falseRob Arthur is president of the Virginia Mortgage Lenders Association (VMLA). National Mortgage Professional Magazine recently spoke with him regarding his work with the state’s trade group.
How did you become involved with the Virginia Mortgage Lenders Association?
I became involved because I felt that mortgage professionals needed an advocacy force to ward off threats to our industry. My term began in October and it runs for one year. Before that, I was president-elect, vice president and a general board member.
Why should mortgage professionals in your state join VMLA?
They need to protect their turf. Look at how the Realtors get through their advocacy efforts—they’re strong because they have a huge, huge voice on Capitol Hill. We need that on a more micro-level in the Virginia General Assembly. We need more active members—those who don’t participate are eating from the table without doing any of the cooking.
What is VMLA’s level of outreach on a state and federal level?
We are not in front of the state legislators as much as we need to be. We do a “Day on the Hill” event, but we need to get our members to see their legislators throughout the year, so they know what we’re dealing with at a street level.
At the moment, there are no pressing matters on a state level. In terms of federal lobbying, I have not gone to Capitol Hill yet, though I plan to go this year with the Mortgage Bankers Association. I feel that, in terms of regulation, the pendulum has swung too far in the other direction. Yes, we were too lax in what we did [prior to 2008] in getting people a loan. But now, it is nuts. A lot of people are saying we’re in the compliance business while doing mortgages on the side.
What do you see as your most satisfying accomplishments with the VMLA?
Our convention set a record number for attendance the last two years, averaging 250 to 260 people. Our vendors tell us it is one of the best conventions they attend. We are also involved in a lot of educational outreach. We’ve had people from affiliated industries, including appraisers and home builders, at our panel discussions.
falseWhat is the VMLA doing to build its membership base?
We are not the Virginia Mortgage Bankers Association. We are the Virginia Mortgage Lenders Association. I would like to strengthen our relationship with the brokers and have more of their input. We are looking for new members across our industry. Because of bank mergers and acquisitions our industry is shrinking. Compounding the problem; not many new banks or mortgage lenders are coming online. We would love to have the brokers join our group and work with us in order to help them be successful.
In your professional opinion, what can be done to bring more young people into mortgage careers?
That might be the biggest challenge we face. It is a constant discussion because not a lot of people are coming into the industry. The average age for a loan officer is 56- or 57-years-old. It is tough to get young people to become a commissioned loan officer if they are carrying student loan debt.
I believe that our industry needs to start thinking differently. There are few people coming out of college that say, “I want to be a mortgage lender.” We need to do a better job communicating with Millennials about career paths in our industry. And mortgage lending is not for the faint of heart … it can be cyclical. A lot of people look at what top loan officers make and are intrigued, but the top 10 percent of loan officers are making 90 percent of the money. Many enter the industry and leave in relatively short periods of time.
What is the state of housing in Virginia?
We don’t have the final statistics in yet, but I can say that it was a good year. Of course, all real estate is local, so it depends on the market you are looking at. Northern Virginia, Tidewater, Southwest Virginia and central Virginia all have different economic drivers. Generally speaking, we had excess inventory at the height of the recession, but now in some areas where the economy is growing there is a shortage of homes available for sale. In addition, the lack of affordable housing, especially related to new construction, for the first-time homebuyers continues to be a problem.
Phil Hall is managing editor of National Mortgage Professional Magazine. He may be reached by e-mail at PhilH@MortgageNewsNetwork.com.
Question: We originate loans almost exclusively through E-Sign procedures. Recently, we were cited for not providing proper disclosure to consumers regarding our E-Sign policies. What are the proper disclosures that we must provide consumers in order to ensure compliance with E-Sign?
The Electronic Signatures in Global and National Commerce Act (E-Sign Act) provides a general rule of validity for electronic records and signatures for transactions in or affecting interstate or foreign commerce. The E-Sign Act allows the use of electronic records to satisfy any statute, regulation, or rule of law requiring that such information be provided in writing, if the consumer has affirmatively consented to such use and has not withdrawn such consent.
Prior Consent is required from the consumers in order to implement the E-Sign Act procedures. Prior to obtaining their consent, financial institutions must provide consumers, a clear and conspicuous statement informing the consumer:
►Of any right or option to have the record provided or made available on paper or in a non-electronic form, and the right to withdraw consent, including any conditions, consequences, and fees in the event of such withdrawal;
►Whether the consent applies only to the particular transaction that triggered the disclosure or to identified categories of records that may be provided during the course of the parties’ relationship;
►That describes the procedures the consumer must use to withdraw consent and to update information needed to contact the consumer electronically; and
►That informs the consumer how the consumer may nonetheless request a paper copy of a record and whether any fee will be charged for that copy.
Jonathan Foxx is managing director of Lenders Compliance Group, the first and only full-service, mortgage risk management firm in the United States, specializing exclusively in outsourced mortgage compliance and offering a suite of services in residential mortgage banking for banks and non-banks. If you would like to contact him, please e-mail Compliance@LendersComplianceGroup.com.
At the end of the day, all we want to know is how to succeed. We want to know how to meet our sales goals, how to exceed our investors' expectations, and how to gain more market share over the competition. Since this is inevitably the end game in business, we tend to seek solutions toward that end. We want to know secrets, tips and tricks that can directly contribute to success. The problem, though, is that I don't think success is that linear. Success, for a business, is much like happiness for the individual—you cannot get at it directly; rather, it comes as the inevitable result of doing other things.
In my consulting business, I place an enormous amount of focus on helping organizations define and develop their core values. In the tradition of Simon Sinek's Start With Why, I work with organizations to uncover their ultimate purpose—the reason that they exist in the marketplace. Why do I do this? What does it have to do with the success that all organizations ultimately seek? Well, it is my belief that the strength of the purpose driving an organization is that very thing that must be properly refined before success can even be possible.
Trying to achieve success without understanding your purpose is putting the cart before the horse. It's like wanting to build the ornate roof of a skyscraper for everyone to see before you've even bothered to build the foundation. The fundamentals make everything that comes after possible. In the mortgage industry, people approach me all the time with questions about how to succeed? In my mind, these folks are asking the second question first. The primary question that should be asked is, "What is my purpose?" Once you've clearly understood and articulated the answer to that question, everything else should fall into place. Here are six questions to get you started in that journey of discovery that inevitably leads to success.
