TMCnet News
THE New Borrower Microscope [Mortgage Banking](Mortgage Banking Via Acquire Media NewsEdge) It hasn't been this tough to get a mortgage in years. One way or another, it's about to get even tougher. If you've ever tried selling something that nobody wants, Michael Chon can relate. P Years ago; when Veri-Tax, an Irvine, California-based nationwide verification and fraud-detection company, began selling borrower incomeverification tools, all but the most conservative institutions said, "No, thanks." * "The first response was, 'It takes too long,'" says Chon, Veri-Tax president and head of customer happiness. "Then they would say, 'It costs too much.'" * When Veri-Tax explained it could provide income verifications in only a day and for only $12 or $15 each, they still said no - which is when the truth came out. "They really didn't want to know," Chon surmises. * "Loan verifications were known as loan killers/ and nobody wanted them. But times are changing." Are they ever. An ever-tightening lens Today, mortgage lenders - whether coaxed by investors, pending regulatory changes, the required retention of credit risk or out of plain common sense - are taking closer looks at borrowers than ever before right up to the point of closing. This includes thorough identity checks, copies of bank statements, employment verification, Internal Revenue Service (IRS) income verification and more, all geared toward solving an age-old question: Who is truly a good credit risk? But this change - from the stated-income heyday of the rnid-2ooos to the myriad hurdles borrowers face today - didn't happen overnight. The recent increase in verification tools correlated strongly with the increase in defaults and foreclosures and tightening credit standards that began in 2008, and it hasn't let up since. Some lenders and industry observers see borrower verifications getting even more restrictive in the years ahead, regardless of how pending regulations play out that will determine how large a down payment many borrowers will have to pay to get a home loan. And that might not be so bad, "Stable institutions have already adopted a sharp focus on borrower verifications, and I think that's a good thing," says Scott Everett, president and founder of Supreme Lending, a Dallasbased full-service mortgage banker with 100 branches nationwide. "You want your investors to know that you have done your due diligence in originating the loans that you are selling to them," he says. There is another very good reason to perform borrower verifications. Last year, Fannie Mae required lenders that want to sell loans to the government-sponsored enterprise (GSE) to verify the borrower's income and identity at least twice during the loan process - at the time the application is submitted and again right before closing. The GSE's Loan Quality Initiative (LQI) went into effect June 1, 2010. But some lenders are doing even more. Rebecca "Becky" Walzak, president and founder of Deerfield Beach, Florida-based rjbWalzak Consulting, a provider of operational risk-management and qualitymanagement solutions and corporate education for banks and lenders, agrees lenders are being "much more conservative" today than they were a few years ago. "They're saying, 'First let's get the data from the borrower, then get the confirmation of the data through independent sources, then let's validate the data' - all before they spend time on origination," she says. The benefits are clear, Walzak says. "No. i, it reduces origination costs; and No. 2, you have a value-add because you know the data is accurate." After this process, she adds, the other pieces of origination and underwriting, such as title and hazard insurance, are much easier to handle and the lender knows it has a good loan. The regulatory push Exactly how the Dodd-Frank Wall Street Reform and Consumer Protection Act will affect lenders rests with how federal agencies choose to define what constitutes a Qualified Residential Mortgage (QRM) standard that most lenders will have to meet to avoid risk-retention requirements. While the final QRM rule has not yet been adopted, the guidelines are universally expected to include a relatively high down payment as well as higher standards of documented income, a low debt-to-income ratio and other underwriting requirements. Dodd-Frank also mandates revisions to Regulation Z that would establish minimum underwriting standards and require lenders to determine a consumer's ability to repay a mortgage before making the loan. Many believe the Federal Reserve's currently proposed general "ability-to-repay" standard - all options for originating loans under the Fed's proposal require a borrower's income and assets to be documented - will affect not only the verification processes lenders use, but their ability to lend as well. "I think it's too early to say what the unforeseen implications of the proposed Reg Z rules are going to [be for] both the industry and consumers," says Supreme Lending's Everett. "That said, . . . sometimes the best intentions have unintended consequences. In this case, there is the potential for fewer consumers to be able to obtain access to credit at lower costs." Indeed, banks will have less leeway than before, says Keven Smith, chief executive officer of Mortgage Builder Software, a Southfield, Michigan-based provider of mortgage origination technology. "Banks and credit unions, especially those that do not sell their loans on the secondary market, are likely to have less