In Part 1 of Loan Origination Processes and Challenges, I tackled consumer loans. In this blog I will address mortgage loans.
The regulatory environment has been a huge influence on how mortgages are processed today. TRID (TILA RESPA Integrated Disclosure) has definitely changed the way financial institutions handle mortgages. However, financial institutions have adapted to the changes and now seek ways to improve processing to reduce costs.
In the early 1990’s, I had the opportunity to work at Fannie Mae. At that time, Fannie Mae was developing a plan to automate the end-to-end process involved in originating and closing a mortgage loan. The reasoning behind this was simple. If mortgage originators could automate and speed up the process, the cost of origination would decline. With lower origination costs, the hope was that originators would lower their closing costs, allowing more borrowers into the market.
Fast forward to 2017, and we find that the mortgage loan process continues to be awash in paper. While most financial institutions utilize images in processing loan documents, most of those documents start their life as paper forms that require scanning. Very few organizations have the capability to utilize electronic forms and the ability to receive scanned documents from their borrowers. To complicate matters further, every state has slightly different rules for loan documentation requirements, wet signatures, and other technicalities related to documents. Freddy and Fannie also have their standards as well. All of these complications add to the burden or processing waste, resulting in higher costs.
Despite the regulatory burdens added in recent years, the process of mortgage origination to closing follows a basic formula. It all begins with the borrower when they initiate the process to buy a home. Borrowers then connect with a mortgage lender through their bank, credit union, or other mortgage company. Once the borrower has signed the initial documentation and disclosures, the process to close the loan begins. Most institutions deploy loan processors who interface with the borrower and other external groups such as appraisers, title companies, etc. to gather all of the required documentation to underwrite the loan. Underwriters review the documentation, appraisal information, borrower income, and other pertinent data to understand whether the borrower presents a reasonable risk to the financial institution. The underwriter may approve, deny, or ask for additional information before rendering a decision. If approved, the loan goes to the closer who works with the borrower, Title Company or closing attorney to get the loan ready to close.
With so much apparent standard processing, how do organizations improve the end-to-end process? While variations in the above process exist including different job combinations such as originators serving as the lender and underwriter, the same person acting as both a processor and closer, there are financial institutions who excel in mortgage origination and while others do not. Similar processes should yield similar results, but my experience indicates that wide gaps in processing efficiency exist across the industry.
In working with a variety of financial institutions, I have found a few differentiators to help drive efficiency into the process. One of the main differentiators is volume. Higher volume originators tend to be more efficient than lower volume originators. While many of the origination activities are not necessarily scalable, there are some differences between higher and lower volume shops. For instance, many lower volume shops argue that dual control issues in the mortgage origination process leads to inefficiencies. Lower volume shops tend to have a processor, underwriter, and closer. Some shops even have two of each of these for redundancy sake. As a result, inefficiencies creep into the process with lower volume shops. Higher volume shops tend to have more FTE to not only support the volume, but also tend to stretch resources a bit more. Many smaller financial institutions complain that they cannot increase volume easily to drive more efficiency into the process. However, institutions that pay a much higher commission to mortgage originators tend to have much higher volume versus those organizations that either do not pay a commission or pay a small commission. So, to increase volumes and efficiency, mortgage originators may need to consider how they structure mortgage lender compensation.
Another way to build efficiency into the system is through more team-based processing. An issue often raised by smaller financial institutions is their inability to find experienced underwriters for their lending functions including the mortgage function. Team-based processing is one way to deal with this issue. For mortgage processing, this means establishing a 2 or 3 person team with everyone cross-trained to process, underwrite, and close a loan. For smaller shops, a 2 person team is completely workable where person A processes and closes loan 1, while person B underwrites loan 1. Loan 2 is underwritten by person A with person B processing and closing loan 2. A 3 person team is better in larger shops where for loan 1, person A acts as the processor, person B acts as the underwriter, and person C acts as the closer. As loans are added to the team, each person takes on a different responsibility per loan. Team-based processing allows for additional redundancies with cross-trained staff members.
Organizations that involve the mortgage lender beyond the initial sale, also tend to be more efficient. Mortgage shops that require processors to chase down customers for their information often find it difficult to get in touch with the borrower. In these cases, the lender is asked to contact the borrower for the required information. Lenders often comment that they have little difficulty reaching the borrower or getting the borrower to call them back. Borrowers usually prefer to speak with their lender who is viewed as their relationship manager. Mortgage shops that allow lenders to choose how active they want to be in the process find that more active lenders in the end-to-end process, the more volume and efficient those lenders are compared to lenders with less involvement.
Mortgage processing continues to be a complex process. And while the basic origination process is standard across the industry, we have found a few differentiators to make the process more efficient.