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Technology Can Simplify Non-Conforming LoansMike Enostechnology, LOS, automated underwriting In the not-so-distant past, non-conforming loans were the dark alleys of the mortgage business. It was best to avoid them, because they were perceived to be complicated--and they were, thanks to nebulous guidelines concerning loan-to-value and debt ratios, documentation levels, and the enormous amount of time required to collect and evaluate the data necessary to make a decision. That all changed however, when the automation of non-conforming loans became as easy to process as their conforming cousins. Now, as a result of superior technological advances, the non-conforming customer has gained considerable respect in the industry, taking a seat next to the more traditional borrower. Simplification Is Necessary The prevailing logic in the mortgage industry tells us that conforming is easy and non-conforming is difficult, and historically, that was true. Guidelines for conforming loans are fairly explicit and clear--either a borrower qualifies or they do not. When occasional exceptions arise, there are guidelines for those cases as well. However, non-conforming loans are all about exceptions and require much more judgment on the part of the lender; it's no wonder that non-conforming loans were never the apple of brokers' eyes. When automated underwriting hit the conforming marketplace, the process became even easier, because there was simply not a great deal of gray area. Automation merely required programming the guidelines and the few exceptions that might occur, allowing loan approvals to become available in seconds, and taking virtually all of the guesswork out of conventional lending. However, under the old rules, the rigidity of conforming standards left a growing number of customers underserved, and a tremendous source of revenue was being missed. Most non-conforming lenders will tell you that their buyers fall into that category for a number of reasons that do not necessarily include bad credit. There had to be a way to serve those customers, without draining the company's resources. Difficulty with Automation A number of companies have tried, with limited success, to automate non-conforming lending standards, but it takes a great deal of assessment and common sense to underwrite these loans, since the lender must weigh a number of pros and cons, and come up with a reasonably sound risk estimate. There are only a few computer systems that have found a way to successfully accomplish this by streamlining the automation process. These new systems generally require only three screens of input for even the most complicated deals. Now, with limited information, quality underwriting decisions can be made on relatively complicated product matrices. Brokers and their clients can choose from a number of options, free of charge, to determine which loan best suits their needs, based on criteria such as varying LTVs. There are other products in the marketplace that still charge for underwriting in the conforming marketplace, so this is long-awaited and welcome news for the non-conforming broker. Brokers Asked for Simplicity These new product designs came in response to broker clients who found the structuring of non-conforming loans to be complicated and time consuming. Now, loan origination truly is as simple as one-two-three--pull the credit, make the application and close the loan. Since the debut of non-conforming loan automation, brokers have utilized it to underwrite billions of dollars in loans. This tremendous increase in volume has resulted in a more focused knowledge of brokers' needs. Lenders are finding that, in addition to speed and simplicity, brokers want continuous access to information about their loans. To that end, more broker-friendly functionality is being built into systems, creating a desirable one-stop shop for brokers, who welcome the opportunity to track their loan status, from application to closing. They can also access message centers, view trade line updates, obtain closing documents and pay for their credit reports online. The ability to close more loans more efficiently will benefit both lenders and consumers. Those additional revenues will open the door for lower costs to book loans and result in an even more competitive rate structure. Time will only tell if the non-conforming market will ever equal traditional lending's market share. Change is certainly on the horizon, but old ideas die hard, and the industry will be slow to change. Fortunately, thanks to advances in technology, the non-conforming market no longer seems like such a daunting arena, and all it will take is time and trial. Mike Enos is vice president of marketing for NovaStar. He may be reached by phone at (913) 514-3597.