Closing the digital mortgage gap

The scale and scope of implementing a digital mortgage strategy may seem insurmountable to many lenders. But success can be achieved when executives stay committed to their vision, while remaining nimble enough to overcome myriad roadblocks along the way.

The leaders at Quicken Loans and Mid America Mortgage know firsthand the challenges that come with disrupting a deep-rooted industry like mortgage lending. It hasn't been easy and their journey is far from over, but these early digital mortgage adopters have charted a course for the rest of the industry to follow.

"I got pushback internally," said Jeff Bode, CEO of Mid America, which uses the brand Click n' Close for its digital mortgage experience. "Nobody likes change. Everyone wants to come in and do their job like they did the day before."

But infusing automation into online mortgage applications and streamlining the closing process wasn't developing technology for the sake of simply having more bells and whistles. The goal was to transform not just how business is done internally, but throughout the entire loan process.

"We were also worried about the perception from the loan officers as to what our borrowers and title companies would feel about it. We did have a few title companies that were averse to trying it," Bode said. "After they did one closing, they thought it was great. They didn't have to produce a pile of documents or chase down anything from the borrowers post-closing. I wish I'd done it five years earlier."

Still, initial progress was slow.

"We didn't roll out a fully closed system right out of the gate. Initially, we had a bifurcated process where the borrower would go to the title company and sign anything that needed to be notarized in front of the closer," Bode said. "It was a clunky process where they still had some paper to deal with."

Handling the e-signed notes after closing was even more difficult.

"We found a big challenge in the execution allocation in our secondary marketing," Bode said. "We had to break what worked before, until we figured out the process, found our best execution and made sure we got the best price for our loans."

Simplifying the overall process and making it faster — while still maintaining rigorous underwriting standards — is essential to any digital mortgage strategy. Identifying which parts of the process to modernize is often best achieved by listening to borrowers.

"Importing financial information is something clients love and tell us about all the time," said Regis Hadiaris, executive director of Rocket Mortgage at Quicken Loans. "Connecting bank accounts and digitally verifying information in real time gives a lot less for the client to do and the burden of proof is lifted from them. With everything all verified upfront, it shaves a week off closing time. There's no additional manual verification and they don't have to find documents they never use."

The speed and ease of other types of online commerce has raised expectations for all manner of consumer transactions. But mortgage lending is unique in how far it has to go to meet these demands.

"Consumers and their expectations are changing very rapidly. We live in a world where we expect to do anything at a touch of a button on our phones and when we can't, it seems odd. Our whole industry has to live up to that," said Hadiaris.

But speed is only part of the equation. Consumers demand certainty as well.

"First-time homebuyers want to understand what they qualify for so they can start making offers with confidence. Real estate agents want verified approval from potential homebuyers. We've learned that and leveraged the technology to roll out those things," Hadiaris said.

Universal, remote notarization is the final piece of the mortgage process awaiting full digitization. Less than one-fifth of the states permit remote notaries, but it's gradually changing across the country.

"Fully digital, remote e-closings is the thing clients want that we haven't been able to fully roll out yet. That's a state-by-state change that has to happen to enable that," Hadiaris said.

"It's crazy to think you can go online, do your research, customize your mortgage options, get approved, and lock your interest rate," he added. "Then at the closing table, here comes a stack of paper and a pen. We have a hybrid model, but where we want the whole industry to go is the fully remote online closing."

Bode agreed. "We still could do a better job on the application side. The remote notary piece through all the states needs to expand, but that unfortunately requires law changes and that's never easy."
— Paul Centopani

Fannie Mae and Freddie Mac's loan data validation initiatives promise lenders faster turn times and certainty on buyback risk. But operational integration and loan officer acceptance remain impediments to a widespread embrace of these programs.

Fannie's Day 1 Certainty and Freddie's Loan Advisor Suite offer waivers on representation and warranty requirements on data points in the loan file that have been automatically validated through approved, third-party vendors.