1. Why do you exist?
2. What are your values?
A second important question to ask yourself is, “What do you believe?” This sort of question can lead to developing your own internal "code of ethics." This, of course, is above and beyond what is necessary for compliance. Great leaders are accountable not only to regulators, but also to their own high moral standards. Knowing what your values are takes much of the risk out of doing business. As long as you are sticking to the guidelines you've laid out for yourself, you'll know that you aren't cutting any corners. If, on the other hand, you don't have any clearly defined values, then you never know where you might end up.
3. How do you work?
After you've gotten the basics of why you exist down, the next step is to move on to how you work. When you ask this question, you are asking about your process. How do you go about carrying out your mission? What systems do you have in place that guide the day-to-day operations of your business? All too often, organizations work in a haphazard manner. There is no rhyme or reason to the process—it sort of just arises spontaneously. If you want to increase your chances for success, you've got to be more deliberate about how you get there. Take a look at your processes and see what could use some tweaking.
4. What do you offer?
The next question you might ask is often the question people start with, “What is your product?” What do you sell? What is it that your customers want that you can provide? Before you know what you sell, you should definitely know who you are. Why you are in business and how you operate should come first but, let's face, without a product you don't really have a business. At the end of the day, you need to have something to sell. What are the products that you can offer within the context of the mortgage industry? On one level, everyone will have relatively the same product, but you can be creative in what you offer in such a way that makes it unique? Oftentimes, the package is the product? How are you packaging what you sell?
5. Who is on your team?
A fifth question for you to ask if you want to know that fundamentals on which you will build success is this: “Who do you have working with you?” Business is a team sport. You might have coaches. You might even have star players, but success only happens when everyone crosses the finish line. How invested are you in developing your team? Too many organizations give little attention to this question. Of course, everyone says that they want the best people, but few are willing to really devote the resources required to hire and retain them. In the mortgage industry, one great employer is worth at least five mediocre ones. The industry can be complex on both an intellectual and social level, and you need to employees that can balance both. That means hiring the best for the job and then training them to be even better. So, what about you? Have you paid enough attention to the quality of your team?
6. What makes you different?
Even after you've ironed out your purpose, process, product and people, you are still left with a quandary when trying to compete with other organizations in the mortgage industry. When seeking to clarify a worthwhile purpose that serves as the foundation for success, you must ultimately ask the question, “What make us so special?” What are you doing that no one else is doing? What do you bring to the table? Of course, you believe you are unique, but is that fact obvious to those on the outside? Do investors see you any differently than any other organization in the industry? What about customers? It's not enough to be different; you also need to look different. This last question you must ask is how you differentiate yourself—how you refine your image to reflect a competitive advantage against others in the industry.
There are, of course, many more questions you could ask to help you understand your core purpose. Moreover, having solid answers for these questions won't necessarily give you success. It will, however, make success possible. When you can understand fully who you are, how you work, and what you do, you will have the necessary building blocks to work toward success. It may end with meeting sales goals, exceeding investors' expectations, or achieving the highest market share in your niche, but always remember … it all starts with why.
David Lykken, a 43-year veteran of the mortgage industry, is president of Transformational Mortgage Solutions (TMS), a management consulting firm that provides transformative business strategies to owners and “C-Level” executives via consulting, executive coaching and various communications strategies. He is a frequent guest on FOX Business News and hosts his own weekly podcast called “Lykken on Lending” heard Monday’s at 1:00 p.m. ET at LykkenOnLending.com. David’s phone number is (512) 759-0999 and his e-mail is David@TMS-Advisors.com.
This article originally appeared in the October 2016 print edition of National Mortgage Professional Magazine.
How many things do we have at our disposal today that would have seemed absolutely preposterous if they had been described to us 10, 15 or 20 years ago? Walkie-talkies were once a big deal, but today we can call anywhere in the world, check video monitoring of our homes remotely, and do a million other things on devices that fit in our pockets.
Quantum leaps get bigger and more frequent in the technology realm, but things don't move quite that fast in mortgage banking. Mortgages don't get invented, redefined or completely overhauled the way gadgets do; our product doesn't change much. But the way we sell and deliver it must. With the rise of the digital mortgage and the fact that the lending industry is still a political football, the only constant the mortgage industry can count on going forward is change. How well companies fare in the future will depend on their ability to embrace and adapt to it.
There are two types of change in the mortgage industry: Inherent and imposed.
The cyclical nature of the economy, housing and other markets are inherent changes and companies and mortgage loan officers alike regularly adjust to shifting conditions to maintain and grow production and profit. Other changes are imposed by outside forces, such as government, and must also become an integral part of the mortgage industry. But these are not as readily accepted or dealt with skillfully because they're required for survival rather than promoting success.
The Dodd-Frank Wall Street Reform and Consumer Protection Act is the most sweeping imposed change in the history of the mortgage industry, imposing a compliance grip that takes hold before consumers even become clients and creating a minefield that originators and their companies must navigate all the way through closing. Though it's understood that fines for compliance violations can incapacitate and close entire companies and end careers, mortgage companies nationwide struggle to manage all aspects of today's requirements from marketing to closing. Resistance comes from inside and out, with in-process staff frustrated with system changes and producers who want control and variety in their marketing.
Technology has made its way into the mortgage business both as a friend and a foe. Today’s demanding regulatory climate has brought forth many systems and products to help the mortgage industry comply with marketing, disclosure, archiving and other requirements. The majority of today’s compliance solutions require adjustment to work process, pattern and flow, as well as infrastructure, and the solutions can seem as daunting as the compliance challenges themselves. However, the multitude and intricacy of rules that apply to all aspects of a mortgage transaction make them necessary and indispensable.
Technology has also become "the competition" with the rise of digital mortgages. Global consulting firm Accenture has been particularly diligent about chronicling the ascent of digital lenders, juxtaposing the amount of market share they're gaining against the losses suffered by traditional lending sources. It uses the term "Convergent Disruption" to describe what the mortgage industry must deal with to survive and succeed.
In its report, “Convergent Disruption in the Credit Industry: A Roadmap to Achieving Sustainable Competitive Advantage by 2020,” Accenture lists what lenders must do today to succeed in the Era of Convergent Disruption:
►Proactively invest in initiatives that will build the business rather than reactively respond to regulations, competitors and industry changes.
