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This is the technology issue of National Mortgage Professional Magazine and despite the fact that NMP Next can cover any topic that sheds light on the future of our industry, it seems worthwhile to spend some time focusing on technology.
When I first started writing about the mortgage industry in 1997, technology was just moving from the position of trusted servant to secret weapon. By the time I got involved, pencil and paper loan applications were pretty much a thing of the past, thanks in large part to companies like DocMagic that made document technology so easy that brokers would embrace it. At that time, mortgage brokers were lifting about 70 percent of the weight on the front end of the business. By the late 1990s, people expected to use technology to originate loans and service them, although Alltel’s servicing technology at that time was still a DOS-based green screen connected to a mainframe in the back room.
The IT department, if the lender had one, was pretty much relegated to keeping the file server operating and running more cable as the companies grew … but that was all about to change.
One of the very first special reports I wrote was about a new kind of loan product that was exploding. Back then, they called it “B&C Lending” and the lenders who were originating these products were making ungodly amounts of money. One of the first meetings I covered was an investor meeting in Washington, D.C., where a number of companies I would later write about extensively were explaining the upside potential of these non-conforming loan products. People were excited.
Suddenly, everyone wanted to know how to get into the sub-prime lending business, but there was little, if any, technology available to help scale their lending operations. Technology vendors stepped up, and for the next decade or so, all an observant executive had to do in order to determine the future direction of the industry was to watch the technology news. If someone was ordering or buying technology, you could bet they’d be making money with it in the days ahead.
That all changed with the crash, the passage of Dodd-Frank and the creation of the Consumer Financial Protection Bureau (CFPB). Today, if you ask an industry executive about what’s coming next, their answer will focus more on compliance than technology. Sure, technology is essential for navigating today’s complex regulatory environment, but for the past decade or so, it has not been the leading indicator it was when I first came into the business.
This, in my mind, opens the industry up to a serious risk that was probably best framed recently by Alan Murray, editor at Fortune Magazine, when he wrote, “One of the great spectator sports of the digital era is watching to see whether companies with great domain expertise can develop digital skills faster than the digital ‘natives’ can develop domain expertise.”
For much of its history, the mortgage industry has been very comfortable picking up technologies 10 years after they have be shown effective in some other industry. Fending off big technology firms has not been particularly difficult and still isn’t. It was only about a month after Google announced that it would jump back into the mortgage lead generation space that it jumped back out again. This may have led many operating here to a false sense of security.
Digital natives don’t know what they can’t do and that makes them particularly dangerous, especially to an industry that has lost pretty much all of the consumer goodwill it ever had, which wasn’t much to begin with. Technology may no longer be the indicator it once was as to where the best companies were planning to go next, but it can still be a reliable indicator of where financial technology firms think they can go next. Wise executives will pay heed.
But as we look at the direction technology is taking our industry, we must not make the mistake of assuming that it will always take us somewhere new. Need a case in point? The FHA program began insuring home loans for lower-income borrowers in the early 1930s. No one would call it a new program. And yet, one innovative wholesale lender has committed its people and its technology to specializing in the origination of these loans, revitalizing the program as a result and helping thousands of new homeowners in the process. The company is Freedom Wholesale Mortgage and we bring you that story in this issue as well.
A Conversation With Mark Dangelo
Following the career trajectory of the typical mortgage technology executive is usually straightforward. They start out as project managers or junior developers and work their way up. Many start out in banks, where much of their expertise is in network management and security. Some are entrepreneurs that started small tech companies and grew. A few are former mortgage lending executives who saw a need for a tech tool and found a way to develop it. Mark Dangelo (pictured right) doesn’t come from any of these backgrounds.
When I met him, he was chief technology officer for Ocwen, back when that firm was just setting up their VOIP lines to connect offshore resources to its servicing and technology divisions. Mark spent seven years at Ernst & Young on a team studying technology and advanced architecture along with four years in Manhattan working for A.T. Kearney on domestic and global stock exchanges and very large M&A’s. He worked for Key Bank and a handful of other financial services and consulting firms before writing his first book, Innovative Relevance, about strategic technology investments that made sense across the enterprise. He’s written two books since then, including a 100-page “White Paper on Mortgage Industry Outsourcing,” co-authored by yours truly (Rick Grant).
When I think about what’s coming next in technology, I always call on Mark. I called him recently. Here is part of that conversation.