When asked about their assessment of the initiatives, lenders view them favorably, with an average score of 7.8 on a scale of 10 in a survey conducted by industry analyst Tom LaMalfa, president of TSL Consulting.

To be sure, the group of 26 lenders, surveyed at the Mortgage Bankers Association's Secondary Market Conference earlier this year, is a small sample. But those surveyed said only 24% of their loan volume is being closed using either government-sponsored enterprise program.

"There are an awful lot of things everyone likes about them, but a surprising number haven't yet employed them for one reason or another," LaMalfa said.

One possible reason is that lenders are focusing their resources on more pressing issues, such as the TILA-RESPA integrated disclosures and Home Mortgage Disclosure Act updates.

"Lenders over the past three to four years also had to spread their technology investments and time on implementing and revising TRID and the HMDA changes, as well as digital point of sale initiatives," said Craig Focardi, senior analyst for banking at Celent.

"It's not just a business decision, but an operational decision to implement significant GSE technology. There's lots of data elements to map, integrations and workflows and processes to change," he added.

The adoption pace is similar to what happened when the GSEs first rolled out their automated underwriting systems.

"I look back to those early AU days and it took a good three to five years until there was normalization of process, and the acceptance of staff within the lending organizations that it was not going to take over their jobs, it was a tool to enhance what they do," said Randy Jones, Freddie Mac vice president of client solutions, who worked on its Loan Prospector pilot in the mid '90s.

Something similar is happening with Loan Advisor Suite, he said.

"We are currently tracking as expected," in terms of lender adoption, said Fannie Mae Director of Product Development Cindy Keith. "We've learned a lot of good lessons along the way with the support lenders need for adopting" Day 1 Certainty.

The difficulty for lenders often lies in implementing new procedures for loan officers and other staff, including tasks like ordering reports earlier in the origination process, she said.

"Those with challenges have asked us to give them some best practices," Keith said, so Fannie created additional support tools, including the ability for lenders to measure return on investment.

"The lenders themselves are not reluctant; senior management is accepting of the concept," said Michael Celenza, vice president and head of consulting at Digital Risk.

Digital Risk has a contract with Fannie to help lenders incorporate Day 1 Certainty. That work has shown that lenders lack a true understanding of the time and effort needed to incorporate the data validation programs into lenders' operations, Celenza said.

"It's significant, it's a process change; it's not necessarily a technology change," he said.

Another part of the acceptance problem, he said, is at the loan officer level. "Change is hard, but this is a struggle for them," he said. "But when they let go of the documentation and let the process work, the results are dramatic."

When lenders use Fannie's property valuation tools, they save 20 days in the process, while using employment verification saved 12 days and asset verification saved six days, Keith said.

Freddie Mac's implementation approach includes having a dedicated team to help customers integrate its technology. It also teams with the vendors to assist lenders, Jones said.

Loan Advisor Suite brings in the other two "c's" of mortgage loan underwriting — collateral and capability — that were left behind when automated underwriting systems were first introduced. But the centerpiece of Freddie's program is the credit part, Loan Product Advisor, and that's where a lot of the new capabilities reside, Jones said.

This includes the capability Cloudvirga created earlier this year with Freddie that allows for a single-click submission into both Freddie's Loan Product Advisor and Fannie's Desktop Underwriter.

"That's where our whole push and direction is. It shouldn't be an either/or choice, you should have easy access to both systems so you can see that upfront," Jones said.

"The track that we're on is not surprising. When you're building things to try and provide value and help change, you always want it to happen overnight but that's not reality," he said.
— Brad Finkelstein

The origination segment has garnered much of the digital mortgage attention in the industry, particularly when it comes to customer experience and satisfaction. But incorporating many of those same processes into the servicing side of the business presents an attractive opportunity to realize those same objectives, particularly for borrowers facing financial difficulties.