►Fundamentally shift from a product-oriented organization to a customer-driven organization.
►Rebuild bank reputations.
►Embrace and integrate new technologies, channels and strategies.
This is not necessarily news to companies and MLOs who have been implementing technology in varying degrees for years. Mortgage industry leaders regularly mobilize to combat obstacles in order to preserve and increase business. But enthusiasm and execution diminish exponentially when effort and attention are required to deal with conditions that don't support or enhance the company's bottom line. Producers and staff understandably get cranky when they must alter their routines. Changes necessary for regulatory compliance not directly tied to production or profit are dull at best; at worst, they are debilitating and costly on many levels.
Technology is no longer just a tool to increase efficiency, it's an essential safety net for survival.
The best way to mitigate implications of requirements imposed on the industry by lawmakers unfamiliar with the process is to take control at the company level and deploy an enterprise solution that can be managed and monitored by leadership so that the company's interests are protected and exposure is minimized. Additionally, it's critical to maintain the ability of originators to produce and remain driven in a climate where common business practices of the past have become financially-crippling compliance violations, while simultaneously avoiding logjams that overwhelm support staff.
Consolidating marketing along with in-process data and managing disclosure checkpoints enable companies to satisfy regulators along with their own operational and financial needs and goals. Streamlining marketing and in-process activity into a centrally-monitored system will eliminate mistakes and free originators to produce and assist internal staff in adhering to disclosure and timeline rules. Watchdog agencies are hungry for headlines that inflame the public and fines that fill their coffers—and they’re all too eager to audit your company to get them.
While technology is a solution, it’s also a change and generally not a small one. There is an abundance of information, analysis and opinions on why change initiatives fail, and two major reasons repeatedly appear: Communication by and resistance within the organization. Leadership is essential to make a successful, sustainable change in an organization, and it must begin, be monitored and be consistent from the top. Communication plans must be made almost simultaneously with decisions to make and implement change.
Understand what management and your organization as a whole will be facing as you craft your message and communication plan: Resistance to change must be understood in order for it to be overcome. Just as coughing and sneezing are symptoms of an underlying illness, questioning, resisting and avoiding change are indicators of underlying concerns such as:
►Anxiety from disruption of comfortable, mastered routines.
►Embarrassment in needing to ask questions about new processes or technology.
►Discomfort with one’s ability to do the job in current and/or new conditions.
►Confusion amid mixed signals from superiors about change and the future.
Communicating to achieve a desired result requires anticipating, acknowledging and addressing the reactions of those being charged with accepting, adopting and sustaining change. The Towers Watson 2012 Global Workforce Study exposed a significant gap here, finding that about nine out of 10, or 87 percent, of organizations train on how to manage change, but only one in four managers say the training is effective.
Too many companies implementing change initiatives assume that their directives will be accepted and that the reasoning behind them is sound. As a result, they fail to anticipate objections and how to overcome them. Resistance triggers must be addressed at the inception of a change initiative and factored into all training and communication checkpoints throughout implementation.
We never know the full extent of inherent change in the mortgage industry until after the fact. For example, we can't pinpoint when interest rates will bottom out in a particular cycle until they have climbed back up and vice-versa. However, with imposed change such as government regulation, we are given the guidelines as to what is affected and when, what is required and what consequences are to be expected for non-compliance. The only unknown with this type of change is what the impact will be on operations and production.
Success in any business requires more than merely staying afloat. The mortgage industry will always be subject to the inherent change of market fluctuation and competition, but it doesn't have to be dragged under by consequences and difficulty of imposed change. Effective, sustained change does not occur without planning, understanding and addressing resistance, monitoring, in-process adjustment and consistent communication through all company channels. Especially in cases of imposed change, leadership must first own the solution in order to get organizational buy-in and the desired result. Change is unavoidable; how it is managed determines the degree of your longevity and success.
Sue Woodard is president and chief executive officer of Vantage Production, a provider of technology and services supporting the sales and marketing of mortgage products, as well as the professional development of mortgage loan officers. She can be reached by e-mail at SWoodard@VantageProduction.com.
This article originally appeared in the October 2016 print edition of National Mortgage Professional Magazine.
Does anyone remember the ‘dot-bombs’ from the late 1990s and early 2000s? CEOs right out of college with an MBA in their hand offered to revolutionize mortgage loan origination processes only to see their bubbles burst not long after the turn of the century.
With the explosive growth of originations and securitization markets in the early 2000s followed by the Great Mortgage Recession, whole loan trading technology remained an “uninvested” area, continuing as a back-office function dominated by “tape crackers” and personal relationships.
We learned some lessons about dot-com technology in the mortgage space, but despite the fallout in online technology, some of the tools, policies and procedures behind online mortgage origination, servicing and secondary market trading remain relevant to this day. MISMO data standards, for example, are a constant presence in online mortgage technology not only for loan originations and mortgage servicers but for tomorrow’s secondary market technology.
We continue to make progress with data standardization because industry players recognized early the necessity for different systems and software to speak the same language.
Thanks to recent technology innovations, the time has finally arrived for online automated whole loan and bulk mortgage trading. And it’s not a minute too soon, given the greater volume and complexity of loans and the need for greater compliance. Several organizations are beginning to think so, as new trading platforms are being launched and pilot programs are underway with multiple associations and banking groups.
Standardizing loan data “tapes”
Before whole loan trading goes mainstream and online, however, some basic things need to be established. We need a standard process and a standard set of data. If the names of the data fields on a loan are different from one company to the next, there is no way for parties to effectively share information via a common platform.
In the mortgage business, we “crack tapes” to map column headers and data formats, with the most common difficulty around loan program names. Technology can certainly facilitate loan trading, but the industry will have to adopt a common data standard first.
What about the fields that are required to trade loans? It would seem that we need a slightly different set of data depending on what type of loan is being traded, whether it be a plain-vanilla agency loan or a non-performing mortgage. While those different standards are generally understood by market participants, they’re not published or enforced. Newcomers need to learn them, and everyone is translating (“mapping”) data to get things into their individual format.
