Editor's Note: This select print feature originally appeared in the January issue of MReport, available now.
From a macroeconomic perspective, the mortgage market entering 2008 was in tatters. The collapse of the subprime and the Alt-A markets, as well as an extremely weak jobs market, made consumers skittish to borrow and lenders reluctant to make most loans. It was the worst of times.
“Entering 2008, we were dealing with all of the fallout from the liberal lending policies of the previous 10 years,” says Matt Clarke, CFO/COO of Churchill Mortgage. Those previous 10 years had included low and no-documentation loans that could easily be falsified, as well as mortgages with no principal payment requirement, meaning they would have negative amortization. Extremely popular adjustable-rate mortgages were readjusting with higher payments due to higher interest rates at a time when many mortgagees were losing their jobs.
“The subprime crisis quickly infected all lending,” recalls Faith Schwartz, a veteran industry consultant and principal of Housing Finance Systems Strategy, LLC. “The mix or originations shifted considerably and many people were displaced over several years due to foreclosures.”
The private-label securities market had collapsed as well, so there were no secondary market loans outside of loans available through Freddie Mac and Fannie Mae, says Joe Melendez, Founder and CEO of ValueInsured, Inc., a company that provides down payment protection for homebuyers.
“The focus was on saving people’s homes, not on mortgage originations,” says Camillo Melchiorre, President of IndiSoft. “Everything was in the tank.”
Though the beginning of 2018 may not qualify as the best of times, the mortgage market is in far better shape than it was a decade ago. Rates are again on the rise, with the Federal Reserve hiking interest rates 25 basis points in mid-December of 2017, the third such increase for the year, and two to three 25-basis-point increases expected for 2018.
“We are getting back to a normal landscape,” Melchiorre says, a sentiment expressed by many others.
Rising interest rates make it more difficult for some borrowers to obtain qualified mortgages than a year ago. Yet, even with the expected increases in 2018, rates will still be below what they were in 2008. Additionally, borrowers with the best credit profiles can get better rates. Risk-based pricing is a much more refined concept now than it was at the beginning of 2008.
However, just as it was at the beginning of 2008, the rising rate environment entering 2018 will mean that borrowers will be doing very little refinancing, mortgage industry experts agree.
Will Fisher, SVP, National Sales and Marketing Director for Citadel, the largest nonprime/nonQM lender in the country, expects 2018 to be a “coming out party” for nonqualified mortgages. “The current vintage of loans are much better than subprime and other non-comforming loans from the early 2000s. These loans have better credit and income documentation than 10 years ago. The ability to repay is being heavily scrutinized.”
When they were still in vogue prior to the mortgage meltdown, the availability of no-doc and low-doc loans meant that the ability to repay wasn’t always confirmed. That has changed with stringent verification of income, debt, history of payments, and other financial information.
In 2008, mortgage insurance companies were just starting to get hit with their first claims from the collapsing mortgage market, says Brien McMahon, Chief Franchise Officer for Radian, the nation’s largest mortgage insurer with a 20 percent market share. The company has also made acquisitions to expand into other areas of mortgage and real estate services. The claims were so extensive that they eventually led to the collapse of other private mortgage insurance companies.
Those private mortgage insurers that survived the depths of the market are now positioned to help creditworthy borrowers obtain loans with very low down payments. Radian also has an insurance product that will cover mortgage payments for up to six months in the event of a job loss.
The housing market is stable, with prices appreciating in most areas, coastal markets hot, and some older areas benefiting from regentrification. Though prices are up—and up rather sharply in some popular areas like Seattle, San Francisco, and New York—they are not up into the bubble territory of 2003-2005, mortgage industry experts agree.
In 2008, home values were dropping sharply, with some sinking to half of what they had sold for only a few years earlier—leading to many borrowers being underwater on their mortgages. Today, home values are rising in most markets, which can be a double-edged sword. It makes homes, from starter homes to luxury homes, more valuable for the owners, but also more expensive for prospective new buyers. It’s a seller’s market—as long as they can find buyers who can meet loan qualifications.
However many homes are still affordable for those prospective buyers who do the research to find the right loan product, McMahon says. He and several others point out that, even though rates are rising, they are still historically low. Homeowners can build equity and wealth, unlike renters.
In spite of this, a higher percentage of people are renting now. In 2008, homeownership rates were still near their peaks of more than 67 percent, and now that is closer to 63 percent. Some millennials are still hesitant to buy after watching their parents suffer with declining home prices a decade ago, Melchiorre says.
A Farewell to Paper—Mostly
In 2008, the mortgage process, from application to closing, was still largely a paper-driven process—paper documents at the beginning, a large paper packet at the end, and loads of paper shuffling for the 45 to 90 days between those two points.
“Whether the application was done in a branch or in an office, the loan operating systems were still dealing with a lot of paper; that was a problematic approach,” says Steve Comer, Director of Financial Services Sales for Hyland. Simply reviewing the paper before bringing the documentation to underwriting took 45 to 50 minutes per application. Now it’s only 15.
Some paper had already left the mortgage business before 2008 thanks to the low-doc and no-doc loans, but by 2008, lenders and underwriters were already looking for better proof of a mortgage prospect’s creditworthiness. “Paper was coming back in into the system,” says Jeff McGuiness, Chief Sales Officer of Embrace Home Loans, an independent mortgage banker.
