In fact, it’s even more likely that, as you read this, several or even dozens of small, previously unheard-of companies are starting to grow in spite of economic headwinds. They’re under the radar at the moment. They might be small enough to get lost in the rounding of a large company’s accounting books.

“The smallest businesses — forced to do what it takes to survive and unburdened by the expectations of stakeholders or large investors — are being forced to get creative.”

Make no mistake about it: While the larger mortgage companies are, for the most part, bound to a playbook based upon cutting expenses and hunkering down until origination volumes grow again, the smallest businesses — forced to do what it takes to survive and unburdened by the expectations of stakeholders or large investors — are being forced to get creative. They must try something new to get ahead of the competition.

It’s true that necessity is the mother of innovation. You need look no further than the amazing advances of the loan origination system or point-of-sale technology, with regard to both capabilities and adoption rates that were spurred by the Great Recession and housing meltdown.

By and large, these advances, which came to dominate the next big refinance surge, weren’t pushed forward initially by the largest lenders or brokerages. Instead, it was small and mid-cap companies that rode innovation through the market trough and onto the crest of the next wave of origination volume.

Overlooked businesses

A lot of time is spent (and not just in the mortgage industry) talking about the publicly traded titans. After all, they’re usually the best indicators for how the market as a whole is performing. They didn’t become high-revenue, high-volume businesses by pure accident. But when the performance of virtually the entire industry declines significantly, you hear a lot less about most of the big players.

In large part, that’s because the Fortune 500-sized companies are usually the first to hunker down and cut back when origination volume declines. They have the means to hold on until the wind changes. They have reserves, investment capital and adequate cash on hand to hang on until conditions improve. It’s a tried-and-true strategy.

“It makes a lot of sense, then, to forecast that the next wave of success stories in the mortgage industry will involve those who develop, improve or deploy innovative technologies and business models.”

Most small, independent businesses, on the other hand, don’t have such a lifeline. The unfortunate truth is that more than a few won’t make it to the next market upswing. But many others will, and they’ll do it by trying out tech tools, business models or strategies that have yet to become orthodox throughout the industry.

It happens in every down cycle. Many of the biggest names in the mortgage industry today, in fact, grew from their origins as small or midsized companies into industry leaders during the last period of rough market conditions. And they’re here today because they used some kind of innovation to adapt to and survive these market challenges.

These innovations, in fact, vaulted them to success. That’s happening right now too. The next big thing could make a small business into a big business.

Lingering challenges

There’s certainly room for improvement across the board in the mortgage process, even if the industry has made tremendous strides throughout the most recent digital revolution. Much of the advancement of the past five years has been concentrated at the point of sale or origination.

Lenders and originators alike can especially appreciate the leaps that point-of-sale and loan origination software technology have made, driven by significantly increased interest and investment. The benefits were particularly felt during the historic refinance boom of 2020 and 2021.

With the likelihood that the industry won’t see those origination numbers again for quite some time, especially on the refinance side, let’s look at the industry’s biggest challenges today in order to predict what the next wave of up-and-comers will have mastered. You can easily start with one of the largest thorns in the mortgage industry’s side for decades: the 50-day or more average time between the sales agreement and closing.

It’s something no originator or Realtor is proud of. It’s the most tension-fraught, anxiety-inducing stage of the entire mortgage financing experience (especially for purchase transactions). And yet it persists.

The most obvious reason the industry has yet to tame what’s been tabbed as the settlement stage of the transaction starts with the need for collaboration between multiple partners. These include the title or closing company, an appraiser or appraisal manager, the Realtor and the originator.

Whether it’s communicating a change in data important to the closing, awaiting an appraisal report or sifting through the title insurance process (e.g., homeowners association liens, curative services, federal laws), the collaboration between the different independent professionals required to bring the transaction to closing is usually carried out by means that range from fax to phone, email, digital app or online portal. And it’s almost never uniform. Sometimes, it seems that half of the 50-day average closing time is tied to missed emails or phone tag.

Additionally, it’s all too common to find that one service provider’s technology does not integrate neatly with that of the originator or another service provider. The result, more often than not, is a continued reliance on stare-and-compare, manual data-entry processes. Far too often, this is the way mortgage professionals approach gaps in technology or workflow.

