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Follow The Money
The Mortgage Bankers Association estimates that last year lenders funded $1.6 trillion of purchase loans, the highest level since 2005. The demand for residential mortgages in the U.S. has skyrocketed, due to pent-up savings, interest in owning one’s own place during the COVID-19 pandemic, and low interest rates. The industry is expected to originate more than $2.5 trillion for each of the next three years, one year of the three is expected to be at least 40 percent higher than average annual originations between 2010 and 2019. And although rates may slide higher, the low interest rates have made refinancing attractive over the past two years. Volumes and margins are expected to shrink in 2022, but many lenders are sitting on profits and a portion of those will be reinvested in their companies. But where?
2020 and 2021 saw plenty of profits being spent on signing and retention bonuses. But lenders have also been improving their marketing, processing, underwriting, funding, and servicing technology to streamline the front-to-back process of financing a home. Home loans are becoming smoother and faster. Efficiency is increasing… certainly inefficiency is not rewarded. We can expect to see lenders spend money on further improvements at the point of origination, processing, underwriting, and loan servicing, as well as expand consumer access to home-financing and home-buying services.
Third-party technology and data providers, combined with in-house IT staffs who are aware of a particular company’s policies and procedures, are streamlining more parts of the mortgage process. The mortgage industry has been adopting technology to streamline the process of a borrower obtaining financing, with the aim of making the consumer experience better than it was ten years ago. Or six months ago.
There are limits, however, and no one is expecting individual MLOs to become extinct. But borrower expectations for digital engagement have risen dramatically in recent years. And although it would be nice to snap up a home loan in less than five minutes like we do airline reservations, we aren’t there yet. Customers like speed, but what if the sellers of the home can’t move for 30 days? Or it is going to take two weeks for the appraiser to come out?
Mortgage customer satisfaction is now monitored by companies like The STRATMOR Group. Unfortunately, there continues to be much room for improvement, especially compared with adjacent products and other industries. Many lenders have been able to provide a smoother mortgage-application experience by digitizing the front-end platform, the digitization of the industry remains incomplete and we can expect lenders to spend revenue in this area. Many origination and servicing processes are still slow, manual, labor intensive, and fragmented, therefore ripe for disruption.
Third-party technology and data providers are streamlining more parts of the mortgage process, and lenders will spend money to make sure that this is done right. Bank and nonbank lenders have invested in either proprietary or third-party technologies across various parts of the value chain to help with a number of processes. Initiatives include front-end platform modernization, workflow management, document extraction and management, income and asset verification, employment verification, title verification, appraisal management, e-closings, automated compliance, and decisioning. These software solutions are designed to speed up the mortgage-application process, lower costs for the lender, and improve the overall customer experience.
Although it would be nice to snap up a home loan in less than five minutes like we do airline reservations, we aren’t there yet.
Mortgage originators still engage in labor-intensive and repetitive fulfillment and servicing, even though there is potential to automate more than half of the tasks across front-to-back processes. Failure to update older processes usually results in elevated origination costs and delayed cycle times relative to competitors, and no lender wants that. Most of the technology innovation and investment in mortgage lending has been put toward the front end of the origination process. In 2022 we can expect accelerated automation efforts, including back-end elements such as straight-through processing, automated decisioning of applications, and more efficient servicing transfers. Consumers can benefit. Tech-focused lenders are helping their MLOs by “reimagining” the front-to-back operating model, including streamlining document management, and driving rapid fulfillment. Processing times are reduced, and with them costs.
Many loan officers have found themselves dealing with servicing questions long after a loan funds. Although this is a good way to stay in touch with the borrower, servicing problems are a lightning rod for complaints, and therefore scrutiny by regulators like the Consumer Finance Protection Bureau… and no one wants that. Subservicers are introducing more efficient digital platforms while the market is experiencing a greater shift from in-house servicing to outsourcing, propelled by higher regulatory scrutiny and the challenge of default servicing (which can cost five times as much as servicing a performing loan and requires niche expertise).
Moreover, the capital-intensive nature of the servicing business often acts as a deterrent, and therefore technology that drives down servicing costs will be where money is spent. Modernization and digitization are two things driving servicing departments. The use of technology and behavioral science to increase efficiency, improve the borrower experience, boost retention, and strengthen compliance will be emphasized, and those things come with a price tag, as does building a digital interface that helps mortgage borrowers access information about their loans, make payments accurately, upload or receive documentation, and communicate seamlessly.
Lenders (and vendors) have had a good few years from a profitability perspective. Despite the belt tightening that is expected throughout 2022, money will be spent on technology initiatives that will help lenders in the long run. We’ve already seen a digital acceleration in the mortgage industry, much of it directed at long-term cost savings and providing a superior customer experience. The reasons are compelling: offer a more efficient, consumer-friendly mortgage process that is less expensive or watch potential borrowers go elsewhere.