Fannie Mae's new representation and warranty relief offers lenders a long-awaited incentive to use its automated loan validation technology. But is it enough for lenders to make the necessary technology updates and process changes to implement the tools?
Fannie Mae is betting big on the effort, dubbed Day 1 Certainty. As first reported by National Mortgage News, the initiative is designed to improve data accuracy and underwriting timelines by automating income, asset and employment verifications, as well as appraised property value validations.
"It's helping the origination process be as error free as possible, but they've added another layer of work and effort in the process," said Scott Fecteau, managing director at Accenture Credit Services.
That work includes initial implementation and technology integrations, as well as process changes and training to ultimately make it easier for lenders to originate loans. Fannie validates the appraisal data using its Collateral Underwriter technology, while Equifax performs the income and employment data and FormFree validates borrower assets. Fannie also has been working with loan origination system providers to ensure that there are interfaces available to the tools.
"It will require some attention and investment by lenders to be able to make full use of these new innovative technology tools, but everything I've been hearing from customers is that they are more than happy to make those investments in order to get these benefits," Fannie Mae CEO Tim Mayopoulos said in an interview with National Mortgage News.
Fannie selects vendor integration partners and lender testers based on their willingness and ability to test the technology, and has worked with players of varying sizes, Mayopoulos said.
"Lenders who have tested our validation service report that they can now pre-approve borrowers in minutes, not days. They also report that in some cases they are able to slice four to seven days off the time it takes to process a mortgage," Mayopoulos said Thursday during the company's third-quarter earnings call.
Laura Reichel, senior vice president of investor relations and product development at Ditech, expects many lenders will decide the reductions in risk and closing timelines justify the upfront implementation because "at the end of the day, they're going to take time out of the processing and underwriting process."
Being able to offer the rep and warrant relief is the result of Fannie's cumulative investments in technology over a number of years. Those investments are a component of Fannie's administrative expenses, which totaled $661 million during the third quarter, down from $952 million a year earlier and $678 million in the previous quarter.
Technology initiatives like Day 1 Certainty aren't a primary driver of Fannie's earnings, but they do play a role in the size and stability of its book of business. Fannie reported net income of $3.2 billion during the third quarter, compared to $2 billion a year ago and $2.9 billion in the previous quarter. Fannie's serious delinquency rate was 1.24% in 3Q 2016, down from 1.59% in 3Q 2015 and 1.32% in 2Q 2016.
"The Day 1 Certainty innovations, I don't think they're going to have a dramatic effect" on earnings, Mayopoulos said. "But I do think that they should continue to produce good credit results."
The majority of loans that fit within Fannie's credit box should get a green light, though not all loans will be eligible for rep and warrant relief immediately, or on all counts. For example, a loan would be ineligible for appraised value rep and warrant relief if there is limited data to support the automated validation of the collateral.
Still, Fannie wants the initiative to encourage lenders to participate more broadly within its credit parameters, instead of lending more narrowly to avoid rep and warrant liability. This, combined with efforts to reach more lenders with affordable loan products like its HomeReady 97% loan-to-value ratio mortgage, could help Fannie address concerns its regulator and conservator, the Federal Housing Finance Agency, has about its ability to fulfill affordable housing goals. About 800 lenders have been delivering HomeReady loans, Mayopoulos said.
"They set those goals well in advance of when we meet them and then there's a process by which they evaluate whether it was achievable for the enterprises to meet those goals," he said. "We're gathering up information at the request of FHFA to provide that and they then make that evaluation. I will say we have worked hard at Fannie Mae to try to increase access to credit."