This less than optimal situation is being magnified by the growth in whole loan trading relative to other delivery options. Not only is trading volume rising and expected to keep growing, but the variety and complexity of loan types is also expanding. While pay-option loans may not make a comeback soon, non-QM lending, expanded criteria loans, and the growth of the second-lien market all suggest product innovation is increasing. The secondary market will grow along with them, but only if the technology is in place to keep pace.
It seems, then, that for technology to facilitate loan trading, standardized data sets by loan product will be necessary, along with common formatting of particular data fields. And if the data does become standardized, what else do we need for technology to streamline loan trading?
The MLPA offers a starting point for commonality
There have been numerous efforts, by both industry trade groups and large financial institutions, to take this task on by themselves, by standardizing a single version of the Mortgage Loan Purchase Agreement (MLPA). Loan sellers would love for this to happen, as it would open up more trading options with less time spent in obtaining counterparty approval. But buyers, not surprisingly, aren’t as enthusiastic, since it could mean increased risk on their part. Buyers may also look at this as driving towards common fee schedules, reducing their flexibility in negotiating with potential counterparties.
After reviewing many MLPAs, it seems obvious that there is some level of commonality. Buyers and sellers frequently talk about creating a single standard document that would simplify the legal process and increase liquidity for both large and small participants. There seem to be enough common areas that, if structured broadly, might lead to a consensus to a standard document.
Importantly, however, the MLPA will still need to be a one-to-one relationship, meaning each buyer to each seller. There is consensus that a multi-party agreement will not work, but a common document for each counterparty pairing might.
So, then, if we are getting closer to a standard MLPA, what’s the next step? How will technology facilitate online whole loan mortgage trading as a result?
Here are six benefits we can expect from a technology-driven mortgage loan trading platform made possible by standardized data:
1. Greater efficiency: Standardized data and a common MLPA would dramatically increase the efficiency of the loan trading process. Technology would support this with embedded code for “tape cracking,” and document signing would become a function of the trading process.
2. Enhanced security: E-mailing spreadsheets is not a secure way to trade whole loans, yet many still do it. In a trading platform, that risk is largely removed by encryption technology. Data and documents are stored in a secure, password-protected environment. Just like any other financial system, it removes the unknowns and dangers in transferring data and documents via unsecure e-mail.
3. Improved communication: Rather than communicating via e-mail or telephone, buyers and sellers communicate in real-time directly through the platform, facilitating safe and transparent communication. Traders on both the buy and sell sides view the same data at the same time, and can notify each other of loans and pools they wish to trade via “chat” functionality. They can exchange loan data, documents and pricing information and settle transactions, all without exiting the platform.
4. Wider search options: Sellers will be able to create pools from their inventory by searching multiple criteria to create offered pools. Buyers can search by loan criteria, seller or pools and create their own pool reflecting their investment criteria. If they choose to do so, they can ignore the seller’s pool and focus on an investment strategy across pools. Buyers can also create an “axe,” which is a defined search criteria that continually looks for any of the loans posted on the platform that match what the buyer wants.
5. Automated best execution in real-time: Best execution will help the seller determine the best delivery for every loan, whether that is standard delivery options or a bulk bid. One buyer might want the entire pool, another might want just a portion, while yet another might want to pick and choose. Calculating which results in the best return for the seller in a spreadsheet is tedious. A platform provides best execution automatically and in real time so traders spend more time making good decisions rather than running math scenarios.
6. More system integration: Online trading platforms enable users to directly integrate their pricing engines, loan origination systems and service providers.
Secondary market trading technology, like the technology widely in use in mortgage loan origination and servicing, has finally arrived. Its widespread adoption by the industry is not a matter of “if,” but of “when.” In order to get where we need to be, we need to adopt proper procedures for standardizing data. Eventually, we’ll be able to increase transactional speeds so that buyers and sellers can continue to increase liquidity in the marketplace.
Trading platforms will soon become an important intersection for everyone in the secondary market. Already, dozens of major players—banks, servicers, investors, hedge funds and others—are trading thousands of loans through a platform. The day of inefficiently using an Excel spreadsheet to track whole loan trading will soon be long gone. Two cheers to that.
John Ardy is chief executive officer of Resitrader Inc., a Calabasas, Calif.-based provider of whole loan mortgage trade management software. He can be reached by phone at (310) 469-1640 or by e-mail at John.Ardy@Resitrader.com.
This article originally appeared in the October 2016 print edition of National Mortgage Professional Magazine.
Mortgage denials aren’t just a problem for homebuyers. When mortgage denials are up the entire mortgage industry stands to lose.
Every time a consumer is denied a mortgage loan, it sets off a chain of events that impacts all of us. The loan officer doesn’t get paid, the lender doesn’t make money, the realtor is at a loss and the industry’s reputation is maligned. All have long-term effects that could cost you future customers. Consumers who are denied a mortgage loan often end up feeling dismayed, disconnected, and discouraged. They may then take their mortgage and banking business elsewhere. This is particularly harmful when cross-selling opportunities arise.
Among minorities, mortgage denials are an even greater problem. Black and Latino homebuyers are less likely to be approved for mortgage loans than their White counterparts. Research has shown that with the number of minorities continuing to rise in the United States, Black and Latino consumers will be the homebuyers of tomorrow. How will you expand your customer base when customers feel alienated by being denied a loan?
What the industry can do to decrease denials
Since everybody loses when a mortgage loan is denied, we can all benefit from the work of strong counseling organizations who can help stop mortgage denials in their tracks. Counseling organizations work with consumers to assess their readiness for homeownership and if they’re not ready, we work with them until they are.
Borrowers need more than mere information and advice. They need a step-by-step personal mortgage-ready plan, and a system designed to monitor and motivate them so they stick to that plan. According to a study by the Federal Reserve Board, 47 percent of Americans couldn’t come up with $400 if a financial emergency struck. I’ve come across people whose lives were turned upside down because they needed new tires, got a divorce, had high student loan debt and could not save a dime.
When people don’t get the pre-purchase financial guidance they need, challenging circumstances can turn into financial disasters. When borrowers aren’t equipped to make wise financial decisions on a daily basis they are more likely to have credit challenges yet many expect to be approved with a 500 credit score. The health of the mortgage industry depends on getting people financially prepared and approved for sustainable homeownership.
