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A Tale of Two Lenders

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

By all appearances, 2022 could be another banner year for the mortgage industry, particularly for purchase mortgages. Employment is rising as the U.S. economy continues to rebound from the grips of the COVID-19 pandemic. Demand for housing remains strong and purchase loan originations could even reach record levels. Meanwhile, innovation within the mortgage industry is at a peak and lenders are adopting digital processes at an unprecedented pace.

Amid this optimism, however, some lenders face a number of choices in the coming year, given current market conditions and consumer trends. One of those choices will be deciding whether to maintain old business practices that may have worked before the COVID-19 pandemic or to recognize new borrower preferences, untether themselves from legacy technologies, and do business faster, remotely, and more conveniently with the digital processes available today.

A Transitioning Market
There are plenty of reasons to feel good about this year’s housing market, but many unknowns remain. For example, markets continue to struggle with inventory shortages based on issues left over from the pandemic, as well as labor shortages, supply chain issues, lumber shortages, and the rising costs of building materials in general. The most recent National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) found that builder confidence is rising in spite of supply chain issues, but that builders themselves are worried about buyer affordability, especially with interest rates set to rise in the near future.

With that in mind, housing prices should continue to rise—perhaps not at the pace we’ve seen in the past couple of years, but enough to entice more consumers into becoming homeowners and enable current owners to leverage home equity for major expenses, which will boost economic growth. Despite an outlook for rising mortgage rates, any rate increase should not be significant since employment levels still lag enough to draw concern.

However, rising rates will likely lead to the mortgage industry flipping back to a more purchase-driven market in the years ahead. In October, the Mortgage Bankers Association projected purchase loan volume will increase 9% in 2022 to a total of $1.73 trillion, which would be a new record. Yet originators’ profits will be muted somewhat as refinance volume is expected to drop by 62% and the total number of originations will decline by 33%, which will fuel rampant competition between lenders.

This year’s market challenges will likely drive a large uptick in non-QM and nonagency mortgages to accommodate borrowers who don’t fit traditional products. Earlier this year, S&P Global estimated the non-QM market would reach a record $25 billion by the end of the year, while Angel Oak Mortgage Solutions, one of the largest providers of non-QM loans, expects the market to soon reach $200 to $300 billion annually.

As the number of loan options increases, lenders will need to exercise greater flexibility in underwriting strategies and due diligence in the year ahead. Already, many lenders are using alternative forms of income and asset verifications with new automated technologies. These tools will continue to help originators meet demand for the growing number of self-employed workers, who currently account for slightly more than 10% of the U.S. workforce.

How Lenders Have Performed
With the exception of forward-thinking organizations, most lenders maintained traditional operations at the start of the COVID-19 pandemic and had trouble transitioning to remote processes. Many lenders that adopted digital mortgage processes during the past 18 months did so not necessarily because borrowers wanted them—although they did—but because they had no other choice. Still, when rates fell and refi volumes soared, the vast majority of originators went on hiring sprees to address capacity issues rather than leveraging their digital processes.

This could explain why many borrowers had a poor experience with their lenders last year. According to JD Power’s recently released 2021 U.S. Primary Mortgage Origination Satisfaction Study, overall customer satisfaction among mortgage borrowers fell by five points on a 1,000- point scale as originators struggled under the weight of large refinance volume. It happened despite the fact that lenders have adopted more digital processes and self-help tools. The problem, apparently, was that lenders failed to provide a highly tailored experience that blended technology and human assistance.

So, what do borrowers really want? In my view, customers are looking for holistic solutions from their lenders, including a consistent customer experience throughout the entire loan process. While more borrowers want self-service technology that enables them to shop and apply for loans on their own, they also expect personal attention from their loan officer when they need it. They also want to sign disclosures electronically, submit loan paperwork online, be able to digitally access their accounts, and utilize some form of eClosing, whether that happens through a hybrid approach or fully online with remote notarization.

To accommodate all types of borrowers—those who want human assistance, those who prefer self-service, and everyone in between—lenders need access to an end-to-end digital experience, including eCosings and remote online notarizations (RONs). In addition, they need technology that can be customized for their channel or channels of business, including retail, consumer direct, and affiliates. Finally, they need the flexibility for a loan officer to jump in at any point in the transaction to guide the borrower through the process in a timely and seamless manner.

Many banks, lenders, and credit unions we talk to tell us that this is what they want. The problem is that their current technologies cannot be optimized to meet their business goals, so they typically piecemeal together different platforms and software. The result is reflected in the JD Power study. However, end-to-end technologies are becoming increasingly more available and easier to implement. In the coming year, we should see a direct link between lenders that adopt an end-to-end approach and those that improve customer satisfaction levels.

How Close Are eMortgages?
Of course, it’s difficult to talk about an end-to-end mortgage experience without mentioning eMortgages, in which the entire mortgage process is digital. Very few loans originated today can be described as eMortgages, in spite of the fact that most borrowers are comfortable with online processes and are demanding the kind of speed and convenience eMortgages provide.

Theoretically, true eMortgages are possible, given available technology and the increasing use of RONs. But what percentage of origination volume will be eMortgages by the end of this year? What obstacles remain in the way, and how easily or difficult will they be to overcome?

One thing that would greatly accelerate adoption of eMortgages is the passage of the federal Securing and Enabling Commerce Using Remote and Electronic (SECURE) Notarization Act, which would make RONs legal nationwide. From the start of the pandemic, when lenders were forced to use remote processes, at least two-thirds of U.S. states passed temporary or permanent laws that legalized the use of a remote notary in real estate transactions. Since then, the American Land Title Association, MBA, and other groups have called for a uniform standard for remote notarizations.

The SECURE Act would establish a national standard for RONs and require federal courts to recognize RONs from any state. Should it pass this year, RONs, along with a number of changes to lenders’ processes and having a complete digital experience supported by strong compliance guidelines, will further increase the adoption of eMortgages.

The bottom line is that, in today’s transitioning market and declining levels of customer satisfaction, the best path forward for lenders in 2022 is not implementing digital processes one by one, as most do now. The better strategy is to reinvent the mortgage production process with new, modern technologies that have recently become available. It’s not reinventing the wheel. It is utilizing today’s technology to overcome production delays and borrower frustrations.

In the coming year, I believe we’ll see a chasm form between two types of lenders. The first will be those that continue to rely on old processes and legacy systems, looking for incremental improvements where they can find them. As purchase volumes increase and profit margins compress, this group will likely see their loan costs continue to rise while failing to make headway in improving the borrower experience. The second type of lender will include those bold enough to reimagine mortgage manufacturing and seize opportunities to reduce operational costs as purchase loan volume increases. These lenders will lean on new solutions to deliver the kind of end-to-end digital mortgage experience that borrowers really deserve.

Lenders have already been choosing which group they belong to, whether they intended to or not. And by year-end 2022, it should become clear who made the right choice.

About Author: Joey McDuffee

Joey McDuffee is a VP at Blue Sage, a provider of innovative, cloud-based digital lending technology for retail, wholesale, and correspondent lenders that delivers a superior lending experience for all users throughout the loan process. McDuffee has more than 25 years’ mortgage technology experience. He can be reached at [email protected] bluesageusa.com.
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