One thing has been certain on the mortgage lending front over the past year: despite a labyrinth of challenges both expected and novel, there’s been no shortage of work to go around for an industry that has remained strong despite the economic hardships that have pummeled the nation. Last year saw a boom in refinancing activity, driven by continued low rates, and this year is experiencing a strong originations market even as the refis continue. But while having plenty of work to go around is a good thing, the real-world logistics of managing that workload can prove challenging, especially when it comes to navigating the interplay between the purchase and refi markets, as well as ground-level issues such as staffing concerns and bandwidth.
For this month’s cover story, MReport spoke to representatives of Planet Home Lending, Blue Sage, SLK Global Solutions, and the STRATMOR Group about the factors keeping loan turn times elevated, the headwinds the industry is facing from staffing perspectives, and how they can work to address these challenges in order to better serve homebuyers and the booming American housing market.
The MBA recently forecast that “purchase originations are on track to grow 16.4% to a new record of $1.67 trillion in 2021.” With mortgage rates on the rise since January, the pendulum looks to be swinging back toward the purchase market, but regardless of how the year plays out, the industry will need to remain nimble and adaptive in order to best meet the needs of homebuyers and homeowners.
One critical metric, at least from the viewpoint of your average homebuyer, is loan turn times. According to a recent Origination Insight Report from ICE Mortgage Technology, “the average time to close all loans fell to 52 days in March, down from 53 days in February.” While that’s down ever so slightly from October 2020, when that average stood at 54 days, that number was already 10 days longer than a year prior, and some of the slowest loan turnaround seen since 2012.
“Many lenders still have not achieved economies of scale as volume has spiked,” said David Aach, COO of Blue Sage, a cloud-based digital lending platform for retail, wholesale, and correspondent lenders. “This is largely a function of their technology platforms being much the same as they always have been, where people are manually typing in most of the data rather than having it automatically derived based on upon rules and data. It doesn’t lend itself to being able to maintain your turn times when volume increases.”
Jim Cameron is Senior Partner at STRATMOR Group, a mortgage advisory business founded in 1985. He noted the results STRATMOR found from their Mortgage SAT program, which he described as a “borrower satisfaction survey benchmarking program.” In the past year, the Mortgage SAT program received more than 250,000 borrower responses, compiling the results into a net promoter score (NPS). The higher the NPS, the more favorable the customer reviews.
According to Cameron, the results for 2020 showed that when turn times for refinances are 15 days or less, the NPS is 94 points. When the turn times are 16 to 30 days, the NPS is 91 points. When turn times are greater than 90 days for refinances, the NPS drops to 42 points. For homebuyers, clearly, turn times are a factor.
“The big challenge is to set expectations with the borrower and then meet those expectations,” Cameron said. “There are communications challenges and expectation-setting challenges. When lenders fail, or when it takes too long, it dramatically and negatively impacts borrower satisfaction.”
One of the mortgage industry’s primary tools for managing capacity is to raise prices and increase margins, according to Cameron. “We’ve had such a prolonged period of the refinance cycle that the operations group can’t get out of the backlog, because it just continues to pile up. It’s hard for operations managers to look at the backlog and figure out how to mitigate problems,” Cameron explained. “Many lenders have done it by adjusting how many applications they’re taking or adjusting their pricing to try to control too many loans just sitting in their pipeline.” However, this approach puts lenders at risk of “an overwhelmed operations staff and unhappy customers.”
Remote Work, a Not-So-Remote Risk of Burnout
The struggle to manage record volumes began unfolding last year in a time of economic and health strife, paired with the challenges of navigating a widespread shift to remote work for many industry professionals.
Cameron explained, “Because there are only so many experienced mortgage operations staff available, many lenders have, as a fallback, offloaded those tasks to less-experienced people, who are easier to hire and train. It’s a way to survive, and it’s throwing bodies at the problem, but not in a cost-effective way.”
“Our industry did a great job in quickly pivoting to working remote, but the burnout factor is real,” said Anthony Galiano, VP Mortgage Solutions, SLK Global Solutions. In addition to the simple strain of an increased workload, remote work has removed some of the perks of office life that could help offset the stress: everything from face-to-face social interactions to amenities such as in-office gyms, cafeterias, and the overall sense of corporate culture and community.
