Origination Outlook: Expect More Consumer-Direct, Mini-C Activity

The increasing number of consumers starting the home buying process online, combined with the ongoing contraction of the refinance market, will lead more lenders to start their own consumer direct channels in 2015.

"Lenders are recognizing the need to start experimenting with different delivery models," said Rajesh Bhat, the chief executive of Roostify.

Mortgage bankers have been approaching the San Francisco-based technology company about creating their own consumer direct operations. Roostify's Web-based technology lets borrowers electronically submit loan documents and receive automated status updates throughout the mortgage process.

Lenders are seeking "innovative new approaches to consumer engagement," he said.

It might seem counterintuitive to use the consumer-direct approach to reach purchase customers. But with more consumers going online first, even before they see a real estate agent, it makes sense to have an online presence.

Furthermore, mortgage originators realize they need to find new books of business because they've exhausted their existing customer bases, Bhat said. These originators are trying to build relationships with referral sources such as real estate agents and financial advisors, but they realize that takes a lot of work.

"The referral sources that are going to be lucrative and interesting already have previous relationships that you are effectively trying to displace," he said.

So originators are looking to go directly to the consumer to get more purchase business.

Longer term, Bhat expects home buying trends to shift in that as consumers begin the process of searching for homes online, they'll also engage with a lender online to understand their financing options, often before working with a real estate agent.

"A healthy demographic of consumers aren't working with Realtors when they engage a loan officer. As that trend extends, I would expect the lenders who don't have direct-to-consumer practices to recognize that and start to invest in" this line of business, he said.

Consumer self-service tools have been a growing area of focus for mortgage technology vendors. Web-based loan origination system providers like DH Corp.'s Mortgagebot have long offered consumer-facing tools for borrowers to fill out applications online. LOS provider Ellie Mae recently released a consumer-direct portal, as did EDM vendor Kofax, In the servicing side of the industry, Fiserv launched a consumer-direct loss mitigation portal earlier this year.

Even with this initial contact coming through the consumer-direct channel, many lenders will still seek to pair customers with loan officers who have connections with real estate professionals.

Providing consumers a full self-service experience is a goal for some lenders. Right now, Bhat sees a more realistic interim step being "semi-self-service," where consumers do bits and pieces of the process on their own, requiring a "lower-touch" from lenders.

Warehouse Lending Revival
The warehouse lending business is also experiencing a transformation of its own. After a period when many originators have faced difficult finding firms to provide lines of credit, the sector has gone from famine to feast in a short amount of time. That could cause a big problem in the near future, said Robert Rubin, a consultant and principal of Southfield, Mich.-based The Business Loan Connection.

Banks large and small, and even some credit unions, are starting to provide warehouse credit to mortgage lenders, but many don't know what they are doing. When it comes "to understanding the dance of the game, they have flat feet. So there are going to be problems that way, in terms of fraud," Rubin said.

Banks have realized the return on the warehouse lending business is phenomenal, but Rubin warns that the biggest gains only come from originators with a lot of volume.

A lot of creativity is going into how these lines are structured, too. For example, some warehouse providers are allowing their originator-clients to lend out a portion of their lines of credit to other entities, like mini-correspondents.

But many of these mini-correspondents are going into these arrangements with "a broker mentality," Rubin said, adding they often have no idea about the complexity of the mortgage banking secondary marketing process.

"That broker mentality can really do a lot of disruption and harm to the industry," Rubin said.

Last summer, the Consumer Financial Protection Bureau issued guidance on how it views the mini-correspondent business.

Some originators making the mini-correspondent move don't have the accounting background to handle a warehouse line. Rubin recounted a conversation with a mini-correspondent lender who said he does his accounting himself at night. "I asked him what his tangible net worth was and he didn't know what I was talking about," Rubin said.

Yet there are warehouse lenders "tripping over themselves" to give this mini-correspondent and others like him lines of credit.

Warehouse lenders' relaxed standards could create a bubble, and combined with originators that aren't equipped to be mortgage bankers and products with looser terms could result in that the bubble bursting, Rubin said. That's unlikely to occur in 2015, but could happen soon after.

"I think there are a lot of situations out there where people who shouldn't have the credit are getting it and if things ever really go bad, they have no way of digging themselves out," he said.