We talked with Chris Boyle, senior vice president of Single-Family Sales, Marketing and Relationship Management, about Freddie Mac’s exciting, new collaboration with fintech company LoanBeam. Freddie Mac has teamed up with LoanBeam to help lenders automate the income validation process for self-employed borrowers.
Question: What do you see as the most important challenge and opportunity in the mortgage market today?
Chris Boyle: The main challenge, in my view, is the late-cycle stage of the economic recovery we’re in currently and the subsequent pressures on the industry—mainly tight inventory, affordability problems and rising interest rates. We’ve seen these factors play out this year in the form of slowing home sales and a drop in refinancing activity.
On the bright side, the economy is still strong and wages are growing, so people are still well positioned to buy homes. One customer segment that is ripe for growth is nontraditional wage earners—or self-employed borrowers. Today, there are only about 14 million self-employed borrowers, but studies indicate sharp growth in the number of nontraditional wage earners in this country. LinkedIn recently published a study predicting that some 43% of U.S. workers will be freelancers by 2020. Even if this estimate is ambitious, it still highlights a trend that lenders will want to pay attention to.
Question: What difficulties do lenders experience when underwriting people who are self-employed borrowers?
Chris Boyle: Self-employed borrowers are among the toughest customers to underwrite because of their unique income picture. The U.S. tax code incentivizes the self-employed to reduce their taxable income through write-offs and deductions, making it challenging to accurately calculate the monthly income they’ll have to pay a mortgage. This means that loan officers must manually reconcile dozens of pages of tax documents—including 1099s, Schedule C’s and other forms—to calculate income. The process can take days to unfold, only for the loan processor to discover that some essential information is missing, requiring more back and forth between processor, loan officer and customer. These delays increase processing costs and, in some cases, can even lead to the denial of the mortgage application.
Question: How can lenders better meet the challenge of underwriting more self-employed borrowers?
Chris Boyle: I believe that technology is part of the answer. At Freddie Mac, we spend a lot of time thinking about how we can support lenders. We’re constantly surveying the fintech landscape to analyze the potential of new industry players. In the last several years, fintechs have matured, and they’re coming to the market with solutions we need to explore and take advantage of. These solutions offer lenders the opportunity to leverage technology to automate processes—namely income calculation for the self-employed—something that most lenders still do manually.
It’s important to remember that next to getting an appraisal, the collection and validation of income documentation is the longest part of the underwriting cycle. Efficiency in this case is all about reducing origination time. With an automated income validation tool at their disposal, lenders can potentially eliminate days from the process.
Question: Can you talk about the collaboration you’ve launched with LoanBeam?
Chris Boyle: We began working with LoanBeam, a fintech company, last October in the form of an offline pilot project, with two lenders who are now using LoanBeam’s software. After seeing positive results, we decided to take the next step and integrate LoanBeam’s technology with Loan Product Advisor®, our automated underwriting system. This way, lenders who choose to work with LoanBeam will know that they can use its income calculation to underwrite loans that are saleable to Freddie Mac.
Question: What was it about LoanBeam’s solution that impressed your team?
Chris Boyle: After doing our homework, we decided that LoanBeam has some of the best optical character recognition technology (OCR) in the marketplace. It also comes to the table with deep-level knowledge about tax accounting software. LoanBeam’s OCR technology is highly refined. It extracts and reads data from tax returns, and then calculates an income total at a 99.7% accuracy rate. Freddie Mac and lenders need this level of accuracy before entertaining the thought of using software to calculate an income total. We can’t take chances, given the complexity of deriving a monthly stable income figure for a loan.
Question: Can you talk about how cost savings to lenders could ultimately benefit borrowers and, in doing so, help Freddie Mac to execute its mission of promoting housing affordability?
Chris Boyle: Automated income validation takes a lot of the cost due to inefficiency out of the loan processing equation for self-employed borrowers. In certain cases, lenders may be able to pass on these savings to borrowers in the form of lower rates. When you’re looking at the difference between a 45-day lock and a 60-day lock, that could be the difference between 1/4th or 1/8th of a percentage point in this current climate of rising rates. You’re talking about delivering more benefits to the borrower and expediting a process that has traditionally been onerous and expensive for the lender.
Question: Lenders already have in place processes and IT systems that support the income validation calculation function. Why would they want to use LoanBeam’s technology instead?
Chris Boyle: It’s true that lenders have developed their own worksheets to calculate income, but it requires their staff to not only be tax experts, but also monitor compliance and update systems to reflect changes in the U.S. tax code. Take the example of the recent tax legislation that has redefined the map for sole proprietors. LoanBeam is always adjusting its software to reflect these changes better because they grew out of a tax accounting software background, and have perfected this technology. After they’ve calculated an income total, they output it into workbooks that can be customized to meet specific lender and GSE requirements. That’s a lot of code writing and testing of solutions—along with meeting compliance standards—that a lender has to do on its own, drawing down on resources better spent in other areas of its business.
Question: Do you think today’s changing business landscape (e.g. rising rates, shrinking inventory, slowing home sales) renders it even more important for lenders to embrace technology like what LoanBeam offers?
Chris Boyle: The answer is absolutely. As the landscape grows more competitive resulting in margin pressure, you need to make sure there is no unnecessary cost in your processes. Being an originator with a structurally lower cost base is one way to improve profitability. At the same time, a lower cost structure cannot be your sole focus. You also have to think about how to better serve the borrower. If there’s technology out there that makes you more efficient, reduces cycle time and cuts costs, then you’re improving the borrower experience. This is just one piece of the puzzle, but it’s an integral one.
Question: Can this type of collaboration, the one you’re in with LoanBeam, help lenders to grow their business? For example, is there an opportunity to boost lending to the self-employed, as more Americans become their own bosses?
Chris Boyle: We’re confident that the integration of LoanBeam with Loan Product Advisor will help lenders market themselves more effectively to self-employed borrowers. Historically, this segment hasn’t been aggressively courted because underwriting these loans has been so complex. But now something exists in the market that stands to be a real game changer.
Lastly, I’ll say that this collaboration dovetails nicely with the work we’re doing in reimagining the mortgage experience. As part of this effort, we’re looking at ways to help make the lending process more automated, transparent and, ultimately, less costly for the borrower.
Visit www.freddiemac.com/loanbeam to learn more about the collaboration between LoanBeam and Freddie Mac, and how LoanBeam works with lenders to automate the income validation process.