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Getting Ahead of the Cycle

This piece originally appeared in the January 2022 edition of MReport magazine.

In mid-November, the New York Times asked in a headline, “Will Real Estate Ever Be Normal Again?” Home prices continue to soar in cities around the United States, and despite a record rise in the Consumer Price Index in October and reports of goods and employee shortages nationwide, the U.S. Federal Reserve Bank has signaled it will keep the benchmark interest rate low to support the still young economic recovery. However, the economy may force the bank to act much sooner. If inflation is transitory, the Fed might be able to continue its near-zero interest rate policy, which will support current trends, but we don’t know that inflation will fade.

Tabling the conversation about rates being linked to inflation, there are other factors that may contribute to a continuation, or delay, in relation to our current housing bubble (let’s not pretend we’re not in a bubble). A projected COVID-19 baby boom could keep families on the move, looking for more and better places to live. However, if commodity prices remain high and the Fed raises rates sooner than most expect, the party could end in a hurry. We all have our opinions about what will happen. The market has the final say.

While the timing is unknown, a residential real estate market correction looms. Lower home prices and higher interest rates will reduce the volume of new purchase loans and refinances, forcing the industry to contract. Loan processors and underwriters will be particularly hard hit. If history repeats, mortgage lenders and brokers will invest in sales and marketing to keep volume up, ignoring the need for investment in loan processing and underwriting operations in advance of the next upturn.

Looking beyond the looming downturn, as the mortgage originations sector recovers and begins another cycle, the industry will struggle to keep up with growing demand from a new set of lower rates and/or increasing home prices. The homebuyer’s experience will suffer as closing times lengthen and stress mounts, as we saw when rates bottomed, and loan applications spiked during the pandemic. This is an outcome that lenders and brokers should have seen coming, given previous experience.

As the originator of more than $2 billion in residential real estate loans across all 50 states during the 2010-11 recovery in U.S. real estate markets, I’ve felt these acute pain points, deal by deal.

Real Estate Is Slow to Change
The mortgage industry is slow to change and resistant to disruption. The way we shop for clothes, furniture, and food is radically different from the standard practices a decade or two ago. Imagine yourself in 2003, choosing your groceries on your phone and setting up a delivery time. In those days, you probably still carried around a plastic card granting you the right to rent DVDs from a physical store on your way home from work.

Surprisingly, the homebuying and financing experience hasn’t changed much at all. Financing terms are determined, as ever, by a borrower’s ability to establish credit, capacity to pay, and the value of collateral. Some lenders are better than others. However, their rates and fees are higher than other lenders with less technology. The top two lenders in the industry leveraging heavy investments in technology, Quicken Loans/RocketPro and United Wholesale Mortgage (UWM), have less than middle-priced rates. So, why are they the leaders in the space? Customers generally don’t expect the mortgage closing process to be pleasant, straightforward, or fast. Most people will only go through the process a few times in their lives, so they have a narrow frame of reference.

The industry adage is that the average adult will own fewer than three homes in their lifetimes, generally purchased during early adulthood (a starter home), midlife (the upgrade), and near retirement (the leisure abode). A homeowner might also refinance their mortgage multiple times during a falling-rate environment, but today’s homebuyers are not likely to see lower rates ahead. Let that sink in … we will likely never see rates this low again. Feel free to get rid of the word “likely.”

The situation is unpleasant for mortgage loan officers as well. In good times, they are overworked and pressured to push financings through despite being saddled with antiquated technology, manual processes, and frequent errors made by those submitting and reviewing documentation. The best loan officers own their own brokerages or work for well-funded franchise brokerages that treat them well. Many burn out and move into other industries. Others work long hours during boom periods and find themselves out of work when the economy turns, never to return to an industry which could benefit from their experiences.

Technology Can End Reactionary, Boom-Bust Thinking
We now have reliable and scalable technology that can increase the productivity, efficiency, and accuracy of the mortgage loan officer function, allowing companies large and small to keep, reward, and retain their best talent in good and bad economies. In a digital age with machine learning and artificial intelligence widely available, forward-thinking organizations should adopt automation into their mortgage application and underwriting processes.

Document Management: Systems allow for borrowers and their representatives to upload standard documents such as tax returns, wage, and bank statements while quickly and accurately analyzing those files to determine if additional documentation will be needed early in the process. A homebuyer might not know, for example, that they need to report court-ordered alimony or child support payments. However, an automated system can capture such an omission right away so that the borrower isn’t left scrambling to provide documents in the final days before closing.

By quickly correcting these errors and omissions, I believe that such systems can reduce the time and effort required on the part of borrowers and mortgage lender staff by 50%, allowing energies on all sides to be spent more productively, improving the customer experience.

Information Warehousing: These systems can provide a common point of reference for every professional who needs to touch the loan throughout the process, including the borrowers, loan officers, loan processors, underwriters, and other professionals involved in each transaction. Everything is in one place, clearly labeled, stored securely in the cloud, and available for download as needed, eliminating the need for phone calls and for busy professionals to hunt down documents.

Systems Integration: Real estate is a fragmented industry with many organizations using free, generic software systems that can’t be customized. An intelligent document and process management system will augment existing systems and prevent errors throughout the ecosystem and process.

The Business Case
Companies that implement automated solutions now will free themselves from the boom-and-bust decision-making that has grown endemic. Technology that increases efficiency and capacity while shortening closing times by eliminating errors will allow managers to help their teams succeed in a scalable environment.

Technology allows lenders and brokers to hire fewer people and make them more productive. Newer workers will ramp up faster and provide a higher level of service sooner. This will improve the customer experience and could alleviate the need for excessive and expensive marketing, as customers will not only return for their refinancing or next purchase but will refer their lenders and brokers to their networks.

If you’re skeptical that an industry that has been so slow to change can be moved in this way, your skepticism is understood but won’t serve you in the face of changing market dynamics. The machine learning and artificial intelligence algorithms that are revolutionizing manual processes like driving a car are happening for loan origination, underwriting, and servicing. Nothing stays the same forever. Not our current real estate boom, and not our present ways of doing business. Adapt now, or risk falling behind.

About Author: Christopher Hussain

Prior to founding RealKey in 2015, Christopher Hussain was the number-one mortgage originator in the United States from 2010-2011. He personally funded over $2 billion in residential loans in all 50 states. A born entrepreneur, in 2013 Hussain also co-founded Sindeo, a San Francisco-based startup that raised $50 million to create a new mortgage experience. As a recognized business and thought leader in the mortgage industry, he has successfully scaled numerous mortgage loan companies. In his current role as CEO and Founder of RealKey, Hussain is leveraging his breadth of industry experience to transform and enable faster, more efficient mortgage loan processing.

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