Point of View

Disruption not duct tape is the key for mortgage transformation

July 30, 2020

If you’re satisfied with incremental advances in mortgage processing, read no further. Earlier this year, HFS wrote about how emerging technologies such as artificial intelligence (AI) and process automation help the mortgage industry digitize processes and streamline cost and cycle times. While lenders are making notable progress in how they originate mortgages, especially in the realm of cognitive document processing, our overarching conclusion is that lenders are using emerging technologies to modify existing processes rather than create new ones. Emerging technologies such as cognitive document processing are becoming the duct tape of mortgage transformation.

 

To best explore the mortgage industry’s future, we went to the experts and spoke with various lenders and service providers supporting the mortgage industry. From these conversations, we have identified three key areas that hold significant potential for mortgage processing:

  1. Consent-based permissions: Lender validation and verification of borrower information through consent-based permissions.
  2. Data-based real-time decisions: The future is in corralling the data and leveraging it to make more real-time decisions, similar to the credit card industry.
  3. Tokenization and the expanded potential of a digital wallet: The new pre-qualification becomes tokenized verification of a borrower’s risk-worthiness that lives in an upgraded digital wallet.

Consent-based permissions are the first step toward a streamlined mortgage origination process

We already know that mortgage origination is a document-intensive process, with a dual and repetitive burden firstly on the borrower to provide myriad documents attempting to prove their loan-worthiness. In an equally arduous, lender-led process, the lender validates the data it received and verifies its authenticity. While many lenders focus on automating the validation and verification steps, the CEO of a leading BPO firm explained there is an alternative:

The future is verifying loan application information directly from employers, financial institutions, credit agencies, IRS, etc., to match early and create trusted, verified information that allows lenders to be confident the information is legitimate. This is cost-effective because the lenders are already going to these third parties anyway to verify the documents provided by the borrower.”

Rajan Nair, CEO Indecomm Global Services

 

Describing consent-based permissions, Nair hopes to facilitate an improved user experience for borrowers and significant time-savings for lenders with a streamlined collection process. By verifying information directly from the necessary third parties, document origin and validity are fundamentally guaranteed, which removes the need for the verification stage. Glimmers of this potential have been baked into Fannie Mae’s Day 1 Certainty program for income, asset, and employment verification. Many of the systems that are accessed for validation are suboptimal, though, so there is an opportunity for credit agencies and other third parties to help streamline the data for the validation process. Additionally, this approach does not adequately consider exceptions such as self-employment or the very current reality of mass furloughs during the COVID-19 pandemic, but it does begin making documents irrelevant.

Leveraging data to facilitate real-time decisioning will make mortgage origination invisible, much like a credit card application

Ultimately, both the lender and borrower want the mortgage origination process to be as seamless as possible—even invisible—so both parties can benefit from cost and time savings. While removing the need to collect, verify, and process documents would undeniably streamline the process, many lenders are calling for mortgage origination to be invisible, with instant decisions, much like the credit card application process. One lender explained:

 “Why are we going to such great lengths to verify if somebody can afford a loan? We should be able to pull mortgage information like you can for a consumer loan or credit card. The data is available today. If a borrower has a two year non-self- employed work and earnings history, we should on a more consistent basis be able to automatically validate the essentials and move more quickly from application to funding.”

Sherri Calcut, Mortgage President, BOK Financial Mortgage

 Most borrowers tend not to have their data organized, which has led to the advent of digital mortgage applications, as popularized by Rocket Mortgage, Blend, and Roostify. These systems step borrowers through the loan application process, specifically calling out what information the loan requires and verifying the information as customers load it. While these systems help borrowers curate the necessary information, they are not changing the process. The real change potential lies with real-time data. In the same way credit reports can garner enough information to grant approval for credit cards for tens of thousands of dollars in minutes, a lender using existing electronic Know Your Customer (eKYC) information or other existing personal digital financial profile information should be able to process an application in the same fashion. Millions of similar lending transactions executed in the past should form the basis for a massive catalog of training data to support and generate machine learning algorithms to drive approvals and help manage fraud. But as data privacy and regulatory rules forbid the creation of a big happy shared stockpile of information, we continue to chip away using the public data we can access and the data we can obtain via consent.

The future digital wallet should include mortgage pre-qualification

Financial services firms, perpetually product-minded, should consider an expanded concept of a digital wallet—one that corrals and pre-qualifies relevant credit-worthiness information such as tax returns, income, assets, employment, and debt in a digital wallet. For the US, it could be sanctioned by Freddie Mac or Fannie Mae as pre-approved tokens, meaning prospective borrowers’ information has already been processed through automated underwriting systems and approved. These tokens would act as certificates of eligibility streamlining the mortgage origination process while driving consistency and minimizing risk and repetitive audits while improving borrower experience and potentially increasing borrower intelligence around what their borrowing potential and reasonable risk thresholds are. One of the experts we interviewed suggests there is a massive opportunity to leverage current mortgage transactions as the gateway to the future tokenized digital wallet:

“The digital wallet can be administered during the initial sales transaction process or as a leave-behind after closing a transaction. As a token-based subscription, the wallet can be a gateway to pre-process the lending transaction. Borrowers who have organized their tokenized data might be able to garner better rates from lenders because of the lower processing burden. Post-transaction, the application can live as a communication portal for a variety of service offerings related to home ownership and personal financial management. Borrowers who consent can refresh credit eligibility information so they can maintain just-in-time credit eligibility for refinance or re-purchase scenarios. The sponsor of the wallet will serve the long-term housing finance needs of the borrower, generating brand loyalty from first time home buyers, millennials, and low-to-moderate income segments.”

Henry Santos, Mortgage CIO and Global Director of Real Estate Finance Solutions, Infosys

The Bottom Line: Addressing inefficiencies in the existing mortgage model can only go so far; sometimes, a complete overhaul is needed. Lenders and their partners must contemplate new models, or their clients will look elsewhere.

If the ongoing pandemic has taught us anything, it’s that every single process is ready for disruption. Lenders are looking toward a more direct approach to mortgage origination to introduce even more efficiency. However, that’s not the only benefit; this approach will also completely transform the borrower’s experience. Service providers must be prepared to support lenders overhauling their existing mortgage origination processes if they hope to thrive in the post-pandemic world.

 

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