The impact of denials is great, but counseling organizations can mitigate some of those denials and maximize closings. HomeFree-USA has looked at a multitude of mortgage programs and we understand what borrowers must do to be prepared for certain mortgage products. Our job is to ensure that homebuyers are financially ready to buy a home before they come to you. With us, homebuyers are more likely to be approved and successful in their quest to buy a home.
In a world with more mortgage approvals, lenders are happy, real estate professionals are happy and most importantly your homebuyers are happy. Successful homebuyers believe that the lending community is working with them and not against them. When that happens, all of us win.
Marcia Griffin is founder and president of HomeFree-USA, a leading homeownership organization with 68 results-oriented culturally and ethnically diverse non-profit partners nationwide. HomeFree-USA has offices in Washington, DC, throughout Maryland, Atlanta, and South Florida.
As a commercial mortgage underwriter, broker and lender with more than 30 years of experience, I am constantly asked by residential lenders and brokers to explain the mechanics of commercial mortgage underwriting. Residential lenders are accustomed to asking about a borrower’s income, credit, net worth, liquidity and debt-to-income ratio. Commercial lenders ask those same questions, but also need to understand the cash flow of the underlying commercial property. There are various mathematical calculations that are employed in this cash flow analysis.
I will define and attempt to explain these calculations in a logical sequence, as follows:
►Potential gross income: This represents the maximum income to be realized from the property. For example, let’s say that a borrower owns a 10-unit apartment building with average rents of $1,000/month. The potential gross income would be $120,000/year (10 apartments x $1,000 x 12 months). This $120,000 doesn’t tell us enough yet, but it is our starting point.
►Operating expenses: Every building has expenses, including real estate taxes, insurance, utilities, maintenance and repairs, garbage, landscaping, etc. These operating expenses need to be reviewed carefully as many sellers, owners and real estate agents often understate actual expenses when selling a property.
►Underwritten expenses: There are certain expenses that are always overlooked by sellers and brokers, but assumed by underwriters. These include vacancy factor, management fees, repair allowances, tenant improvements and leasing commissions. Underwriters will assign a vacancy factor (say five percent) to allow for lost rents during tenant move-outs and tenant move-ins. Management fees are required (again, say five percent) to pay for management duties even if performed by the owner. Repair allowances cover unforeseen expenses and building repair for non-regular events such as a new roof or new boiler. These events do not occur annually, but must be budgeted. Commercial properties, such as retail and office buildings, might also require tenant improvements to lure a new tenant and leasing commissions to a real estate broker. All of these expenses will be estimated by the underwriter.
►Net operating income: The operating expenses and underwritten expenses will be subtracted from the potential gross income to generate what is known as the net operating income. This is the building’s net profit before debt service, or mortgage payments.
►Annual debt service: This represents the total annual payments for the existing or proposed mortgage. For example, if the monthly mortgage payment is $2,000, we say that the annual debt service is $24,000. The debt service needs to be adequately covered by the net operating income. This concept is explained next.
►Debt service coverage ratio: This is the first of two main ratios considered by a commercial mortgage underwriter. The debt service coverage ratio (DSCR) is calculated by dividing the net operating income by the annual debt service. As an example, say a building has a net operating income of $125,000 and proposed annual debt service is $100,000. In this example, the DSCR is 1.25 ($125,000 divided by $100,000). A number above 1.00 means that the property operates in the black. A number equal to 1.00 means the property breaks even. A number below 1.00 means that a property operates in the red. Most underwriters look for a DSCR of 1.25 or better. If the number is lower, a reduction in the loan amount would be necessary.
►Capitalization rate (Cap Rate): The cap rate is the rate of return that an investor expects to realize on his cash. If you deposit money in a bank CD paying one percent interest, you can say that the cap rate is one. A real estate investor typically seeks a return of five to eight percent. The cap rate helps an underwriter determine the value of a commercial property. This concept is explained next.
►Property value (Income Capitalization Method): Above we discussed a building with a net operating income of $125,000. That means that the building generates $125,000 of cash flow (before the mortgage). If an investor wanted a cap rate of eight percent, that building would be valued at $1,562,000 ($125,000 divided by 0.08 equals $1,562,000). If a different investor was willing to accept a cap rate of five percent, the same building would be worth $2,500,000 ($125,000 divided by 0.05 equals $2,500,000). As you can see, the higher the cap rate used, the lower the value. The lower the cap rate, the higher the value. A professional appraiser will know the appropriate cap rate in the given market for the given property type. To recap, the value of the building will be determined by the net operating income and the cap rate used.
►Loan-to-value ratio (LTV): The second main ratio used by a commercial mortgage underwriter is the loan-to-value ratio. This is much simpler to calculate and is similar to a residential loan. Once the value is determined (usually by the income capitalization method), the lender multiplies by the LTV to determine the maximum loan. As an example, if a lender has a maximum LTV of 75 percent, and the property is worth $2 million, the maximum loan (based on the LTV method) would be $1.5 million. The maximum loan using the LTV method might be higher or lower than the maximum loan available using the DSCR method explained above. The underwriter will calculate both and usually cap the loan amount at the lower of the two ratios.
As you can see, there is a fair amount of basic arithmetic employed when analyzing a commercial mortgage loan request. A borrower should familiarize himself with these calculations prior to submitting a loan application to a lender, or submitting a purchase offer to a seller or broker.
Stephen A. Sobin is president and founder of Select Commercial Funding LLC, a nationwide commercial mortgage brokerage company. He is an industry veteran with more than 30 years of mortgage lending experience, and is also a founding member of the InterCapital Group, a nationwide alliance of commercial mortgage professionals. Stephen may be reached by e-mail at SAS@SelectCommercial.com.
This article originally appeared in the December 2016 print edition of National Mortgage Professional Magazine.
Conventional lending covers a wide swath of the residential mortgage industry, as it includes both fixed-rate and adjustable-rate mortgages, conforming and non-conforming loans and nearly everything else that isn’t guaranteed by the U.S. government. As such, it has long dominated the residential mortgage market, but even more so since the housing crisis and subsequent tightening of credit standards.
This past July, conventional loans accounted for 65 percent of the mortgages originated1, according to the Ellie Mae Origination Insight Report. And no wonder, as conventional loans had the highest closing rate at 72.1 percent. These numbers are reflected in the often narrow offerings of today’s wholesale lenders. These lenders dictate strict guidelines and requirements for their conventional loans, and show little interest in investigating the realities of more complex loan scenarios.