From a technology perspective, what do you expect to see visit the financial services industry next?
I expect to see virtual currency leading to virtual lending to creating a comprehensive individual digital identity that uniquely identifies a customer across organizations and product types. This will go well beyond the two-dimensional view of the borrower (credit, collateral) we focus on in the mortgage industry.
We’re going to see comprehensive disintermediation of our traditional banking solutions offered up by outside or non-traditional bankers, especially as the election draws near and deregulation becomes a priority. We’re already seeing people pushing hard for compliance repeals. This will benefit fintech as much or more than it benefits traditional industry players.
As banks form partnerships with fintech firms, we’ll see multiple layering of orchestration solutions (or white labeling of patented apps) especially within layers of cryptography necessary for virtual currencies, virtual branches and predictive consumer intelligence. Things are going to get complicated for us, but for the consumer much simpler. Don’t be surprised to see virtual reality branches become an oft-seen replacement for brick and mortar.
What risks/opportunities does this view present to mortgage lenders and servicers and the companies that support them?
I expect a lot of legal risk. Patent wars brought forth by fintech groups and traditional banks eager to find revenue opportunities or defend leading investor brands could become common. Meanwhile. Higher development costs will create barriers as developers work to overcome a lack of traditional skills needed for rapid cycle iterations of products and services. Failure will likely lead to avoidance instead of refinement. Meanwhile, greater returns for initial first movers will lead them to double down. Like we’ve seen for technology developers in other industries, success will breed arrogance.
Another risk will be fixation on a genre of solutions including social media, mobile offerings and big data to the exclusion of larger changes taking place in currency, cryptography, virtual reality and virtualization. It’s very easy to get distracted by the next shiny thing, especially when you are trying to please consumers, who are all about that.
If you were working as a CTO today, what would you be asking management for? Why?
My list would include:
►Retirement of applications that might be considered leading edge
►Creation of variable costs of labor pools due to rapid skills and scare availability
►Ability to conduct transient joint ventures along with outsourced availability for anything already in production
►Short-lived apps that are compliant but disposable, to guarantee data needed for consumers, management and investors
►Raising of capital pools for rapid response that can be marshaled quickly without attracting competitive responses
►Back away from traditional fee based income models, instead focusing on new offerings that can be value priced
►Less of a “cool” factor and more substance for all aspects of the financial services supply chain
What are you working on now?
After three years of research, which I spent compiling a massive amount of data across all operational segments (covering 8,000 unique criteria), I have created a set of digital roadmaps for financial services enterprises. These maps blend characteristics we see in today’s FS business with those we expect to see in future financial services companies. The models are multidimensional and allow for repeatable evaluation as a company iterates forward, and not just a singular evaluation of a particular solution. The model takes into account the likelihood of benefits versus risks with existing and emerging enterprises. One of the first applications for this is to allow for the rapid transformations of brick and mortar branches into virtual reality ones.
To reach Mark Dangelo, e-mail him at [email protected].
Freedom Mortgage Wholesale: Expanding Within the FHA Lending Space
In the wake of the sub-prime lending crisis and the subsequent foreclosure crisis, millions of Americans that had previously been new homeowners lost their homes. Millions of additional consumers with lower income or less than perfect credit found themselves locked out of the housing market. Fortunately, a government program that had been quietly working since 1934 stepped into the breech.
Since inception, the FHA lending program has helped approximately 40 million Americans purchase or refinance homes–nearly seven million of those just during the most recent crisis, when FHA experienced a volume increase of 500 percent. FHA currently has 4.8 million insured single-family mortgages and 13,000 insured multifamily projects in its portfolio. In 2015, single-family FHA loans saw a significant double-digit percentage increase from 2014. Thanks in large part to the Obama Administration’s reduction in some FHA insurance premiums.
Today, FHA says the number of single-family loan delinquencies has declined to pre-crisis levels. This decline, the government says, indicates the housing market and economy are beginning to recover. But there are still millions of Americans who can benefit from an FHA-insured loan. Fortunately for these borrowers many lenders continue to support this important program.
A real need in today’s market
The fact that FHA’s loan volume exploded at the same time that subprime lending went away led many to believe that FHA was the new sub-prime. A few independent mortgage lenders have never subscribed to that theory, instead treating these borrowers as worthwhile investments and good long-term mortgage customers, which they have proven to be.