Innovative approaches

It makes a lot of sense, then, to forecast that the next wave of success stories in the mortgage industry will involve those who develop, improve or deploy innovative technologies and business models that directly target the most inefficient elements of the loan process. And it’s safe to say they’ll be using increasingly advanced artificial intelligence (AI) — especially natural language processing such as ChatGPT — or robotic process automation to do so.

These innovators will likely deploy AI closer to the borrower-facing elements of the closing process. In fact, there are already settlement- side AI technologies designed to field routine client inquiries such as “When’s my closing?” or “What do I need to bring with me to closing?” This is likely to grow exponentially in the coming years. You’ll also see natural language processing software creeping into marketing, sales and other communications-heavy processes.

While the inherent ability of AI to adapt and learn on the job makes it a natural fit for communication-heavy processes, robotic process automation (commonly known as “bots”) is another underutilized but rapidly growing tool. It could soon automate many of the most manual, mundane and repetitive tasks currently trudged through by humans.

Think of all the places in the origination, underwriting or closing processes where a form has to be manually keyed, or data needs to be collected and entered into a difficult-to-access app, program or portal. Now imagine a bot doing that almost invisibly, behind the scenes, and certainly faster and more accurately.

Enhanced performance

Loan officers, independent brokers and others need not worry about being replaced by technology either. Instead, they’ll find their performance enhanced by new technology or by partners that deploy tech-enabled models. For example, it’s easy to see technology further accelerating the processes of closing disclosures and loan estimates.

These tools could further improve and accelerate an originator’s options when comparing or working with wholesale lenders. They also might help real estate agents, originators and consumers to better shop for products and providers who best fit their unique needs.

It’s undoubtedly been a tough stretch for the mortgage and real estate industries. The good news is that no down market will last forever. The better news is that tough times like these tend to open the door to new success stories, as well as new and even better ways of doing business and serving clients.

These success stories are happening throughout the industry right now. You just haven’t heard about them yet. ●

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Historical perspective

Efficient automation

Substantial need

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With the murky six-month and one-year outlooks for the market, this will be a true test for lenders and originators alike, each of whom tend to lock down expenses and investments in down markets.

Specific solutions

Borrower expectations

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Fannie Mae’s forecast this past December anticipated that total origination volume of $4.29 trillion by the end of 2020 would give way to a volume of $3.47 trillion in 2021. Much of this decline is expected to come at the expense of refinance volume.

At the same time, the forecast by the Mortgage Bankers Association (MBA) as of January 2021 predicts record purchase activity in the coming few years. For starters, MBA is predicting $1.57 trillion in purchase mortgage origination volume in 2021, an increase from the $1.42 trillion anticipated by the end of 2020.

By many accounts, 2021 will still be a good year but only for those willing and able to succeed in the purchase market. It’s fairly well-established that a refinance mortgage is faster, cheaper and less troublesome to bring to closing than a purchase mortgage. In a traditional purchase-oriented market, a lender’s expenses rise and per-loan profits decline.

Although traditional marketing and sales positioning for a purchase-dominated market includes ramping up sales efforts and networking with local real estate brokerages, there’s another important element that often gets overlooked: production efficiency. Too many lenders over-look the potential cost savings in process improvement, especially for a purchase market. It’s an omission that’s likely costing them significantly. Originators will want to work with lenders that understand this concept.

Burdensome process

It’s elementary: Purchase mortgages simply cost more and take longer to process, cutting into profit margins. While the industry is to be lauded for its massive effort to automate and improve the origination process, the vast majority of these efforts to date have focused on the sales, application and underwriting process. Whatever is lumped into the operations category is left running through a hodgepodge of proprietary, ad hoc technologies or good old-fashioned shoe leather — replete with voicemails, emails and even faxes.

The reasons for increased costs and slower closing times in a purchase transaction are nothing new. In a typical refinance, the only true parties are the borrower and the lender. In essence, it’s a two-way conversation with a streamlined process. But in a typical purchase transaction, there also is a seller, one or two real estate agents, an appraiser, a home inspector and a title company. (Lenders usually have a go-to title agency for refinances, while for purchase mortgages, the buyer, seller or even the Realtor will have some say.) Any one of these parties can quickly derail or stall a pending purchase transaction for any number of reasons — be it an unexpectedly low appraisal, inspection concerns or even the cancellation of a sales contract.

