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Open Banking Data Pushes Mortgage Underwriting Into Digital Age

Homebuyers are facing major challenges: a dwindling housing supply, rising interest rates and pandemic relocations are creating a high demand for homes. Other issues plaguing the housing industry include labor shortages, supply chain issues and rising materials costs, all of which are making new builds a lengthy, frustrating, and extremely costly undertaking. However, these market barriers are only part of the battle. 

According to a recent study from Mastercard, consumers say obtaining a mortgage is a serious pain point in an already painful homebuying process. The survey shows that 89% of homebuyers find the mortgage process to be equally or more stressful than the homebuying experience. 

There has been a movement within the industry to adopt a fully digital mortgage and make assessments easier for lenders and borrowers. Freddie Mac has been at the forefront of this effort, working to provide a digital solution that uses bank account data to help streamline the underwriting process. They took another step towards digitization by announcing the latest enhancement to LPA asset and income modeler (AIM) with the automation of the 10-day pre-closing verification (PCV) of employment. This is now live and available in LPA, the company’s automated underwriting system.  

Automated Employment Assessment With AIM
The new VOE Payroll and VOE Transactions reports provide the data Freddie Mac needs for the 10-day PCV. In adding one of the reports, lenders receive only the data needed to close rather than refreshing the current, full reports that have already been underwritten. This helps eliminate last-minute hitches and other redundancies in the closing process. 

Automated Income Assessment With AIM
In February, Freddie Mac announced AIM for income using direct deposits, facilitating lenders’ assessment of a prospective homebuyer’s income paid through direct deposit to reduce the paper documentation burden on borrowers, thereby allowing lenders to close loans faster and simplifying the mortgage lending process. This provides cost and time saving efficiencies while continuing to meet Freddie Mac’s stringent credit underwriting standards. 

As a designated third-party service provider of Freddie Mac, Finicity, a wholly owned subsidiary of Mastercard, offers an integration of its open banking data and Mortgage Verification Services (MVS) with AIM that allows clients to automate the capacity assessment using consumer-permissioned data, direct deposit account data and work history. In the case of income, lenders can now look at direct deposit history to verify income. 

According to the American Payroll Association, with more than 93% of U.S. workers being paid by direct deposit, AIM can assess various income sources. In addition to direct deposit data, with borrower permission, AIM can assess an applicant’s income from employer data. Finicity, a Mastercard company, was one of the initial service providers supporting Freddie Mac’s AIM for income using direct deposits and is one of the few providers that offers both transaction and payroll data for the 10-day employment verification. 

"Freddie Mac's integration of Mastercard's open banking technology with AIM’s 10-day PCV solution will help minimize risk and streamline the mortgage lending process for both lenders and borrowers," said Kevin Kauffman, Freddie Mac Single-Family VP of Client and Partner Delivery. "Open banking data is improving the lending process by providing financial data from consenting consumers' bank accounts to verify assets, income and employment."  

The Transformational Impact of Open Banking
The mortgage process is still largely burdened by manual processes that leave consumers submitting (and often re-submitting) a large amount of paper documentation or scanning and emailing PDFs. This cumbersome process is frustrating for both lenders and consumers who are, increasingly, embracing digital experiences over manual processes. 

Mastercard’s data showed nearly three out of four respondents (72%) were surprised that manual processes still drive so much of the mortgage process. In an environment where consumers are accustomed to everyday digital experiences where speed and accessibility matter, open banking is changing mortgage lending and how the industry thinks about the customer experience. 

The availability of real-time data through open banking and the acceptance of this data by Freddie Mac is allowing lenders to adjust underwriting models to not only be more efficient and scalable, but also potentially more inclusive since they have a more comprehensive picture of the borrower’s financial situation, thereby enabling more consumers to realize the dream of homeownership.  

A Digital-First Mindset
Consumers are increasingly relying on financial technology to gain insights and streamline their experiences. What’s more, consumers understand the potential of their own financial data and are comfortable with using it. Only 12% of respondents to the Mastercard survey indicated that they were not comfortable sharing their financial data with a lender.  

This access to data can give lenders a faster, more accurate, and more efficient underwriting process. Consumer-permissioned data is providing an additional view that can lead to better decisioning for lenders and better financial outcomes for consumers. Additionally, consumers whose lenders leverage digital verification processes are more satisfied with their overall borrowing process.  

Borrowers whose lenders used digital mortgage verifications were less likely to say the loan process was the most stressful part of buying or refinancing a home, and 83% of respondents using digital verifications said their loan processing time was shorter than expected or met their expectations. 

These new tools and systems can help reduce the manual verifications and documentation that can add to the frustration of borrowers. A recent study by Freddie Mac found that the lenders who are leveraging digital technology effectively and integrating digital enhancements with changes to process management and culture are generally those in the top-performing category. Additionally, across all lender categories, mortgages with digital offerings produced, on average, 9 to 10 days of savings in closing cycle time. 

Using open banking data with AIM helps to meet the needs of today’s digital consumer—providing a streamlined process with less friction and paper-chasing versus manual processes.

Automating Mortgage Lending
The benefits of automating the mortgage lending process are significant for lenders: reducing the frustration of document collection, removing manual errors, lowering the risk of fraud, increasing referrals, and opening new doors for account and employment verifications. 

Consumers benefit from automation that fits their lifestyle and expectations when it provides transparency in the ability to permission their financial accounts for their benefit. Using open banking also gives the consumer more choices, allowing them to select the solution that best meets their needs. 

Mortgage Verification Services (MVS) from Finicity, a Mastercard company, is a one-touch digital verification product that provides the financial data necessary for AIM to assess assets, income and employment seamlessly. Each lender’s workflow can be unique. MVS is designed to be flexible and accommodate everything from refinancing to new purchases, including qualified and non-qualified mortgages. The features are built with both lenders and borrowers in mind to create a reliable and agile solution—enhancing the overall experience. 

Leveraging open banking in mortgage lending is a win-win for lenders and borrowers. 

About Author: Andy Sheehan

Andy Sheehan, EVP, leads Mastercard's Finicity Open Banking in the U.S. In this role Andy Sheehan is President and Chief Operating Officer of Finicity, a Mastercard company that enables innovation in the fintech industry through its state-of-the-art open banking platform. Andy is driven to build and inspire innovative teams to deliver exceptional customer experiences. For more than 30 years he has focused on harnessing data, analytics and technology to strengthen businesses and consumers alike across various industries. Prior to joining the Finicity team in 2019, Andy spent nearly two decades at Experian. While at Experian, he successfully positioned the business for growth during the volatile post-recession period, developed Experian’s international assets and piloted strategic planning and corporate development initiatives.

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