This speed of change also is notable in a recent J.D. Power study that shows 43 percent of mortgage clients reported applying for a mortgage digitally in 2017, up from 28 percent in 2016.
While digital mortgage applications are on the rise, eClosings
remain exceedingly rare. Once the loan reaches the closing table, the
industry goes back to pen and paper. Mortgage industry eClosings
have been so rare, in fact, that each time a company does one, it still
generates media coverage.
When United Wholesale Mortgage (UWM) completed a virtual
closing in July 2017 — deemed the first for the industry — it produced a media buzz, as did UWM President and CEO Mat Ishbia’s
bold prediction at the time that the majority of closings will be done
this way by the end of 2019.
Paper slog
With eClosings and eNotarizations still a novelty, it remains to be seen
whether clients — and originators — will fully embrace an end-to-end
digital solution, although the inclination is certainly present. Here’s
how it worked just a decade ago for most homebuyers and originators. The prospective homebuyers would fill out a paper application
and gather supporting documents. These would typically include
paper copies of pay stubs, two years of W-2s, their most recent tax
return, a couple of months’ worth of bank statements and a signed
permission form to allow the lender to pull the prospective borrowers’
credit reports.
Depending on the homebuyer’s situation, they might be asked for
more documents, such as a letter explaining any large deposits into
their bank account, a divorce decree and property settlement, their
most recent retirement account statement or a letter from their boss
verifying employment. It felt like slogging through “War and Peace”
(all 1,225 pages) for both the consumer and the mortgage originator
who had to check off that each document had been received and
uploaded into the loan-origination system.
In the wake of the 2008 financial crisis and the regulations that followed, mortgage loan files by circa 2013 had ballooned to 500 pages,
according to the Mortgage Bankers Association. This is up from just
about 100 pages pre-crisis.
Now, imagine that some of that paperwork gets misfiled or doesn’t
get uploaded properly. If that happens, the borrower gets asked to
supply some of the same documents again. Missing documents from
loan-modification files in the aftermath of the housing crash were a
massive embarrassment for the industry, causing serious processing
errors and even wrongful foreclosures.
Finally, when closing day arrives under a paper process — and
paper closings are still the norm — the homebuyer sits down in the
title insurance office, is handed a pen, and is asked to sign about 20
documents. Through it all, this historical paper-based mortgage
process was slow, cumbersome and lacked integrated, computerized
data analysis for good risk management.
Filling the void
With a nod to the vintage Virginia Slims ad campaign, the mortgage
market, likewise, can claim to have come a long way with its move into
digital mortgage platforms. To date, much of the market’s focus has
been on the front-end digital-application process. The industry saw
significant movement on this front in the wake of the financial crisis as
innovative startups came in to fill a void left by big banks that tamped
down on residential mortgage lending as they sought to deal with
bad loans on their books.
At the end of last year, about 10 years out from the crisis, Bank of
America still had nearly $11 billion in credit-impaired mortgages left
from buying Countrywide Financial, according to Reuters. As of the
same date, JPMorgan Chase & Co. still had roughly $30.5 billion worth
of their $89 billion in bad loans.
As big banks put the brakes on residential mortgages, alternative
lenders seized the opportunity to address the unmet demand. They
employed technology to make mortgage credit available in a manner
that was faster, smarter and more consumer-friendly.
These alternative lenders have had success. The U.S. market served
by nonbank digital lenders has grown rapidly, to about $35 billion in
2016, a 22 percent increase over the year before, according to a 2017
University of Cambridge Judge Business School report on alternative
finance. In just a few short years, these alternative lenders have gained
clout as they’ve introduced intricate underwriting algorithms and
expanded data analytics and improved risk management via sophisticated online platforms.
Robert Greenberg is chief marketing officer at
Patch of Land. He is responsible for branding, corporate-communications, lead generation, marketing automation
and managing integrated-marketing activities. Prior to Patch of Land, Greenberg led the marketing efforts for B2R Finance, where he helped originate
more than $1 billion in real estate investor loans that led to the industry’s
first-ever multi-borrower, single-family rental securitization. Reach him at
rgreenberg@patchofland.com.
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