But as more and more brokers and originators jockey for the perfect conventional loans, they may be overlooking the borrowers—and lenders—that can help them close more loans. With some larger banks leaving the wholesale space, mortgage brokers have the opportunity to expand their business with new lenders that can manage more complex conventional financing beyond the typical loan scenario.
Conventional does not equal simple
Mortgage brokers recognize a good loan prospect when they see one: A borrower with great credit, a 20 percent downpayment and a steady job with a good income. For a mortgage broker with this borrower, finding a conventional loan is just a matter of securing the best rate for their customer. But not all borrowers meet these criteria. Many have a more complex credit history or a less traditional source of income. For these borrowers, mortgage brokers may have a harder time finding a lender that will provide financing.
Some wholesale lenders don’t want the additional time and effort it takes to underwrite more complicated financing scenarios, such as:
►A self-employed borrower with good/great credit and cash on hand for purchase
►A borrower with income from child-support payments
►A borrower with income that isn’t great, but who has a lot of assets
►A borrower seeking the lowest possible monthly payment for the first few years of the mortgage
►A borrower needing a mortgage on a partially completed home
►A borrower seeking a cash-out refinance after the home was listed for sale, but then taken off the market
►A self-employed borrower looking to refinance, with equity in the home
All of these scenarios are conventional loans. But they may require more attention from a conventional lender.
A closer look
If you consider just the first scenario of a self-employed borrower, it doesn’t seem like it should be a stretch for conventional lenders. Good credit, good down payment, good to go, right? Not necessarily. According to Fannie Mae’s underwriting factors and documentation for self-employed borrowers2, a lot more information is required, as well as more documentation. Following Fannie Mae’s guidelines, these factors should be analyzed for a self-employed borrower:
►Business location and nature
►Product or service demand for the business’s focus
►Financial strength of the business
►The income potential of the business: that is, whether the business can keep generating and distributing sufficient income so the borrower can meet the mortgage commitment
Some lenders see the need for this kind of in-depth analysis and shy away, making it difficult for mortgage brokers to secure the financing their client needs. But financing is possible if the borrower, broker and lender are willing to take the extra time to procure the necessary documentation. Required documentation would include in this scenario, two years’ of federal income tax returns (both business and personal), written analysis of the borrower’s personal income and business income and potentially a business cash-flow analysis, if the borrower intends to use business funds for the downpayment or closing costs.
If you look at the next scenario—a borrower with income from child-support payments—it, too, doesn’t seem that complicated, as it’s just income from another source. But it requires extra documentation as well, which many lenders don’t like because of the extra work, and potentially extra risk, it entails. Conventional lenders and the government actually have similar standards on verifying income from alimony or child support, and they include3:
►Documentation that the child support and/or alimony income will continue for at least three years after the mortgage application date; must be an official legal document
►Documentation of at least six months of regular payments being made to the borrower
►Review of the payment history to determine if it is suitable as a stable qualifying income
Some lenders may be concerned about the eligibility of this borrower because many couples may have “informal” agreements as to child-support payments, which means they are not a stable source of income. In addition, how much of the borrower’s income is represented by the child-support or alimony payments is another factor. For many lenders, if the payments comprise more than 30 percent of the borrower’s qualifying income, additional documentation is required, often including documentation of a full year of complete, on-time payments. All this does not mean, however, that this borrower is not a good candidate for a conventional loan—although that is how some lender’s guidelines interpret this situation.
Just by looking at these two possible scenarios, it’s apparent that not all conventional lending is created equal. There is a wide variety of borrowers out there, and their needs may not be met by the typical conventional guidelines of many wholesale lenders. Luckily, some lenders do understand how to operate beyond straightforward conventional lending scenarios.
Finding the right lender
Mortgage brokers often work with an array of lenders—some who work exclusively with U.S. Department of Veterans Affairs (VA) loans, or construction loans or some that only do conventional lending. Partnering with a lender can be a complicated process, but mortgage brokers who want to serve the most clients—from straightforward purchase loans to more complicated cash-out refinances—should seek lenders that have the same objective.
When lenders list the types of loans products they offer, brokers should take the time to make sure they fully understand just what lenders mean by their lists. If a lender provides Federal Housing Administration (FHA), VA and conventional loans, examine their underwriting guidelines to see if they follow the broader guidelines of the government, or Fannie Mae or Freddie Mac or if they instead place additional requirements on their borrowers. Talk with other brokers who have worked with a particular lender to determine if they have a rigid set of requirements or if they look at the entirety of loan scenarios. Consider talking with someone at the lending institution, especially if you have a particular scenario in mind. By taking these steps, you can find a lender that meets your needs and the needs of your clients.
Mortgage brokers should partner with lenders that offer conventional lending that provides financing for a wide variety of borrowers, not just one small subset. Conventional lending ranges from the everyday, uncomplicated borrower to those with more challenging financing constraints. Look for a wholesale lender eager to work with you and your clients to secure them a mortgage, whether they are self-employed, a borrower with child-support income or some other variation that may require more time and documentation.
For many lenders, any loan that doesn't fit into their rigid criteria is rejected out of hand, but mortgage brokers know there are many potential borrowers out there who are conventional loan prospects, even if they are more complex from a financing standpoint. There are financing options available to mortgage brokers working with these clients, but brokers must be willing to put in the work to discover the lenders that take on these challenges by offering a wide variety of loan products and services to provide financing for not entirely traditional borrowers.
Rey Maninang is senior vice president and national sales director of Carrington Mortgage Services LLC’s Wholesale Mortgage Lending Division. Under Rey’s leadership, Carrington’s Wholesale Division has increased volume production by over 100 percent within a two-year period, and successfully launched several strategic initiatives resulting in consistent profit increases.
This article originally appeared in the September 2016 print edition of National Mortgage Professional Magazine.
The mortgage lending environment has changed dramatically since the introduction of the Dodd-Frank Wall Street Reform and the Consumer Protection Act in 2010. Add in “Know Before You Owe” (also known as TRID) to the mix and you have a compliance department’s worst nightmare. With these changes, financial institutions have found themselves struggling to build or maintain in-house mortgage operations while managing to comply with all of the new regulations. Many financial institutions are still considering other options that increase income, reduce expenses, and improve their value offerings.