The FHA program is actually the best option for many of today’s home loan borrowers. Companies that understand this product can provide benefits to the borrowers who need its flexible program parameters. One company supporting FHA is Freedom Mortgage, an FHA approved lender since the 1980s who has made a serious commitment to the market. Since 2011, Freedom has been a key driver in making the American dream of homeownership a reality for over 41,000 homeowners with less than perfect credit scores.
Over the past four years, their wholesale FHA volume has seen exponential growth and now accounts for about 25 percent of total closings—much of that gain can be attributed to its purchase business.
And, if you add the VA program to the mix, government-insured loans account for over 61 percent of Freedom Wholesale’s loan volume!
If you compare Freedom Wholesale’s growing FHA loan volume to the overall national trend for FHA lending, which has leveled off now that we have some distance from the downturn, the company’s leadership position becomes clear.
Many consumers face challenges that will often knock them out of eligibility for a conventional mortgage. It can be their credit score, but often it has to do with the funds required to close or fund the downpayment. FHA financing is available with as little as 3.5 percent down and borrowers can use gifts as part of their funds to close. Finally, debt-to-income guidelines are not as stringent for these loans.
Even so, lenders committed to FHA do not see today’s FHA borrowers as sub-prime. They are typically first-time homebuyers with limited downpayment and borrowers who have had some kind of extenuating circumstance that caused a period of derogatory credit–most usually caused by job loss during the economic downturn, divorce or medical emergency. Another class of FHA borrower is a buyer who doesn’t use traditional credit and therefore doesn’t have a FICO credit score.
When these borrowers attempt to enter the housing market, they need to find a mortgage broker who can offer them an FHA loan. Borrowers should look to lenders and brokers who understand the risk, know how to underwrite the loans and employ a great team of underwriters.
Well-trained and experienced underwriters are key to keeping the processing moving along smoothly, so that lenders and brokers can fulfill the promises they make to business referral partners and close on time.
As for the appraisal requirements, the overall guidelines FHA has established for the real estate collateral are not significantly different from those in place for conventional loans. Appraisal management companies (AMCs) that employ FHA-approved appraisers are required, but beyond that, the requirements are not particularly stringent.
Freedom’s wholesale underwriters would agree that the misconception regarding FHA appraisal requirements is still out there. An FHA appraisal is not that complicated to get, in actuality, it’s not much different than going out and getting an appraisal on a conventional mortgage.
The experience to meet the need
Freedom Mortgage Wholesale’s experience in underwriting FHA loans has paid off. The company is enjoying excellent performance in its portfolio of FHA loans. The company sells much of its production to the agencies, GNMA, FNMA, FHLMC or private investors. However, in the majority of the cases the firm retains the servicing rights and uses its own staff and servicing platform to service those borrowers.
Industry wide, FHA delinquency and default has been decreasing steadily and Freedom’s experience mirrors that, management said. The slow but steady improvement in the economy and increasing properties values are expected to reduce delinquencies even further.
The company’s success with the FHA loan product has enabled them to make good on their mission to ensure that qualified borrowers receive a second chance and another opportunity to achieve their dream of homeownership. As a result, Freedom Mortgage has grown into one of the largest and most successful FHA lenders in the country.
One area in which Freedom Mortgage Wholesale demonstrates this leadership is in the area of FHA purchase loans. There are many first-time homebuyers in the market today that want to stop renting, but have a high DTI or limited downpayment, as well as those seeking homeownership that have experienced a period of derogatory credit or financial problems that were beyond their control. The FHA program can rescue these borrowers, if it is offered by a lender who understands how to underwrite the risk and deliver the loan.
As for risk, Freedom looks at FHA borrowers differently than other lenders. Instead of seeing these deals as inherently more risky, the company views FHA as a niche offering that can meet the needs of a special class of borrower that is just as likely to repay the loan as their conventional counterparts. The current economy backs this up, with housing inventory low and rents high, consumers will be paying someone for shelter. It’s better for everyone if they are building equity in their own futures.
A dedicated team to help brokers succeed
Freedom Mortgage offers a full menu of mortgage products to meet the needs of any borrower, but FHA is hardwired into the company … it’s a part of its DNA. Freedom Mortgage Wholesale’s experienced account executives support brokers in the field as they work with FHA borrowers. They understand that they are doing the important work of providing the opportunity of homeownership to borrowers who otherwise may not have access to it.
