In the midst of depressed demand for home financing, lenders continue to seek new opportunities for growth—especially when faced with a rising interest rate environment and weak housing market. Fortunately, there is a bright spot on the horizon. Forward-reaching lenders, particularly those at the top tiers, are showing renewed interest in the correspondent lender channel.
While the production costs of originating a correspondent loan tend to be higher, the additional volume could provide a boost to the bottom line—as long as the loans from this channel are clean. If mortgage bankers are able to mitigate the greatest lender and investor concerns surrounding this channel—notably the quality of the loans produced—the next five years could result in a renaissance of the correspondent channel.
Underlying this renewed interest in the correspondent channel is the desire of lenders to build more flexibility and variety back into loan originations. In an era of “vanilla” loans, lenders and investors are looking beyond what any single source can offer to uncover more refined solutions. While the opportunity exists, the actual undertaking carries its share of complexities.
Making it work
Traditionally, correspondent lenders have been known for having a greater tolerance for risk. However, in an era of investor activism and increased regulatory concerns, this risk must now be more carefully monitored than ever. Which is why today’s correspondent lenders are taking a more proactive “trust but verify” stance.
So here’s the real question: How can correspondent lenders successfully increase loan quality, streamline productivity and increase loan velocity while keeping costs in check? There are three primary approaches they can take to enhance pull-through, lower defect rates and mitigate repurchase risk:
►Expanded delivery options
In the first approach, automated data extraction via enhanced or new technologies eliminates the dreaded “stare and compare” problem. Thousands of resource hours are spent manually comparing scanned data, such as a 1003 validation, against true data. Automation technology enables the system to self-check its data, and creates a new paradigm in which static documents are converted to fully electronic and dynamic “smart” documents embedded with business rules and logic.
The benefits of this switch include not only reduced resource hours, but also lower error rates. With the human element taken out of the information transfer, discrepancies in reported versus input data can be caught early. Productivity gains from full-cycle automation are clear: More work gets done with fewer or the same amount of resources by streamlining the process. The organization becomes more efficient by focusing employees on more complex, value-added tasks with fewer distractions.
However, for true automated data extraction to be achieved, correspondent lenders need to use a holistic technology infrastructure that extends from lead to funded loan. A fractured technology framework leaves gaps in the production process, meaning that significant human intervention is still necessary to validate basic loan file information. For example, a loan application that is in an electronic format, such as a PDF and is emailed out to various parties still has to be re-entered into a loan origination system (LOS). In practical terms, very similar to moving a paper file from desk to desk. The data is still static, and the transfer of information is manual. True automation requires the digitization of data from point of application through to funded loan. In today’s environment of increased regulation and investor scrutiny, it is more important than ever that loan-level data remain easily accessible indefinitely.
Yes, technology upgrades may seem a bit luxurious in uncertain times. Yet downward curves in volume can also open the doors to new opportunities, making now the perfect time to build organizational strength and competitive advantage with minimal disruption to daily operations. In particular, the right changes can ensure increased competitiveness in a time when lenders are chasing fewer borrowers. The large retail lenders have embraced this concept, and many are busy implementing total process automation. Now is the time for the correspondent channel to catch up.
Like production automation, this next concept involves integrating compliant processes into the workflow via electronic data validation. The labor-intensive process of manually managing communications with third-party service providers—which includes inputting data back into the loan production system, and having an actual person evaluate and make decisions—is another significant area for process improvement.
Streamlining the data validation process with rules-based technology enables rapid integration of third-party data and analytics, and allows instant decisioning to take place on standard compliance actions such as verification of income (VOI) and verification of employment (VOE). Data contradictions, omissions and discrepancies not easily detected in a manual process can also be easily captured using automated systems. Lenders can then focus their resources on exceptions-based processing, which help increase loan velocity as it moves through production.
In other industries, this model has been adopted simply to handle the sheer volume of incoming data. For example, the Internal Revenue Service (IRS) has, for years, been replacing human review of tax filings with automated systems that primarily compare the wage numbers reported by employers with the self-reported numbers on taxpayers’ returns. It is only when a discrepancy is flagged that an agent reviews the application manually. This exception-handling approach allows the IRS to focus its resources on capturing income as opposed to ordinary processing. While it may seem obvious that a lender would seek this same type of approach, the complexity and length of the data-intensive mortgage transaction makes the implementation of a similar automated system more difficult to architect and achieve. At the same time, the alternative for not implementing automation in today’s market can be dire.
Flexible delivery options
Moving to an exceptions-based processing model, lender resources are now free to focus on handling loans that would otherwise not close. This entails not only working more closely with the borrower during the handling of an individual loan, but also becoming more fluid in the actual roles that a correspondent lender undertakes. With a less segmented clientele than ever before, correspondent lenders have unprecedented freedom to adjust their response to a particular opportunity.
There is a paradigm shift occurring in the industry: Lenders are no longer looking at wholesale and correspondent lenders as discreet silos, but as a single “third-party” channel. This blurring of lender types creates a new opportunity for the lender, as well as more choices for the borrower. Instead of working in retail/wholesale/correspondent silos, the emerging “new era” correspondent lender proactively examines each loan file with an eye towards compensation optimization and volume maximization. In this emerging structure of numerous options for pricing and delivery channels, the empowered correspondent lender is able to slot a loan for best execution—including profit optimization.
As an example, the number of Federal Housing Administration (FHA) loans has decreased in recent years, possibly as a result of new regulation that prevents correspondent lenders from offering FHA loans. But as part of a single third-party channel, the “new era” correspondent lender can switch roles to offer the borrower an FHA loan as a wholesale lender by choosing to opt out of its traditional underwriting, closing and funding roles. This organizational fluidity represents a refined and sophisticated response to a fluctuating operating environment.
In summary, the re-emergence of the correspondent channel is clearly imminent, but the scope of this comeback will be driven by how deeply lenders internalize the need for proactive change. The successful implementation of automation technology is an important step toward reaching this performance-optimized state. But equally as important is the evolving role of the “new era” correspondent lender, who moves forward with the big picture in sight, to take advantage of dynamic market conditions.
Dino Lack is director, product management for CoreLogic Dorado, where he develops strategy and architecture for the company’s cloud-based mortgage origination systems. Lack has more than 16 years of senior level technology management experience, contributing in a range of areas including business process reengineering and automation, technical architecture, research and development, and overall project management. He may be reached by phone at (650) 227-7590 or e-mail [email protected]