Inlanta Mortgage, headquartered in Wisconsin—a state that has always been heavily concentrated with community banks and credit unions—recognized an opportunity to partner with institutions to support their mortgage origination departments with their platform and started growing their business as a third-party originator (TPO) three years ago.
We saw a need in the industry and wanted to help support the small- to mid-sized banks within our communities. Through a TPO program, local banks are able to outsource their loans for disclosures, processing, underwriting and funding, while they maintain the relationship and “face” to the depository customer. The bank or credit union still originates the loan and keeps the relationship with their customers by acting as the point of contact and advisor through the entire transaction. However, they do not need a staff of processors, underwriters, and closers, which dramatically reduces the bank’s expense structure and keeps their costs low.
Through this partnering, it provides a great opportunity for independent mortgage bankers to expand their business, leverage off their existing platform, and bring in additional fundings that may not have been considered in the past. Consumers can benefit as they are able to continue working with their local bank in which they hold a current relationship. Consumers also benefit as the bank and the mortgage company are now working together to serve their communities that they previously may have competed in. It is truly beneficial for all parties involved.
Before growth as a TPO can begin, you must ensure that all of the appropriate systems and processes are in place to support the new business. Some items of business to consider include: Do you have an LOS system to handle the separate business? Can you support third-party origination online and host the bank’s online loan application. You will need to have dedicated employees throughout your organization who will focus on TPO, such as internal account management and processing support. The business development side of the TPO channel can be slow since the parties were previously competitors, but once you build trust and credibility, the relationship makes complete sense.
There are numerous benefits to your partners by participating in your TPO program. As mentioned before, one major benefit is lower cost of origination for the bank. A TPO program allows local banks and credit unions to leverage the systems and processes of a leader in mortgage origination, without the significant staffing costs. The TPO will prepare and distribute all mortgage loan disclosures to all loan applicants on behalf of the TPO partner. This will not only reduce compliance risk but also relieve the financial institution from employing resources to perform these tasks. In addition, the TPO program offers processing services through a dedicated team of processors who are well-versed in all programs and able to process the file from start to finish. Eliminating the need to staff a processing department or by removing this task from the bank loan officers’ current duties allows the loan officers to focus on securing more sales and serving the depository customer. Underwriting responsibilities are also handled, which lessens the burden of the partner’s need to employ another department.
A TPO program also reduces compliance risk for the bank. The cost of mortgage origination in the area of compliance has dramatically increased with all of the new rules instituted by Dodd-Frank and enforced by the Consumer Financial Protection Bureau (CFPB) over the last few years. If a lending institution is not originating a high volume of mortgage loans, the cost of staffing a compliance department can readily erode the revenue realized through mortgage origination and distract the compliance department from other areas of the bank’s compliance demands. The new regulations can carry stiff penalties for errors in the mortgage process which could cripple a bank’s assets. This leaves the TPO partner free to service its depositor’s needs in-house while adding a profitable mortgage revenue stream.
Having an expanded product offering is an attractive benefit for banks and credit unions that currently have a limited product offering available by working only with one of the government-sponsored enterprises (GSEs). Many banks and credit unions are quite adept at originating conventional mortgage loans to their client base; however, they may have only worked with Fannie Mae or Freddie Mac exclusively. Inlanta’s TPO program has had success in expanding our TPO clients’ mortgage product offerings to include FHA, USDA, and VA mortgage loan programs. As a government lender and one of the top community-based lending institutions in the state of Wisconsin, our TPO program allows clients to leverage our expertise to capture business that they would otherwise be turning away. The cost of turning away the government mortgage business is huge as many government loan programs assist first-time homebuyers or possible credit challenged customers. These customers are not to be confused with those of the sub-prime days as most do have certain credit thresholds that must be met. Some of these programs also allow clients to carry slightly higher debt loads. These clients represent the future depositors of the bank and credit union. By assisting them with their first mortgage, it provides the opportunity to start a relationship with a client that could last a lifetime.
Finally, this adds an additional stream of fee income. One of the first questions one may hear regarding a TPO relationship is how the compensation is structured. Per RESPA requirements, a bank or credit union must choose from a list of services that they will provide, along with taking the initial application, which will allow for compliant compensation under the agreement. This compensation must be based on total volume, just as it is with LO compensation under Dodd-Frank compensation rules. An additional benefit of these new partnerships is that independent mortgage bankers are pure mortgage enterprises and therefore do not present the threat to the bank or credit union of competing for the depository relationship. They’re not trying to lure seasoned deposit customers away.
The changes that came about as a result of the financial crisis have certainly been challenging for many financial institutions, but one of the benefits has been new partnerships where each party can focus on their specific area of expertise and continue to provide enhanced products and services to the communities they serve. Previous competitors can come together in a mutually benefiting relationship where all parties win: Our customers, our businesses, and our communities.
Nicholas DelTorto is president and CEO of Inlanta Mortgage Inc. Nick's experience of more than 30 years in proven sales, marketing and operations leadership allows him to help guide Inlanta in an industry that since the financial crisis has faced serious challenges and difficulties. He is past president of the WMBA (Wisconsin Mortgage Bankers Association) and is immediate past co-chair of the national MBA’s Independent Mortgage Bankers Committee.
This article originally appeared in the September 2016 print edition of National Mortgage Professional Magazine.
For brokers looking to make the transition into mortgage banking, the timing couldn’t be better. Depository lenders are increasingly giving up market share to non-bank mortgage lenders, and with the current rate environment, non-bank lenders are able to offer borrowers extremely competitive rates. What’s more, advances in digital origination technology are poised to reduce the cost to originate, which eases the start-up capital requirements needed to make the leap.
These cost savings are significant, as one of the biggest challenges to making the broker-to-banker transition is establishing the necessary net worth to qualify for licensing and a decent warehouse line of credit. With access to the right technology, and the right correspondent partner, brokers can make this transition more easily than ever.
For years, the mortgage industry has waited with cautious trepidation for the eMortgage to become a reality. Technology and regulation have finally caught up with the industry’s vision, but many are still reluctant to take the leap.