flexibility to determine creditworthiness for their borrowers," he says. "In addition, institutions that have often approved loans for long-term [credit union] members based on their past relationship and performance rather than traditional underwriting methods may find it difficult to continue providing the same services as they have in the past." "What is yet to be seen is whether . . . regulatory efforts [such as| risk retention, . . . result in the creation of a new non-prime market in which only a very narrowly defined QRM loan will be considered a prime loan," Everett adds. "The unintended consequence will likely be higher rates being passed on to more consumers who today would qualify for the best rates." The effects of more stringent requirements - ranging from tax transcripts on all loans, faxing in bank account statements and even calls to employers to verify employment - are already having a profound effect on borrowers, some say. The other burden placed on lenders is having to be the one to tell borrowers what the new rules are so they are not surprised or turned off by the extra hurdles. "There's enough press coming out in recent months where the consumer is becoming more accepting of this higher scrutiny," says Steve Jacobson, chief executive officer of Sun Prairie, Wisconsin-based Fairway Independent Mortgage, a national mortgage lender that sold nearly $4 billion in mortgage loans in 2010. Loan officers need to be forthright with borrowers about the process and set the right expectations from the start, Jacobson says. "It's important to have the confidence to tell the borrower from day one that things have changed, "he says. "We need to tell them that we are going to go through a little more depth than they may have experienced in the past. If we do our job upfront, no matter what the rules are, there are no surprises," Jacobson says. The earlier, the better Until recently, according to Veri-Tax's Chon, income and other verifications - when they were done - were the last step before a mortgage transaction was completed, and were typically performed by the lender. That's changing, too, he says, as the process is being moved toward the front end of the transaction. "We're starting to see a definite industry shift to pushing these verifications toward the point of loan origination," he says. Part of the reason is that Fannie Mae's LQI requires lenders to verify the borrower's identity and income at the very beginning of the loan process, then recheck a borrower's information again before closing to make sure nothing has changed since the loan application was submitted. Chon sees two other good reasons for performing verifications early. "One, verifications done late in the transaction can really slow the loan approval process and borrowers can miss critical rate locks," he says. The other reason is economic. Chon says, "Lenders are pushing the loan originators to pay for verifications." "There is a movement by the lenders to hold the loan officer more accountable for understanding who they're dealing with," says Bruce Backer, president of Appleton, Wisconsin-based LoanSifter Inc. "Once loan officers realize this focus benefits them, too, we'll see the trend accelerate even faster/' Backer says. Supreme Lending is also doing verifiI cations earlier in the process, and uses more than one vendor to help, Everett says. Cost is an issue. "One of our goals this year is to find a way to improve the efficiencies and economies of scale on these services to control the growing costs associated with origination while continuing to provide consumers with excellent service," he says. "We are encouraging our originators to do verifications at a much earlier stage, and to communicate with the underwriters early to go over these areas and to develop a checklist of what is going to be required," says Jacobson. "The whole point is to avoid any last-minute issues." But after verification reports are ordered, there is another issue: Who analyzes the information, and how? Adding to this challenge is the fact that many verifications can total dozens of pages in length - whether they include tax transcripts, bank statements or credit reports. While ordering income, employment, bankruptcy or other verification services sounds straightforward, Chon points out important hurdles that impact closing a loan. "When ordering income verification through the IRS, if there is any error, the IRS will reject the request," he says. But even after verification reports are received, there is the added challenge of interpreting the results. Many verifications require a careful and trained eye to analyze. Technology to the rescue? Like other processes within the mortgage industry, technology is likely to play a growing role in the years ahead. The ideal, some say, would be an environment where lenders could manage all their vendors in one place, whether it is integrated through the lender's loan origination system (LOS) or the lender's own transaction platform, where everything can be ordered at one time. According to Walzak, one of the major obstacles to income and identity verifications are the privacy concerns that the IRS and Social Security Administration have to deal with. The IRS has tried to provide the necessary information electronically, but the requirements associated with obtaining the information too often result in getting the information late or only after the loan has closed, Walzak says. It would be extremely beneficial if the IRS would