As a result, underwriters with less than a decade of experience were dealing with much more documentation than what they had been accustomed to, slowing down their decision making and the entire loan process. Mortgages that had been complete in 30 days were now taking twice that amount of time, or more. Underwriters who were reviewing and decisioning up to a dozen applications a day only a few years earlier were down to only a couple a day in 2008.
“There were a lot of hands touching a lot of paper,” McGuiness says.
Today, automated data capture and data extraction enables many documents to be digitized immediately, if not already in electronic form, and to stay digital throughout the process, explains. A decade ago, even if the information was put into digital format at one stage of the process, that data had to be rekeyed in another area because systems for different parts of the mortgage process didn’t always communicate with one another.
Another benefit, according to Schwartz, is that lenders are not just automating old processes; they are starting to re-engineer workflows for a more efficient process.
Servicers were also behind the technology curve a decade ago, says Tim Anderson, Director of eServices for DocMagic. As more mortgages became distressed, servicers first attempted to address the problem by adding people.
“The meltdown showed what was lacking in terms of technology,” Anderson says. Consumers were seeking loan modifications, but documentation was needed to confirm those. The servicers’ systems couldn’t handle those requests. Automation could handle only the most rudimentary functions.
“In 2018, everything is about digital mortgages,” Anderson adds.
“We are seeing investment in technology and innovation, something that we have not seen in the last decade,” Schwartz says. “Freddie Mac purchased the first ‘truly digital’ end-to-end mortgage in the fall of 2017. New technology [companies], great advancements in data usage as the source of truth and shifting attitudes in the use of technology has created a revolution around the mortgage space. It will be important to make sure that regulation is keeping pace with the innovation.”
“It’s like a whole different era,” Melchiorre says. “The changes in technology have been so innovative that they have driven much of the risk out and shortened many of the timelines.”
Though verification is essential, much of this can be done online, as long as the borrower agrees to provide access to certain information, Anderson says. “You know everything about the borrower on day one.”
Mobile technology has been a boon to the mortgage process as well. Consumers and lenders can start the loan application from a tablet or a smartphone. “APIs have allowed for much more streamlined processes,” Comer adds.
Consumers have access to more technology as well, with Internet searches enabling them to see homes for sale, neighborhood information, and other details that they could only get a decade ago by doing some serious legwork via telephone, the library, and in-person visits. However, the online information shouldn’t be seen as limiting the need to conduct good research to ensure that homeowners are buying the right properties and using the right lending instruments to do so, Clarke says.
Regulations and Red Tape
The seeds of the enhanced compliance and regulation that lenders and others in the mortgage business have to deal with today were planted in 2008, giving rise to Dodd-Frank a couple of years later and TRID a few years after that. Dodd-Frank, TRID, and state regulations have led to an increasingly complex regulatory landscape, mortgage industry experts agree.
The following are just some examples of the TRID requirements:
- Loan estimates must be provided no later than three business days after receiving the application and no later than seven business day before consummation
- Closing Disclosure must be received by borrowers no later than three business days before consummation.
- A revised loan estimate must be received by the borrower(s) no later than four business days prior to consummation.
- A revised closing disclosure must be received by borrower(s) no later than three business daysbefore consummation if APR becomes inaccurate, the loan product changes, or if a prepayment penalty is added.
“Regulation has been like a snowball rolling downhill,” Clarke says of the increasing compliance burden. “Hopefully, the hill ends soon.”
The additional regulation has at least doubled the cost of processing a mortgage, according to McMahon.
All of the new regulations have led to a costlier loan process, with lenders needing both additional automation and more personnel.
Today’s regulations mean stronger quality control is needed throughout the process, says Linn Cook, Director of Sales and Marketing for LendingQB. “We had to spend more than $1 million to change our software in order to support TRID. We had to add new fields and new screens.”
Even changes that look small when completed, such as adding new fields, are actually extremely complex,” Cook explains. Any changes made in one area have to flow correctly through the rest of the system.
The core data set has hundreds of links, so making a change to the core means reprogramming to ensure those hundreds of connections reflect the updated information. New screens were built from the ground up.
“Everything has to be arranged in a logical manner,” Cook says. “Design is a huge problem.”
The regulations drove the advances in technology throughout lender systems, Cook adds. Without the need for greater transparency, accurate reporting, and tight timelines for disclosures, lender technologies would probably be largely unchanged from what they were a couple of decades ago, he says.
Additional people are needed to work with the additional technology. Lenders that might have had a part-time compliance officer at the start of 2008 now have entire compliance teams at the beginning of 2018, according to Fisher. Internal audits are no longer just occasional, instead occurring on an ongoing basis to ensure that all disclosures are made in a timely manner. Failure to provide disclosures, accurate good-faith estimates, and renewed estimates any time there are updates results in costly penalties that lenders want to avoid.
Lenders have spent the last few years working out the details of regulations and the automation of compliance, McGuiness says. “The industry was in an absorption of regulation mode. Lenders had to get [regulations] right. Once they have that dialed in and correct, then they can look to scale. The last two to three years have been spent on deploying the technology to facilitate the efficiency inside and outside of the loan origination system so there was total transparency to the consumer through every step of the loan. In 2018, we should see a race to more sophisticated customer acquisition strategies.”
There is another unknown, Schwartz points out: “We are looking at a change in leadership across many of the regulatory agencies. The jury is out on what this means and it will be interesting to follow. We all agree, we cannot have a repeat of the great recession due to housing mishaps. But we should be careful about the approach to the next decade and remain mindful about transparency, consumer protections, and safe and secure lending.”