The introduction of this often unexpected delta factor is generally compounded by a lack of the most basic requirement for an efficient process: communication (more precisely, effective communication). The various parties to a purchase transaction are almost never interconnected by a single, closed system for data exchange and communication. Instead, it’s usually a random mix of email, text, voicemail, fax, or multiple stand-alone apps or “solutions.” As a result, a delay in a title search can lead to a few voicemails between the on-the-go agent and the title company, followed by an email or two before the communication effectively occurs. Sometimes, this can translate into days of delay.

Although there are several solutions available for these scenarios, many fail to truly bring all of the parties into the same communication channel — often because one or more of the parties is unwilling or unable to use it. This lack of secure, efficient, common communication also leads to additional costs and delays when it comes to an exchange of data.

Often, a purchase mortgage transaction incurs a delay when a loan processor, who could be using their time and energy to process more loans, is forced to hunt down a driver’s license or appraisal report. They might even hunt for it in an email inbox or a folder of incoming faxes.

This nonstandardized process also increases the potential for much greater costs in the form of fraud or defect. With multiple actors involved, multiple points of entry and, often, no single place for anyone to comprehensively track what’s going on at all times, it’s painfully easy for fraudsters to enter the picture or for bad data to become part of the record.

Oftentimes, a lender can’t even convince some of its own originators — notorious for using homemade hacks, workarounds, and third-party apps or solutions — to use its adopted solution.

Overcome inertia

Mortgage originators aren’t the only ones responsible for fixing the flaws, gaps and inefficiencies in the purchase loan production process. A lender can’t always force a title agency to make a costly investment into a more global solution for these challenges. Oftentimes, a lender can’t even convince some of its own originators — notorious for using homemade hacks, work-arounds, and third-party apps or solutions — to use its adopted solution.

It all starts at the strategic level. Without an understanding between all parties affecting the transaction that email, fax and voicemail are not efficient ways to share (much less catalog) estimated fees, borrower data or transaction status, the parties will continue to rely on what they’ve always done. So, a true solution has to be adopted and buy-in must be won.

This solution needs to be easily incorporated or embedded into other systems used regularly by these parties. How many times have you seen a solution that only works effectively if it is the “alpha” technology? The end result is another silo, rather than anything remotely resembling the well-worn cliché of an end-to-end solution.

The solution also doesn’t need to be global. Start by identifying the most manual processes and automating them. The curative process for title searches, for example, is notoriously labor-intensive. The fee-determination process for the TILA-RESPA Integrated Disclosure (TRID) mandated loan estimate can be much easier than having to make phone calls or send emails.

Many of the biggest pain points in the purchase transaction process have digital solutions available. Just be sure it doesn’t create a new silo. Choose the solution that collaborates most easily with the other systems and processes it touches most frequently. And always try to make the decision with the global process in mind.

● ● ●

There is a terrific opportunity in the upcoming purchase market. Inevitably, some lenders will complain about the return of margin compression as refinances dry up (which happened in 2018). The solution begins with mindset and strategy.

Instead of adopting patchwork, silo-creating solutions based upon cost alone, proactive lenders and originators will investigate more global solutions that include other parties to the transaction — whether this comes through integration or simply demanding better from their tech-stack providers. The companies willing to attack the long-standing and fairly obvious flaws in the production and closing processes will not only find themselves more profitable than the competition but will likely gain market share as these efficiencies improve consumer-experience branding. ●

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The country has recently experienced some of the strangest days in its history and the mortgage industry is not immune to this upheaval. The obvious culprit has been the COVID-19 pandemic and corresponding economic shutdown.

Even had there been no pandemic, mortgage-related businesses have been rolling with and adapting to tremendous change for a few years. One trend at the forefront has been the digitizing of the customer experience and automation of as much of the production process as possible. 

What’s not to love about leaning more on technology? When the right systems are identified and implemented — and they’re used appropriately — technology in general makes things faster, easier to do and more effective. Done well, technology results in consistency and transparency, which is always good for the bottom line. It also generates better documentation, which can be crucial for a complete compliance program.

