Charting Rough Waters in the Mortgage Business

Editor's note: This story originally appeared in the February edition of MReport, available here. 

When the coronavirus pandemic first took hold of our country last spring, and we found ourselves in lockdown, leaders of companies across the country were left to figure out how to encourage and inspire a remote workforce shaken and concerned about the future. One popular strategy emerged: to challenge employees to think about the kind of people they wanted to be by the end of this pandemic and work toward it. Some introduced contests to encourage improved health, others instituted programs designed to promote professional development and education, and others cultivated new hobbies. These efforts had one goal in common—to instill in employees a desire to transform and emerge from the pandemic better people.  

Businesses in every corner of the mortgage industry have also experienced a transformation in 2020. It was a record-breaking year thanks to the surge in demand for mortgage refinancing fueled by historically low rates. And because of remote working and social distancing requirements, the year was further punctuated by new processes and workflows and the acceptance of alternative methodologies such as virtual appraisals and e-closings. The lessons COVID-19 and unprecedented volume have taught us ushered in a much-needed transformation and made us all the better for it.  

Technology Adoption 

The past year opened lenders’ eyes to some of their shortcomings regarding offering a truly digital mortgage. Many stepped up their game and did a great job of distancing the mortgage process from borrowers— that will undoubtedly continue well into the new year. As lenders catch their breath from the volume surge, they will continue to review procedures and technologies and adopt even more of them to create a more seamless process and a better borrower experience.  

Simultaneously, both the federal government and several state governments took action during the pandemic to allow for remote and electronic notarization to keep the mortgage business moving forward. These measures are likely to lead to more permanent changes. Borrowers want the ease and convenience of signing documents and closing their mortgage loans remotely. It’s a significant advancement for the industry to facilitate what people have wanted for decades. 

Quality Control 

There is and will continue to be a greater need to check files for quality. The heavy volumes lenders experienced in 2020 forced them to hire teams of people quickly. Some may have shortened training because their loan volumes required all hands on deck. Add to that, the more volume that comes in, the greater the risk for errors. Together, these things make it increasingly important for lenders to run quality control checks both before loans close and afterward to ensure there are no issues and risk for buybacks. And these QA/QC checks will continue to be a critical component of the mortgage process for the foreseeable future.  

Before closing, each loan should be taken through a series of validations to ensure compliance and to determine how the loan checked out, highlighting things that need a closer look. Areas that require scrutiny include:  

• Verification of undisclosed debt  
• Verification of assets 
• Review of the automated underwriting approval 
• Review of credit underwriting attributes (income, assets, liabilities, etc.) 
• Verification of compliance with lender guidelines and state and federal regulations 
• Custom or layered lender requirements for non-agency products (Non-QM, Portfolio, Consumer, etc.) 
• Real-time rebuttal access–cure deficiencies required for CTC 

Lenders should perform post-closing, automated, and manual audits. These reviews verify data and use technology to compare documents for inconsistencies, omissions, and compliance thresholds, such as dates. You should review 10% of each loan type of your closed loans, as required by Fannie Mae and Freddie Mac. Some areas to re-examine include:

• Reverification of employment and assets, rent and lease 
• Review of the automated underwriting approval 
• Retrospective appraisal reviews 
• Audit reports 
• Occupancy checks 

 Shift to a Purchase Market 

While the past two years have been all about refinancing, the MBA believes that is about to change. 

This year is expected to be an active one for homebuyers, with purchase mortgage originations projected to increase by 8.5 % to a record $1.54 trillion. 2020 ended up around $3.57 trillion in total originations. This year, that number is expected to fall to $2.75 trillion, including refinances, with purchase volume accounting for the bulk of that number. 

However, despite this decrease, the expected total volume in 2021 would still be the second-highest figure in the past 15 years. 

More Regulations & Stricter Enforcement  

A Biden presidency more than likely means more regulations, including a more active CFPB and a big question mark around the future of the GSEs. But what President Biden can achieve during his term largely depends on Congress’s willingness to compromise with a new administration. 

Biden has stated many times how he intends to use the federal government’s strength to advance affordable housing initiatives, and he may use Fannie Mae and Freddie Mac to make affordable housing more robust. Biden has already selected a new leader for the CFPB and may reintroduce stronger regulatory oversight. It is also generally believed a Biden administration would keep the GSEs under conservatorship, at least for the short term. However, after the pandemic is over, they could be released as regulated utilities. 

Millennial Renters 

According to LendingTree, millennial homeowners have a median credit score of 693, compared to a median credit score of 601 for renters, which stands to reason considering those with higher credit scores are more successful at qualifying for loans and purchasing homes. 

But as the industry shifts to a purchase market, how are you going to help credit challenged Millennials who want to move from renting to owning but whose credit scores fall a little short?  

Scoring tools that help applicants with their financial health will be necessary, educating borrowers on managing their credit. 

Scoring tools come in various shapes and sizes—some update credit information with the national repositories by forwarding borrower-supplied documents directly to the three bureaus. The repositories then update credit information and trade lines on the borrowers’ credit reports. There are also automatically generated credit report cover pages that provide an instant snapshot of an applicant’s creditworthiness. Additionally, credit score analysis tools are available that make it easier for borrowers to reach their target credit scores by providing a detailed review of the consumer’s credit score. Some even allow you to simulate changes to the consumer’s credit file and predict the score that may result from those changes. Another scoring tool automatically scans credit files to alert lenders to opportunities you might have overlooked and provide potential score improvement values. There’s even a credit score consulting service that offers applicants the highest probability of a successful rescore by delivering customized solutions that truly work. Applicants can target an increase of 5 to 105 points—or a specific product, lender, or rate tier. 

No matter what scoring tools you ultimately choose to use, you can position yourself to succeed in the emerging purchase market by offering millennials a chance to improve their credit score. 

Pandemic Fraud Schemes 

Those who commit fraud often try to take advantage of new government programs created for emergencies, such as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). New account fraud, identity theft, cybersecurity risks, and imposter and money mule schemes are all on the rise due to the ongoing pandemic. 

Tools that identify fraud and mitigate risk will be more critical than ever. You will need to verify and reverify identities, employment, assets, and income throughout the mortgage process to catch invalid information. Look for a one-stop validation process that makes it easy to quickly verify data, perform a thorough risk assessment on applicants, and detect potential problems with applications—before and after a loan closes. And make sure it is fully customizable so you can select the criteria that meets your needs and compliance requirements. 

As 2021 kicks off with a promise of an effective vaccine to combat COVID-19, businesses of all kinds will continue to struggle with the economic impact of the pandemic. And while the mortgage industry is not entirely immune to this impact, it is better positioned to perform well given the anticipated continuation of low rates and the technological strides made in 2020. Lenders who use the right tools to ensure quality, mitigate risk, educate applicants, and properly verify data will be better positioned for success long after the pandemic subsides.