The industry is accelerating the pace of technology adoption to develop a more efficient process, but efforts to streamline the mortgage market haven't strayed much from the originations sector.

While lenders are deploying consumer-facing digital tools that offer streamlined processes to apply and get approved for a loan, default servicers are often relying on disjointed systems and fax machines to process loan modifications and other forms of loss mitigation.

At a time when the industry is obsessed with customer experience, it seems ironic that default — perhaps the most stressful and complex aspect a borrower encounters with a loan — has largely been an afterthought in the digital mortgage revolution.

After all, the steps involved in executing a loan modification share a striking resemblance to underwriting a new mortgage.

"Default is really the last island yet to be overtaken by the tide of new technology, and that's because it's more complex; there's a lot of dimensionality in default, a lot of different data, a lot of different participants," said Steve Horne, the former CEO of Wingspan Portfolio Advisors, a specialty servicer he founded in 2008 and operated until it declared bankruptcy in 2016.

"That being said, technology is catching up," Horne, now the CEO of consulting firm Alta Vista Advisors, said.

In the run-up to the housing bubble burst, the mortgage industry had little incentive to offer, let only streamline, loss mitigation processes. Home prices were soaring, delinquencies were low and the small volume of defaults that did exist were tolerable risks.

But after the Great Recession, an influx of loss mitigation programs and new regulations were created to address the mounting foreclosure problem. Servicers were too overwhelmed to innovate.

But today's mortgage environment, filled with a thirst for technology and far fewer delinquencies, weaves together the perfect circumstances for an overhaul of default servicing.

"The crisis took everybody there in order to manage through it, and now that the crisis is over and the default numbers are at record lows, it's time to play catch-up in that space and look at how can we provide the best consumer experience for our clients and customers that are going through a tough time," said Anne Beck, product manager at Fiserv Lending Solutions.

Vendors like Fiserv have developed loss mitigation tools, including online borrower portals, to make it easier for borrowers to apply for loan modifications. Meanwhile, Quicken Loans is applying its Rocket Mortgage approach to loss mitigation.

"It's not the sexy part of servicing; it's not the flash and bang or the thing that you go out and promote," said Nicole Beattie, vice president of servicing at Quicken Loans. "It's an underserved area of the market that we just thought differently about and said, regardless of what a client may be going through, regardless of if they're performing or not performing, they deserve the exact same respect and we should invest in our technology regardless of the client's situation."

Quicken's loss mitigation platform, called Rocket Solutions, provides responses to consumer mortgage modification requests via Rocket Mortgage's servicing website.

Servicers have now had a number of years to implement and understand the myriad new regulations on their segment of the industry. That's now making it easier to develop technology to streamline and automate compliant processes.

"I think new technology is 100% aligned with the new compliance and regulatory requirements because it's all about transparency at the end of the day, whereas older systems were about really anything but," said Horne.

Instead of being manual laborers by collecting and passing on data, default servicers can focus on overseeing processes to ensure borrowers are delivered the best possible outcomes for their situations.

"It will rework everything in the industry, and if you look at the new wave of technology coming into the financial services space, it has completely redone unsecured lending, consumer lending and even made strides on mortgage origination, which is changing all of the roles," Horne said.

This shift also helps servicers make better use of their employees.

"We don't need as many team members making the decision. We've now put them as part of the defense and said, 'Now you're going to audit to make sure that the product that we're delivering is 100% the right decision for the client,'" said Beattie.

While the originations segment is leading by example in its pursuit of a completely digital mortgage, it's unrealistic to think that the default servicing sector will ever be fully automated, which is probably for the best, according to Beck.

"You cannot really manage through a modification process, or a short sale, or a deed in lieu, without having physically spoken to your servicer," she said. "But it's taking those first steps and taking the process of getting the documentation and understanding the process better that's helpful. So much of servicing still relies upon getting a faxed document."
— Elina Tarkazikis