question has become, 'Why bother with this minutiae?' If you have someone with $10 million in an account, what do you care if there's a loan-to-value relationship of 50%? Why bother with this?
"We see a whole new family of products developing," Mr. Maceda said. "These are products where if customers have evidence of good performance in terms of payment history, or other positive attributes, if they're looking for a refi or cashout, if they're moving from house to house, there may be less paperwork. This is where the future is going."
Whether originators are interested in creating a new origination paradigm or simply trying to automate the old one, they agree that some impediments remain.
The valuation process remains a big obstacle. A major question is whether the industry can get rid of the appraisal process - and all of the people behind it.
"The most problematic portion of the verification process has to do with the property appraisal process," said Dusty Lashbrook, executive vice president and chief operating offer of the consumer-direct division at Mortgage.com in Atlanta.
"For national lenders, they use appraisal management companies who contract with independent fee appraisers," he says. "In turn, the lender contacts the management company to place the order. They, in turn, contact a local fee appraiser, who accepts or rejects the order.
"The appraiser then must contact someone to set up the appointment," Mr. Lashbrook said. "This is typically the listing agent. The appraiser goes on the appointment as scheduled and completes the appraisal and normally faxes a copy of the report to the appraisal management company. They may elect to quality-control the appraisal report, which may result in the request for additional comparables, which would mean delays."
The solution, Mr. Lashbrook said, is to use data bases that provide a value based on previous, comparable sales.
"We are working with Fannie Mae to establish the ability to use these statistical appraisals, based on a combination of credit score and loan to value," Mr. Lashbrook said. "This will allow us to simply determine that the house exists on the property in question with no interior inspection. Today this can be accomplished through a drive-by review by the appraiser. In the future, this will be accomplished with a satellite photo."
Questions remain about how to loop in or possibly to replace other third-party providers. Countrywide has bought these third-party companies outright to speed the process through a subsidiary, LandSafe Inc. of Dallas, which provides appraisal, credit services, home inspections, title services, and flood equivalents, not only to Countrywide, but to others.
Similarly, the secondary agencies are trying to co-opt these third-party providers. Last March, Fannie Mae established a relationship with MortgageLinks Appraiser Connection to assist lenders, and it has established electronic ties for handling title insurance and flood information through two different sources.
"Re-engineering will continue," said Mr. Lashbrook of Mortgage.com. "The question is how quickly everyone can get people to move out of one house and into another. We don't know what to do about that yet. But we're moving ahead regardless."