We again find the Mortgage Industry at a cross road. As I mentioned in my last blog, the expense of producing a perfectly compliant and zero credit risk loan has made the business untenable for large sections of the business. It has pushed out smaller players <$1b, as well as uncommitted banks and credit unions of all sizes.
Fortunately an answer for this has been being tested for a while now. It of course starts with technology. Similar to the leap of faith made when Automated Underwriting came on the scene 20 years ago, the assumption that if you can trust the data you can write a code to replace most human analysis. Over the last 8 years we have added incrementally layers of disconnected data making us all boiled frogs in the process. The recent Fannie initiative announced at the MBA aims to undo all that rats’ nest of technology and move the logic to the front of the process and change the assumptions to the process.
Is it the Return of Fast & Easy? To some extent, yes. Fast & Easy was right a majority of time in its first roll out. High FICOs, low LTVs, standard collateral and provable assets meant loan performance at an extremely high rate. But when you removed all those requirements and allowed virtually everyone in, of course it polluted the results.
But now if you are a traditional borrower with no variables and Big Data knows everything about you, AND the system likes you; you get the TSA PreCheck. You get the potentially much shorter line, you keep your shoes and belt on, and you don’t have to take out your laptop and liquids. However, your property you own or you are buying ALSO has to pass through a new Big Data system. It also has literal red flags and ratings. The system may give you a TSA PreCheck Property Inspection Waiver or a simple green light. But it can also Red Flag your property subjecting it to second opinion frisking, wand-ing and unpacking that can seriously delay your flight.
So the process can be incredibly easy for a decent portion of the country. Will it result in lower costs for the industry? Yes! The borrower? Not right away. It will take a while for the savings to flow through as the old expensive model gets dismantled and the two track process gets rebuilt. How to charge the customer for being a higher cost or rewarding the borrower for being Fast & Easy will be a compliance hot topic to solve for.
So what does this new flow do to the people and titles of the old expensive model? Experienced Ops talent has never been so wanted and sales have not dropped a BP in the commission line item. The slow erosion of the internet on the traditional business will pick up. Rockets and Digitals will siphon off the Easy business that will become very price competitive and hard to add value to. It will still be a slow erosion but it will incrementally increase as did Fast & Easy as data and certainty improves along with the greed to lower cost.
New entities will pop up with self-help like Help-U-Sell for mortgages with no origination fees that traditional models can’t keep up with. BUT not everyone by any stretch will want or be able to use those models. So the ability to decide upfront which path to go down and how to get a borrower or a referring realtor/builder to understand that is key to succeeding. Artificial intelligence in the probing and retrieving of data as well as the analysis of it (reading the virtual docs and plugging it into qualifying models) will greatly change job responsibilities and compensation over time.
If I’m a broker I’d go back to being the lender of last resort doing ALL the loans that the Big Data model can’t, especially hard money and non-QM. All loans that are on the fringe and not easily commoditized allow specialization and margin to be made, as well as not requiring scale. For lenders, solving for the greatly different experiences and matching the costs and fees while still staying compliant in a burdensome regulatory environment will be a challenge. Loan officers have to be true advisors and probe deeply upfront to uncover potential surprises in the process to add value to their referral sources. They also have to excel at conducting financial assessments for the borrower or they will lose at the point of sale and jeopardize future business.
However the first steps that not all loans are seen as guilty is a new beginning. The new announcement by Fannie of their focus and embrace of this integration of Big Data in the verification process coupled with their rep and warrant relief is a huge game changer. It allows lenders to assume innocence and go from a post-9/11 shock and fear to a measured and methodical response that will streamline the home buying process and quality of life for ALL involved in the process.
So bring on Fast & Easy for some, but realize that how you treat the rest of the “guilty” is where you will make your margin and your reputation.