It has been said before, but it is worth saying again: Mortgage underwriting is changing.
With today’s technology offerings of new system capabilities and “big data,” the underwriting processes and tactics of old just don’t work as efficiently anymore. As a result of these technological changes, there continues to be much speculation on the future of underwriting precision and concern over whether important underwriting standards may be compromised. The uneasiness, however, will prove to be unfounded, as these changes should be taken as a beacon of light through the misty fog of a transitioning industry.
Although 2016 was a year of transformation for the mortgage industry, we should expect 2017 to be more of the same. Recent technological advancements have allowed for offerings that seemed unbelievable, or, at least, very distant, just a few short years ago. For example, we are now seeing many of those very same capabilities introduced into our everyday underwriting processes. Offerings such as Fannie Mae’s Desktop Underwriter (DU) validation services, property value representations and warranties, and enhanced property inspection waivers have become a reality, as have the Freddie Mac Loan Advisor Suite, Quicken’s Rocket Mortgage and Caliber Home Loans’ recently launched Ultimate Homebuying Experience.
These service offerings, which are only a sampling of the more heavily advertised programs, have the potential to radically transform mortgage underwriting and are undoubtedly only the beginning of the technological changes we will see and personally experience in the next few years.
GSEs lead the way
In December, Fannie Mae released two new service offerings that support its Day 1 Certainty program and that fit with the idea of transforming the underwriting of DU loans. First, the new DU validation services allow the underwriter to verify income, employment and assets through system integrations with prominent third-party verification services without ever leaving DU.
This service is only available for lenders that opt in, which allows for a quicker, cleaner underwrite of a loan. By integrating key components of the verification process into DU, it speeds up the underwriting process, while also enhancing risk management rather than threatening it. Second, if loan information is successfully verified using the DU validation services, the loan is provided relief from representation and warranty breaches relating to verified information on day one of the loan’s delivery. These new offerings support Fannie Mae’s existing Collateral Underwriter, integrated into DU and now including rep and warranty relief for property values below a specific threshold score.
However, it is not just Fannie Mae that is making moves to modernize the way loans are underwritten. With its Loan Advisor Suite, Freddie Mac now offers a collection of proprietary tools intended to give sellers greater certainty regarding eligibility. The most prominent feature is an automated valuation tool that gives guidance to lenders about the reasonableness of the submitted appraised value. Like many of the features being introduced into the underwriting process, this offering also assists with risk management, drawing on a trove of data and historical experience to provide the lender with greater certainty about the loan file. And though Freddie Mac is not yet offering rep and warranty relief for loans underwritten through Loan Advisor Suite, it may not be far-fetched to observe such a move in the near future.
Lenders also at the forefront
Beyond the government-sponsored enterprises (GSEs), lenders are also making strides to automate portions of the underwriting process and reduce cycle times. Caliber Home Loans’ Ultimate Homebuying Experience automates the majority of the origination process in order to offer an approval and closing within 10 days on eligible mortgages. The program includes electronic collection and verification of critical loan origination documentation and information.
Advertised as intending to provide a differentiated customer experience, Caliber boasts that the Ultimate Homebuying Experience will “simplify the mortgage process” and “reduce stress for its clients and customers.” Caliber demonstrates one way that the industry is responding to the changes and how lenders can take steps to be even more efficient and competitive.
One of the most prominent new-technology offerings we are now seeing is Quicken’s Rocket Mortgage. As Quicken’s advertising campaign boasts, Rocket Mortgage offers an automated origination process that borrowers can manage on their cell phones. The program includes electronic verification of income, employment and assets, but though it touts a simple and quick origination process, there is no specific timeline promised with respect to closing.
The exact capabilities of all of these new offerings vary, but they do very clearly indicate where the industry is headed. Automation is, indeed, the way of the future.
Technological advancements like these stir feelings of unease because of the perceived potential for underwriting standards to be compromised in some way. In truth, industry decision-making now is significantly more thoughtful and forward-thinking than it was 10 years ago.
Before the crisis, underwriting decisions were made on past experience and static information. Today, however, decisions are being made with a forward-looking perspective that examines multiple possibilities. Modeling analytics that support automated valuation models and risk assessments in today’s underwriting systems are centered on predictive, advance-thinking models and, thus, provide a better underwrite.
Even with reduced underwriting cycle times, the benefits of strong modeling and predictive analytics do not diminish. In fact, the faith we can and now do hold in such analytical modeling is what allows us to embrace and encourage reduced cycle times without fearing a loss of quality. And there is no doubt about it, the industry is moving toward increasingly shorter cycle times – and with customer expectations mounting, the push toward quicker underwrites will only increase. Even beyond customer demands for speed, however, the need for reduced underwriting cycles has become paramount, with the potential for greater loan volume in the future.
With increasing volumes, shorter cycle times have become a necessity. However, with the lessons of the past burned firmly in everyone’s memory, it is also critical to ensure that quality is not lost due to an increase in quantity. It is for this reason that technology offerings such as those mentioned earlier are so important. With the ability to incorporate analytics directly into automated underwriting systems and integrate verification processes into those same systems, we now have the capability to confidently accelerate the underwriting process without long-term quality erosion.
A beacon of light through the fog
Though advancements in underwriting are positive, technological innovations do come with some amount of trepidation. The thought of taking the responsibility out of the hands of educated humans and placing it with artificially intelligent systems can be a little scary – but it does not need to be. These systems are assisting with the decision-making but are not bypassing experienced underwriters.
Instead, qualified underwriters should look to leverage these new system-enhanced programs. Technology offers consistency from loan to loan, from underwriter to underwriter, and from month to month. Even when guidelines, policies and products change at a near-dizzying pace, underwriting technology allows for consistency in application.
Such consistency is invaluable as the industry continues to move forward and away from the economic crisis in search of sustainable, healthy growth. In a time of rapid change, technology can serve as a reassuring lighthouse that shows that the industry is headed in the right direction.