As is the case with many things, however, an overreliance on technology can lead to its own challenges and pitfalls. Although this is not a call to rely less on technology, it is a reminder that the mortgage industry still requires a human touch and common sense, as well as business rules and system protocols. This point can be demonstrated clearly when it comes to quality assurance on the front lines of the transaction.

Human endeavor

Let’s admit it: Without a loan officer or independent originator (as well as a borrower), there are no home-purchase transactions, with the exception of the occasional cash buyer. The borrower-originator interaction is at the core of the mortgage industry, no matter what some people might say. 

Even if mortgages someday become almost fully automated and are overseen by some modern permutation of artificial intelligence (AI), the typical consumer doesn’t completely understand how the process works and needs someone who does to guide them through it. Yes, this can occasionally be a Realtor or another type of trusted adviser. It can even possibly be a web-based video. For most borrowers, however, an FAQ does not bring to the table what an originator can.

Ultimately, the mortgage process is a sales process, even if the originator is seeking to be the go-to professional for the borrower’s next home purchase or refinance. No two people sell the exact same way. The process is governed by complex and ever-changing rules. So, it’s not a reach to suggest that loan officers and originators sometimes bump into compliance issues. Yes, there is technology out there to help with that. Is there truly effective automation of the quality-assurance process for originator-borrower interactions? Many of the technology solutions that have become prevalent in the industry are governed by business rules, data analysis and ratios — all of which can be easily skirted by a loan officer or broker willing to cross regulatory lines to make a sale. 

Training is necessary and useful. But even the most robust training programs
can be ignored or misunderstood by an originator looking to make a sale on a
whatever-it-takes basis. Unfortunately, when an originator commits a violation, his or her lender usually doesn’t find out until regulators arrive and a penalty is prescribed.

Even the most robust training programs
can be ignored or misunderstood by an originator looking
to make a sale on a whatever-it-takes basis.

Necessary oversight 

There isn’t a truly comprehensive technology that can understand the nuances of human conversation, which is often where an infraction at the originator level will happen. Quite simply, AI is not yet at a level where it can detect sarcasm, hints, analogies and so forth. There are a million ways to violate the myriad state and federal laws, rules and regulations that govern how an originator sells a mortgage (or explains it) to a consumer, and AI isn’t yet ready to replace people for these tasks.

When it comes to a tech-only QA approach, there also is no truly cost-effective way to monitor and oversee every conversation being had in the industry, and that’s a real problem. Too often, even a lender that has made significant efforts to implement a QA process for its originators finds out that it fell short when a letter from an enforcement agency arrives. 

“Many of our clients are usually stunned when they actually hear what some of their loan officers are saying to prospects or clients,” said Richard Douglass, president of RDAssociates Inc., a competitive intelligence, market research and business development company based in Philadelphia. “Even during the best of times, it’s not easy to be sure one’s associates, specialists and sales personnel are minding their p’s and q’s as they fight for new business, not to mention underwriting and support personnel.”

Although many mortgage businesses are understandably focused on other matters at the moment, now is exactly the time to not let down one’s guard, Douglass said. Instead, having a comprehensive and continuous QA program in place at the origination level is optimal for times like these — when top executives are focused on sales, crisis management or the like. Douglass also points out that simply having a system in place is strong incentive for loan officers and originators to be more compliance-minded.

“It’s during times of disruption, such as the COVID-19 shutdown, that originators get more anxious about closing sales no matter what it takes, and executives are not truly focused on QA, that having a robust QA system earns its keep,” he said. “Even on autopilot, a good QA process combines technology with human common sense, and originators know that the firm is not taking a break from compliance.”

Good-faith effort 

Even the best compliance programs have the occasional hiccup. Many regulators will allow for mitigation of an infraction if the company committing it can prove that it has methodical, overlapping and redundant systems in place to prove they’ve made a good-faith effort to stop and/or catch compliance violations. 

Nobody can monitor their compliance efforts at the granular level with 100% effectiveness. But, faced with a violation, which lender stands the better chance of solving the problem in the long run: the lender that has a multitiered QA program in place or the one that doesn’t? 

An executive can provide hours of testimony and mounds of affidavits certifying that their company’s management team did all it could to educate and train its loan officers. An active monitoring program, with human involvement, is the only truly effective way to ensure that loan officers and originators follow this training. ●

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