“There are definitely things that companies can do to keep that culture going,” Galiano said. He cited examples of seeing companies that had implemented reward systems where employees can earn points that you can use to order items from a catalog. It’s a small thing, and while it doesn’t necessarily offset the loss of community and perks an in-office position can provide, but he suggested that this or similar systems could help “keep employees engaged and wanting to continue to perform. It’s about creating a family environment within your organization.”
Even though the industry adapted quickly to embrace remote-working and other solutions mandated by the pandemic, Galiano suggested that the pain points were amplified by significant areas of operational processes that could be automated—but simply have not been yet. Indeed, most of the experts we spoke to pointed out that, while the mortgage industry has been quick to embrace technology, automation, and innovation on the customer-facing front end, those upgrades have often not trickled down into the day-to-day operational processes and manual tasks.
Galiano suggested that a hesitancy to outsource work to third parties may also be further exacerbating the areas where automation is possible but lacking. “Our industry is one of the last to buy into outsourcing as an option, but I think companies are starting to recognize that,” he continued. “It’s about identifying where you can pick up efficiencies, where you can take processes that, as an employee, it’s a redundant task that continues to happen. As an example, I’m going to order payoffs; that’s what my job is, to order payoffs. That process could be automated, or it could be outsourced.”
STRATMOR’s Jim Cameron suggested that front-end innovation gets a lot of attention and attracts eager fintech providers who are keen to share their tech solutions. However, at a certain point those solutions run into the limitations of workforce capacity due to insufficient back-office automation and innovation.
“Lenders’ ability to take applications efficiently, interact with borrowers efficiently, and get those loans in more efficiently than we used to has been good,” Cameron continued. However, “As those loans migrate into the core operations, I don’t think that we have had the same level of investment, attention, and focus.”
Part of that, Cameron suggests, is simply because the application processes are often more straightforward than what comes later in the game.
“It’s easier to focus on that and get that shored up, but as soon as the loan gets out of the application process and into the fulfillment process, it tends to fall apart,” Cameron said. “It’s because of the complexity. It’s because of the lack of readily available tools to plug in and solve those problems.”
Jennifer Fortier, Principal Consultant, STRATMOR Group also suggests that, prior to the capacity crunch of the past year, many lenders didn’t consider backend automation a priority, or even consider the fact that keeping those processes manual might be a competitive disadvantage. Instead, they viewed it as part of the “human touch” consideration we often hear so much about.
“It’s a very people-focused, people-driven industry, and your staff is getting the work done. Then, the industry reached a period of overcapacity, so there wasn’t a lot of focus on trying to take it off the people. When suddenly we had this refinance boom, the cracks started to show.”
“It’s not about replacing the people with technology,” Galiano said. “It’s about ‘how do we take that technology and make our employees more efficient?’ People always talk about how important the customer experience is, but in my opinion, the employee experience is more important than the customer experience. No matter how great your process is, if you have unhappy employees because they’re being overworked or the process is broken or they can’t figure something out, that’s going to come across to the consumer, right?”
Unsurprisingly, both the pandemic changes to how we work and the coinciding capacity crunch have both led more lenders to reevaluate their commitment to tech and automation beyond just the borrower portals and other out-front aspects of doing business.
However, making those changes is rarely as simple as it seems, because when it comes to mortgage, “simple” is relative.
“Even simple, routine tasks have a bit of complexity just because of the variation in the loans,” Fortier explained. “As such, automation has typically been focused on very discreet processes without a lot of room for variation. Lenders have a lot of interest now in getting smarter automation, machine learning, and AI into the mix. It’s on everyone’s radar in a way that it has never been in the past.”
One reason why pushing innovation across all levels of the mortgage process can be challenging comes down to the complex nature of mortgage, as well as a heavily regulated landscape that could put a heavy penalty on attempted innovation that ends up creating unexpected kinks in the system.