A robust FHA program is part of an overall program designed to provide full support for mortgage brokers who are intent on maximizing their volume by serving as many borrowers as possible with home financing that perfectly meets their needs. Freedom Mortgage Wholesale understands FHA guidelines thoroughly and employs underwriters adept at following them, which allows them to offer the products without overlaying a set of additional underwriting requirements.
The next wave of borrowers our industry serves will be made up of former homeowners who have survived the downturn and who are rebuilding their credit profiles, Millennials who have eschewed traditional credit and do not have the credit profiles required for a conventional loan, and emerging markets borrowers who likely never had the opportunity to develop a credit profile before. This is where tomorrow’s loan volume will come from and only lenders who can offer a full menu of mortgage products—including FHA-insured mortgages—will be in a position to serve them.
From the evidence we found, Freedom Mortgage Wholesale will be among the leading lenders who are in a position to help provide solutions for future mortgage borrowers and their brokers.
Don DiLucchio, first vice president for the Midwest Region for Freedom Mortgage Wholesale Division, contributed to this article. Freedom Mortgage’s Midwest Region is one of the most active regions in the country for Freedom’s FHA wholesale lending portfolio. Don can be reached by e-mail at [email protected].
Extra-Industry Technology We Should Be Watching Now
One of the interesting industry folk that I follow on Twitter recently posted this quote from South African author and social influencer Rich Simmonds (@RichSimmondsZA): “Don't look for ideas to confirm your thinking, rather look for trends that will disrupt your thinking.” Not easy to do, especially in an industry as insular and highly regulated as the U.S. mortgage lending industry.
Disruption is not something companies operating here are likely to engage in, not without attracting the attention of federal regulators anyway. Unfortunately, there is a new class of competitor that does not operate under the same restrictions. Loaded up with VC cash and with access to the public markets, these firms can make short term gains without every serving a consumer (or charging one, at least). When they fail, they fade away, but when they succeed, they disrupt the market.
Already, these firms are launching innovative ways for consumers to raise or invest money (crowdfunding), move it around (peer-to-peer payment services) and understand their money (cloud-based personal accounting software). What will they attack next? Virtually invisible until they are funded, at which point it’s often too late, we can get a clue as to where they may go next by watching the consumer technologies that get the most attention in the market. After all, these firms are expert at gauging consumer interest and then moving swiftly to create apps to meet a new demand.
Here are some recently technology developments that could eventually impact our industry …
The Universal Translator
We’ve seen it in science fiction movies for decades, but recently Waverly Labs release an earpiece that could remove the language barrier in the real world. Currently only capable of translating languages used by humans on Earth, the device known as Pilot looks like a hearing aid and can translate between English, Spanish, French, Italian and Portuguese, almost instantly. More language packs will come out for the device in the near future, including Germanic, Hebrew, Arabic, Russian and Slavic. The device is expected to cost less than $300 when it hits the market, which the company says will be next May.
To make the story slightly more terrifying, the company launched the new product by raising nearly $2 million on Indiegogo (well, that was at press time, when there was still 22 more days remaining in the campaign).
This firm is not the only company working on transaction services in real time, of course. A number of companies are working on this problem, including the big guys, Google, Microsoft and Apple. Last year, Skype released a translator featuring six voice languages and 50 messaging languages.
So, where is the risk or opportunity to the mortgage business? We used to call them “Emerging Markets,” pockets of densely populated geography dominated by a minority population. These markets have now emerged and matured, but many lenders are still struggling to recruit members of these communities to sell mortgage to them. There are exceptions, of course, but imagine what a company could do if they could overcome the language barrier for less than $300 per loan officer? Then, all they’d have to worry about is culture.
Computers That Understand Humans
Having other humans understand what we say and vice versa is good, but it could even be more powerful to have computers understand us. Sure, we have Siri and Cortana and they do a fairly good job of translating what we say into a number of likely search routines or commands, but it’s not real human to computer communication. For that, we’ll need to do a lot more work. Last month, Google made it possible for independent teams around the world to do that work.
In May, Google made the announcement that it would open up the source code on its SyntaxNet system, making it open source software. SyntaxNet is now an open-source neural network framework implemented in TensorFlow that provides a foundation for Natural Language Understanding (NLU) systems. Google released all of the code needed to train new SyntaxNet models on anyone’s own data. It also released Parsey McParseface (I’m not making that up), an English parser that Google engineers have already trained to analyze English text.
