While 2020 was certainly a strong year for mortgage originations—even during a pandemic—there were many lessons learned that will assist lenders and consumers in 2021 as more and more families want to fulfill their dream of sustainable homeownership.
Throughout 2020, record-low mortgage rates drove borrower demand that sustained mortgage origination volume all year long. Many experts expect this low interest rate environment to continue in 2021. According to the Mortgage Bankers Association’s Forecast, mortgage originations are expected to be around $2.75 trillion in 2021, which while lower from 2020 would be the second-highest mortgage market in the last 15 years.
This year should be another banner year for homebuyers and mortgage originators. Unlike every cycle before it, origination volume reached a very high level in 2020 despite the large spike in delinquencies due to the pandemic impacting our economy. Typically, such a spike does not happen in tandem with high origination volume. On one hand you have employed borrowers who are able to take advantage of the low interest rates to purchase a home or refinance an existing mortgage. On the other hand, you have families facing financial hardship and unemployment who need access to homeowner assistance programs, such as forbearance and payment deferral, to help them keep their homes.
In the midst of disruption, the mortgage industry was able to quickly adapt to manage their resources between helping consumers purchase homes or refinance existing mortgages while assisting other families in need with participating in programs to keep their homes. Navigating this unprecedented year left us with quite a few lessons to help guide us into 2021. Here are a few areas that industry participants should keep in mind.
1. Staffing & Technology Needs Evolve — Regardless of industry or sector, staffing and technology remain critical factors in being successful in providing an exemplary customer service experience while managing volume that is difficult to predict, such as future mortgage rates and origination volume. Concerns around staffing largely will depend on interest rates and residential housing supply. If we continue to see relatively low interest rates, lenders will be challenged to continue to ramp up recruiting efforts with a limited pool of experienced resources not employed today while addressing retention of existing staff. As you think through your staffing needs for 2021, it also is important to keep in mind that COVID-19 has shown many people are able to work from home and want to split their time working in an office and from home, if not preferring to work from home full time. Beyond taking a look at your existing policies around flexible work locations, 2021 also may be a good time to assess how much office space you really need— and how best to use that space. Technology and automation also will remain a huge focus in 2021 as many companies were too busy getting volume through to properly focus on implementing some of the tools that would have helped manage through last year’s volume. For example, good Optical Character Recognition (OCR) technologies to accurately index documents and extract data from documents are very valuable especially with more borrowers providing documents electronically to mortgage originators. Self-service technology tools also reduce demand on a lender’s staff.
2. The Importance of Training and Development Increases — If 2020 taught the industry anything, it is the importance of being prepared and able to tackle any volume scenario. The limited supply of processors and underwriters created costs and bottlenecks in 2020 for the mortgage industry. While 2021 will likely be another sizeable market, the mortgage industry would be well-served to make space for a renewed focus on training, development, and certification programs. The increasing digitization of the mortgage process—and our lives, in general—present myriad learning opportunities for everyone in your organization. It is a good time to develop an internal program to grow talent versus solely relying on sourcing resources externally to handle higher than expected volumes. For example, a reskilling program can allow your organization to better flex with shifts in the market by retraining and redeploying talent to different departments.
3. Potential for Increase in Mortgage Defects — In 2020, we experienced historically low interest rates along with many other circumstances as a result of the COVID-19 pandemic that stretched the mortgage industry and shifted the way we operate. In addition to the surging volume, more employees working remotely, the influx of new resources, and investors rapidly changing underwriting guidelines all combined to strain operational teams in a way that can potentially lead to manufacturing errors. As delinquencies progressed through the foreclosure process during the last financial crisis, lenders experienced an increase in loan reviews and audits, which are expected to happen again during the current pandemic. Mortgage originators and servicers need clarity from aggregators, investors, and mortgage insurers to understand their rep and warrant exposure as well as other contractual obligations. They can take advantage of programs and tools that GSEs and mortgage insurers offer to reduce their rep and warrant exposure. Poor loan origination manufacturing quality and lack of rep and warrant clarity create liabilities that can become expensive for lenders to absorb.
4. An Uptick in Hybrid Mortgage Closings — As social distancing remains an important measure in keeping each other safe while we continue navigating through the COVID-19 pandemic, it ultimately has led to a change in how mortgage closings are conducted. The mortgage industry was able to adjust quickly by leveraging technology and developing resources to aid in maintaining business production without missing too many beats. Hybrid closings that are a mix of online and in-person will likely become more of the norm and less of the current circumstance. With a hybrid closing, lenders are able to provide a new and different, but ultimately better, borrower experience.
5. Best Practices for Underwriting Working in today’s challenging environment has identified a few industry best practices when it comes to underwriting:
• Ensure that the most recent paystub does not show any discrepancy to prior years or year-to-date income; if so, do not average.
• Review bank statements for consistency with direct deposits, particularly if an hourly employee to ensure no undisclosed gap or fluctuation.
• Perform independent research of employer to assess any possible disruptions, closures, or layoffs.
• For self-employed borrowers, confirm business is open and operating, as well as current year profit and loss and business bank statements; do not rely solely on prior years taxes.
• Perform verbal verification as close to closing as reasonably possible; best practice is no more than three days prior to closing.
• Have the borrower confirm within a couple days of closing that they have not experienced furlough, pay or hour reductions, or any other change.
• Obtain an updated credit report within 30 days of closing to ensure accurate and current information.
• Assess payoff information/payment history directly from the servicer of the current mortgage to verify the borrower is not in forbearance.
• Consider borrower affidavit or other confirmation that payments have not been deferred, modified, or otherwise impacted.
From the 2008 housing collapse to the COVID-19 housing boom, two of the biggest lessons that have helped us to move forward are the importance of embracing change in the middle of disruption and remaining open to innovation in the midst of uncertainty. Any time there is a severe disruption to the housing market, change is inevitable, and flexibility is necessary to move in a direction that better serves homebuyers and homeowners.