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Mortgage Technology … Taking the Red Pill

Michael Larkin
Dec 30, 2013

“This is your last chance. After this, there is no turning back. You take the blue pill, the story ends; you wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in Wonderland and I show you how deep the rabbit-hole goes.”—The Matrix A mortgage executive from a top five lender quoted this line from the movie The Matrix, a sci-fi thriller, while expressing the pros and cons of sophisticated mortgage technologies with me. I had to look this quote up after hearing it to fully understand the point, but it was that with mortgage technology and from the perspective of risk … once you start, it’s almost impossible to go back. Underwriting and technology It doesn’t seem like that long ago, but prior to Desktop Underwriter (DU) and Loan Prospector (LP), fraud tools, automated valuation models (AVM), and even before fax machines and email (yes…I’m that old), underwriting was very different. Underwriting was based on an assessment of documents and calculations. It was opening up a manila file folder, usually with notes on the outside and a checklist stapled on the inside. An underwriter opened the folder, did the review and within about 30-45 minutes provided an underwriting decision or conditions that would lead to an underwriting decision. This was never a perfect process, but it did generally keep underwriters alert and vigilant since decisions on loans were made based on their recommendations. I remember when I first tested out DU, my first thought was…”this is amazing!” My second thought quickly followed though and it was…”Ok…now do I still have a job?” For the first users it was pretty scary. Lenders were reworking their entire workflow to rely on this new technology and underwriters were being laid off simply because lenders didn’t need as many of them. Underwriting became a battle with a loan officer who had gone to their sales manager complaining that the underwriter was asking for things that DU didn’t. Why weren’t they just following the DU checklist or doing what it told them? The underwriters had to quickly point out simple things like that DU couldn’t see that the signatures didn’t match or that there was whiteout on the pay stubs. DU and LP were never meant to take away the underwriter … they were meant to supplement and support the underwriter, but they did leave gaps. These gaps were then filled by an industry that didn’t exist yet and quickly became known as the fraud tools. Adding technology … to technology … to a process that just a few years earlier was based on expertise and experience. Are you getting The Matrix analogy yet? Obviously there are many sides to this story, and I’ve personally been on a few of them more than once. Most of us believe in the value of the technology, but also concede that it can often make us complacent. I agree that the amount of data we have access to now in the areas of underwriting, fraud and quality is enlightening and can be incredibly valuable in the area of risk management. If not used correctly though…it can be addictive and with results that aren’t always actionable or efficient. Misunderstandings with technology I’ve been in the mortgage industry for 23 years now and still can honestly say that I love what I do. For the vast majority of that time I’ve been an underwriter and involved in either fraud or quality. I’m proud of the fact that I worked as the chief underwriter for both CoreLogic and DataVerify, and served with Interthinx for a short period in more of a consultant role. During that period, I also worked with the U.S. Treasury Department as a lead underwriter looking at the industry as a whole and all the various technology solutions available to it. I’ve even worked with a few companies as they looked to develop new technology platforms to compete with CID (CoreLogic, Interthinx and DataVerify) or new solution areas entirely. Previously as a consultant … my favorite part of my career was always talking about the technology pieces and how to best fit those pieces together into solutions that make sense for lenders. CID (CoreLogic, Interthinx and DataVerify) deserve a large amount of respect. They have built incredibly detailed solutions and provide phenomenal services. Each has a loyal following of users that rely on these tools. Each tool has areas of pros and cons, areas of concentration or areas of expertise in various subjects. When these tools are used correctly they can add valuable insight, but when these tools are represented or sold correctly by CID … there should (and usually is) a common thread. The tools are a supplement. They are there to assist the underwriter. If I had a dollar for every time I’ve heard an underwriter or an executive say that CID approved it, I’d be a very rich man. The CID solutions do not approve loan applications. The tools are there to add valuable support to the underwriter in making their decision. They do not and cannot replace an experienced underwriter. I personally like and have used each of these tools and in reviewing various lending cultures can make the argument on which one makes the most sense for a lender. It’s important to accept the idea that these tools by their very nature can create over reliance and false positives, but so can a dog. Let me explain. Long ago, I came up with the analogy that CID (CoreLogic, Interthinx and DataVerify) is like a barking dog. If you own a dog, you know the dog is always barking at something. Sometimes it’s barking at kids playing in the street. Sometimes it’s barking at the mailman. Sometimes it’s barking at a squirrel, but it’s always barking at something. Sometimes, however, it’s barking because of a fire, a break in or a stranger. I relate to these tools in the sense that as the owner of the dog … you learn the barks. You learn what to react to and what is just a “false positive.” Underwriters, fraud examiners and quality auditors using these tools need to react the same way. The tool is pointing out what it can “see” or “hear,” but it’s up the owner/user to interpret the incoming data. As with a dog, you can tone down the reactions to reduce the false positives, but they’re always there. You just need to make sure your underwriters are experienced enough to not under-react or overreact, and then creating inefficiencies to the process. You also have to decide how much information you can really handle. It’s not that you don’t want it. It’s just how much your company can actually make actionable. Conclusion Lending has risk … it always has and always will. The technology helps to mitigate that risk, but can never eliminate it. For those of us who would choose to take the “blue pill,” we need to make sure we have really good underwriters that understand both risk and the end goal. For those of us who would choose to take the “red pill,” we’ve got a lot of data coming in and we’re paying for all of it. Use it wisely to create new efficiencies when you can, try not to become numb or complacent and welcome to The Matrix. Michael Larkin is director of risk management for Indecomm Global Services. A nationally-recognized risk management and quality control expert, Larkin previously served as vice president, risk management at Kroll Factual Data, where he was responsible for planning and development in risk solutions. He may be reached by phone at (614) 571-7629 or e-mail
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