All that talk we’ve been hearing about taking unstructured data and somehow using it to power our front end marketing systems, our loan origination systems and our compliance software, just got a whole lot easier and less expensive. At the same time, any company that can handle the big data can now search online streams for mortgage leads and pull them down. Google says Parsey McParseface is the most accurate such model in the world. Now all we need to do is train computers to respond appropriately to human text-based requests than our other employees do.
Cars That Drive Themselves
We’ve all seen the news reports about robot cars taking over the roadways. Few people I know have put much credence in these tales. It’s not that they don’t exist, but people who drive cars generally like being in control of the car they’re driving and aren’t waiting for an opportunity to turn it over to a computer to drive.
Recently, we’ve seen stories of self-driving delivery trucks, which could put a decidedly significant monetary incentive behind some companies getting behind the concept. Now, a company that many of us in the mortgage industry have trusted over the years has come out with a report suggesting that self-driving cars are definitely in our future.
Accenture recently released a report (not from the division that works with us in the mortgage space) on the financial benefits of self-driving vehicles in Australia and concluded that 40 percent of all cars on the road in that country will be autonomous by 2040. Yes, that’s 23 years from now, but I just turned 52 and I can tell you that it was just 23 years ago.
No word on what the global consulting firm expects for the U.S. market, but the potential impacts here are pretty easy to figure out. Self-driving cars could decouple public transportation from pre-existing routes and timetables, making living farther from work more attractive for millions of Americans. It could reverse the decades long trend of people moving closer to city centers and revitalize the idea of the suburb, and the concept of urban sprawl along with it. At the very least, it would breathe another few decades of life into the suburban housing tract, fueling builders and lenders both.
Robots in the Surgical Suite
Face it, there are just certain things that computers can do better than humans. According to engineers and surgeons at the Children’s National Medical Center and Johns Hopkins one of those things may be operating on human patients. The two institutions recently announced a new robot that they can operate on soft tissue (I’m assuming that’s us and not a Kleenex).
A recent demonstration of the technology involved a pre-programmed robot suturing together two ends of a pig’s bowel. While doctors do not make sausages, the report published in Science Translated Medicine said the Smart Tissue Autonomous Robot was capable of sewing “more precisely and consistently than an experienced surgeon.”
How could technology like this serve our industry? It probably won’t, unless more robots in the surgical suite translates into fewer high paying medical industry jobs, in which case we’d better hope government-insured lending programs stay around a while. On the other hand, once the initial investments in this kind of medical technology are paid off, it could lower the cost of surgery, lowering medical bills, which remain one of the leading causes families lose their homes. Yeah, that may be wishful thinking.
Getting Ready for the NMP Next Awards
When we launched NMP Next in April, our goal was to present awards to some leading firms by summer. What we found was that our team was so busy responding to information requests from firms interested in sponsoring this special section that we didn’t have enough time to devote to the development of a credible set of industry awards. And really, that’s the whole point of this new section.
So, we’ve backed it up. We now plan to make our awards during the fall conference season. A nomination form will be available on the NMP Web site shortly. The form will be relatively simple. We’ll leave it to you to explain how your firm is leading the industry. We’ll expect you to back up your statements. Those who back them up with commentary from third parties will have an edge.
Expect an e-mail soon. If you don’t hear and think we’ve left you out, e-mail me at [email protected] for a status update.
What’s Next in NMP Next?
At press time, we were completing work on a feature article about Class Appraisals, a company that is redefining transparency in the way it operates and the information it shares with its lender clients. The firm is changing the way many think about appraisal management companies (AMCs).
We are also talking with Ernst Publishing, which as this publication went to the printer (digital or otherwise) was in Charlotte, N.C. for October Research Corporation’s National Settlement Services Summit (NS3). The company is expected to meet a friendly crowd as its Settlement Agent Gateway technology allowed hundreds of smaller settlement agents to comply with the Consumer Financial Protection Bureau’s TILA/RESPA Integrated Disclosure (TRID) rules and avoid losses their businesses as lenders reduced their roster of third-party partners in order to guarantee compliance.
Rick Grant is NMP special features editor for NMP Next and National Mortgage Professional Magazine. He may be reached by e-mail at [email protected].
This article originally appeared in the June 2016 print edition of National Mortgage Professional Magazine.