recognize a document such as the Authorization to Release Information instead of requiring the 45o6-T tax transcript, she adds. "My biggest concern is that the individuals in positions of pushing this stuff - whether it be agencies, the GSEs or senior banking people - ^are either unaware of the multiple advantages of technology or are afraid of what that means to them," Walzak says. "That's going to prevent the market from accepting some of these new ideas that come along." As it stands, most lenders do not have the ability to integrate verification processes into their workflow, says Lloyd Booth, president and co-founder of Blueberry Systems LLC, a Greenwood Village, Colorado-based provider of mortgage technology solutions. According to Booth, many underwriters have to stop, order services and interpret the incoming data, even the ordinary and obvious. Instead, he argues, underwriters could - and should - be spending their time on more critical tasks, such as analyzing more-complex reports. It isn't a question of whether there are good verification products on the market, Booth says. There are plenty. "The issue is more about workflow and how lenders manage it," he says. "Production personnel like underwriters and processers tend to get desensitized to the data they're looking at. We need to come up with ways to not only share the information, but absorb the information and build the results into the workflow," Booth adds. "The future will see more lenders deploying borrower-driven applications, where the borrower orders his own verification and the loan officer isn't spending time on it at that time," predicts Backer. "But when the loan officer does become involved, the software has already integrated the verification data into the origination process, securing an automated underwriting response and making the review of all relevant information straightforward." Backer adds, "We envision a menu of configurable options to match each lender's workflow, leveraging technology with real-time data feeds and sophisticated two-way integrations, providing verification information and automated underwriting in real time." This way, the lender can immediately discover the borrower's particular hurdle in qualifying for a loan, which improves the lender's efficiency, Backer says. "In today's environment," he adds, "everyone wants to take proactive steps to improve their throughput, reduce their fallout rate, while not increasing their workload." But integrating verification tools into the workflow is only half of the equation. "The other side of that is understanding the state of the data," says Booth. "Everybody talks about data transparency, but true transparency is only possible with both an accurate history and an accurate understanding of the state of the data at any given time." Walzak says technology could also facilitate a threeway closing that could do wonders for transparency and smoothing over any bumps or misunderstandings at the closing table. "My ideal closing would be a three-way Skype(TM)-type event between the borrower, the closing agent and the lender," she says. "If the closing agent is going through all the documents and the borrower has any questions, the lender is right there. So there is no 'he said this' or 'she said that.1 You just have a good, solid closing." Never the same again Some believe the sharpened focus on borrower creditworthiness and the strict emphasis on verifications will have a lasting impact on the mortgage industry. "Many things in the mortgage industry go through cycles, but the losses sustained in recent years are certain to have a lasting impact on procedures and requirements going forward," says Mortgage Builder's Smith. "Verifying the borrower's ability to repay the loan will remain in the best interest of the lender and the industry, and ultimately benefits the consumer as well." Blueberry Systems' Booth, however, is uncertain whether lenders can keep up with all the new compliance demands. "We were in the same boat when RESPA [the Real Estate Settlement Procedures Act] and loan officer compensation rules were changing. Most lenders were looking to vendors to say, 'What are you going to do to solve my problem?' Overall, they're not ready to take on many more regulatory requirements without significant help from the technology side. Lenders are at a tipping point in terms of how much data they can consume and analyze efficiently." Walzak says, "I think we're going to have to find a way to combine the demand for faster results, better qualifications, expanded homeownership along with less risk," she says. "We just have to. With the younger generations reaching the home-buying stage, we have to be able to assimilate their needs into the program." For his part, Chon believes that given the severity of the recent financial crisis, the DNA of the mortgage industry has fundamentally changed. "Clearly, both state and federal regulation will raise the bar on all efforts to ensure that we never return to the days of unqualified mortgage originations," he says. "Hopefully, we learned our lesson. But as an industry, we need to continually look at ourselves and [ask], are we doing the right thing?" Even after verification reports are received, there is the added challenge of interpreting the results. Warren Luti is a writer based in Concord. California, and senior account manager with Strategic Vantage. He can be reached at warrenlutz@strategic vantage.com. (c) 2011 Mortgage Bankers Association of America |