“You need to be sure you’re not going to break anything when you implement these technologies,” Aach said.
He also notes that “inertia” is another contributing factor.
“People get used to doing things the way they’ve always done them. When volumes are soft, the pain goes away, and people forget. When volume spikes up again, they go, ‘Oh, I should have done that before.’ We heard a couple of clients last year say, ‘I’d really like to replace my technology, but I’m too busy processing loans.’ If they had done that when things were a little slower, they’d be in a much better spot this year.”
“For an industry steeped in history and comfortable with its ways, change is tough,” said Muthu Srinivasan, CTO for Planet Home Lending, LLC. “However, with the focus on paper reduction and the GSEs getting on board with fully electronic processes, including remote notary options, tech adoption in the industry has had a marked improvement in recent years.”
In addition to all of the tech being utilized out of necessity during the past year’s shift to social distancing and remote work, Srinivasan notes that “lenders are becoming more familiar with adopting electronic verification of employment, assets, and income coupled with streamlined ordering of necessary services and intelligent automation of repetitive processes to improve our turn times.”
Nevertheless, moving innovative thinking beyond just the front end is crucial if lenders are determined to set themselves up for sustained—and sustainable—success.
“There’s only so much efficiency you can gain by automating the customer-facing piece of it,” Aach said. “And many of the popular customer-facing platforms don’t do a lot to improve the underwriting process. They don’t do a lot to improve the closing process.”
As for Srinivasan, he doesn’t necessarily agree that it’s an either-or situation, pitting customer-facing front-end processes against operational back-end ones.
“I believe in focusing on customer experience as the backbone for everything we do,” he explained. “If we improve turn times through better process automation (RPA), it can lead to improved lender associate experience. It will translate to a better customer experience at the end of the day.”
Aach also points out that one of the key things that happens during the life of a loan is that, simply, things change.
“Appraisals come in low. Borrowers ask to increase the loan amount, and they find out that certain conditions need to be satisfied. In many cases, they then have to reclose the loan. That’s a manual process for a lot of lenders, as opposed to having an automated process for repricing the loan, recalculating the fees, regenerating the disclosures, rerunning compliance, and rerunning automated underwriting.” Finding ways to automate parts of that process where possible can streamline things and save on labor.
“Identifying where the labor-bar bottlenecks are and then implementing technology solutions that automate functions that today are still being done by people is critical,” Aach continued. “Many companies are still manually scanning documents. They have disclosure desks that are checking the documents. Those things shouldn’t be manual anymore—if you have the right technology.”
“When it comes to things like processing of the loan, you need to identify, quickly, are all the documents here?” Galiano said. “Do I have a complete file that I can submit it to an underwriter now and have them be able to make a lending decision? If they don’t, then don’t send it into an underwriter. It’s about putting those stops in place so that you’re not utilizing your most expensive resource—the underwriter—only to have the underwriter have to send it back because it’s not ready to be reviewed.”
“Having automated fees is absolutely critical,” Aach suggests. “If you’ve got people typing in loan fees, transfer tax fees, recording fees, and origination fees, as opposed to them being automated, calculated, and then recalculated when anything about a loan changes, that’s a big one.”
Likewise, the use of automated conditions is equally important, Aach notes—"having the ability to automatically define which loan conditions apply based upon loan type, property type, or ownership type would be another one.
“If somebody asks a borrower for a W2 for 2020 and it is provided, the system should be able to automatically recognize that, extract the income information, and not have a whole lot of labor associated with that,” Aach said.
Srinivasan also suggests that the mortgage lifecycle is filled with areas ripe for innovation.
“Secondary markets and servicing, for example. It’s refreshing to see automation and machine learning, along with blockchain-based solutions showing up in the secondary mortgage world these days. However, we are still in early days when it comes to innovating the industry’s post-closing areas.”
“Whether it’s through automation, outsourcing, or process improvements within an organization, you need to make sure that, through every step of the way, the right thing is taking place before it moves on to that next step,” Galiano suggested. “It’s just making the process smoother, start to finish, with the least number of hurdles. Making this smoother will start a domino effect through the entire process.”