Part of this reluctance stems from the perception that investors and/or warehouse banks do not allow eClosings or won’t purchase an eMortgage. This is false. There are numerous investors that have established guidelines for eClosing and eMortgages, and two of the biggest mortgage investors in the country, a.k.a. Fannie Mae and Freddie Mac, have been pushing lenders for years to adopt eMortgage strategies.
On the warehouse side, most banks have been reluctant to adopt an eWarehouse strategy because the efficiencies inherent in the eMortgage process would reduce the amount of time loans sat on the warehouse line before being purchased, thus cutting into the bank’s revenue from interest and fees. In recent months, several forward-thinking warehouse banks like FirstFunding and Merchants Bank of Indiana, have overcome this reluctance and are poised to provide funding for and purchase loans closed via eClosing and eNotes.
Though the industry hasn’t fully dived into the complete eMortgage, it also hasn’t been totally reluctant to adopt digital origination strategies either. According to the 2015 Xerox Path to Paperless Survey, nearly 80 percent of survey respondents indicated they were utilizing eDelivery to send disclosures and other documents to borrowers. In addition, almost 75 percent said they had implemented paperless origination and underwriting processes, and just over 70 percent are incorporating eAcknowledgement and eSignatures with eDelivery of disclosures. More than 60 percent of respondents are delivering closing documents to their settlement agents electronically, and more than half are eDelivering closed loan files to investors.
These numbers aren’t that surprising as many lenders have adopted these strategies in order to comply with the TILA-RESPA Integrated Disclosure (TRID) timing requirements, and data from the survey backs that assumption up, as 92 percent of respondents said they expect to see an increase in their use of eDelivery because of TRID. However, there’s a very clear point in the process where digital origination strategies drop off.
Based on the survey, only five percent are utilizing eDelivery with eSignatures at the closing table (i.e., eClosing), and just four percent are executing a complete eMortgage where the promissory note is being signed electronically (i.e., eNote). For brokers making the transition to mortgage banking, this presents a significant opportunity to differentiate themselves in the market while also gaining much-needed efficiency.
Expense management is a critical concern for emerging mortgage bankers. Start-up costs and overhead can quickly eat into available capital, which can have a negative impact on overall net worth and impede the ability to increase production. Using the full complement of digital origination strategies (eDelivery, eSignatures, eClosings and eNotes) eliminates many of the “sunk costs” inherent in the traditional closing process, such as shipping and labor expenses for the sole purpose of organizing and delivering documents to the investor. This frees up capital that can be invested in more mission-critical areas like quality control, underwriting and compliance.
Speaking of compliance, this is another area that can torpedo an emerging mortgage banker. Anytime you are a beginner at something, having the time to self-correct can mean the difference between success and failure. When a correspondent lender can submit their loan file information to the investor electronically, that gives the investor more time to review the loan pre-funding, and should errors be found, the lender then has time to address the errors before reaching the closing table and potentially having the investor reject the loan.
Furthermore, most eSignature platforms have built-in quality control mechanisms to ensure every document is signed where and how it should be, and with eClosings, all closing documentation is stored electronically, thus jettisoning several menial post-closing tasks that can have significant implications for compliance.
If expenses and compliance represent two of the three legs emerging mortgage bankers need in order to succeed, managing relationships with investors and warehouse banks is unequivocally the third. Metrics such as loan quality, pull-through rates and days on the warehouse line must be continuously managed to ensure small issues don’t become larger problems that negatively impact these critical relationships.
As previously mentioned, digital origination technology can have a demonstrable impact on loan quality, but, it can also aid in pull-through and warehouse line management. Most warehouse banks will start off with a best-efforts engagement with emerging mortgage bankers, as not every broker is able to make a successful transition into mortgage banking.
As the emerging mortgage banker is able to achieve high pull-through rates and demonstrate consistent loan quality, they will garner better pricing, though those incentives are going to be capped. Digital origination strategies aid in achieving a high pull-through rate by creating a lean, fully optimized origination environment that supports quick turn times and eliminates the errors associated with manual, paper-based lending.
Of the two kinds of warehouse relationships, mandatory delivery is the far more profitable of the two for the mortgage banker. The major deciding factor in transitioning from best-efforts to a mandatory delivery engagement is the emerging mortgage banker’s ability to demonstrate operational efficiency, sound fiscal management and foundational understanding of mortgage origination–all of which can occur much more easily when digital origination strategies are used.
Once the type of engagement has been established, the emerging mortgage banker must turn its attention to managing the warehouse pipeline. What digital origination strategies can offer in this regard is the ability to dramatically decrease the number of days loans sit on the warehouse line between closing and purchase. Not only does this save money in the form of reduced interest and fees, but it also enables the emerging mortgage banker to do more with less.
For example, an emerging mortgage banker with $250,000 in net worth could secure a warehouse line worth roughly $3.75 million. Because most loans sit on a warehouse line for around 20 days due to the inefficiencies of the current origination process, the banker has to be conservative with how much of the line is used at any given time. By leveraging digital origination strategies, including eNotes, this same mortgage banker could achieve the same volume using a warehouse line one-fifth the size (i.e. $750,000) because of the potential to reduce that turn time from weeks to a day or two.
To put it another way, that mortgage banker could originate five times the volume without needing an increase in their line of credit. That kind of efficiency and success is what establishes a productive relationship with investors and the warehouse provider and enables emerging mortgage bankers to rise up the ranks to achieve full-fledged mortgage banker.
While the mortgage bankers have been hesitant to adopt eMortgage strategies, they are not pessimistic about the future of the eMortgage in mortgage banking. In the Xerox survey mentioned earlier, more than half of all respondents said they believe eMortgages will account for at least half of all loan production within four years, which is a nearly 55 percent increase over responses to that question in 2014.
Clearly, the industry sees the value in digital origination, even if it hasn’t implemented it in full force. For the forward-thinking, aspirational-minded mortgage broker, now is the time to make the digital leap into mortgage banking.
Jeff Bode is owner and CEO of Addison, Texas-based lender Mid America Mortgage Inc., which operates in the retail, wholesale and correspondent lending channels. Jeff can be reached by e-mail at Jeff.Bode@MidAmericaMortgage.com.
This article originally appeared in the September 2016 print edition of National Mortgage Professional Magazine.