PERSON OF THE WEEK: It’s well-known that technology and automation can help lenders process loans faster and reduce operating costs — but how much do they help lenders reduce the overall risk of loan defaults during periods of high volume?
This was put to the test during the pandemic when credit volumes soared; Not only has the volume of loans increased dramatically, but also the average loan size due to the rapidly rising home prices. As a result, the pandemic became a major test of how lenders’ technology investments would withstand the massive flood of volumes.
Additionally, it was a major test of how this technology would work at a time when many lenders were hiring new underwriters and additional staff, increasing the risk of credit defaults.
To learn more about how technology has helped lenders manage the burden while keeping credit quality under control, mortgageOrb interviewed Stew Scott, vice president of product management at ICE Mortgage Technology.
Q: We know that credit problems arise after a period of high credit volumes. The GSEs and the FHA begin making credit repurchase requests due to deficiencies. As the volume increased, did we increase the potential for error? And if so, how can technology help address this credit quality issue?
Scott: In the early stages of the pandemic, as volumes hit historic highs, lenders struggled with capacity. Existing technology, as used in many facilities, was not up to the strain. Processes were adjusted to save time, and for many, hiring new talent seemed like the most viable option. Lenders’ profitability shrank as they were forced to pay exorbitant salaries to the dwindling pool of underwriting talent.
On the other hand, amazing as it may sound, many underwriters with no prior experience received on-the-job training. All of this culminated in a costly loan origination process fraught with potential risks and inconsistencies.
But for several lenders, we saw then and now market share gains because they invested in understanding and refining their current process before implementing technology. Taking advantage of this falling volume opportunity is an excellent time to prepare for the future.
We often hear our company president, Joe Tyrell, talk about how our mission is to automate everything “automatable”. Through the use of technology, lenders can process complicated transactions quickly and at lower cost with a greater degree of consistency. The oversight of underwriting provided by technology results in loans that are in high demand in the secondary market due to their accuracy.
Q: With issuance costs rising and housing shortages still at risk, many lenders and investors are looking for ways to eliminate time-consuming aspects of the underwriting process. How can technology automate time-consuming data and document review tasks to underwrite more loans in less time with less surrender risk?
Scott: An underwriter’s time is spent on disjointed and error-prone manual tasks, and nearly all operational costs are labor-related, costing lenders hundreds of dollars per loan in margin. According to Freddie Mac’s analysis of mortgage industry lenders’ reimbursement and loan operation data, they estimated that every hour saved by performing specific processing and underwriting tasks on a given loan results in a cost saving of $132 per loan.
There are several footnotes to this statistic, but they specifically state the time spent obtaining the client’s W2 or other annual financial statements, and the time spent on underwriting can range from one to two hours. Using technology to eliminate the manual preparation and sorting of incoming documents through automated data discovery and extraction coupled with tools to reduce manual income and credit scoring can shave days off time to close—not just hours.
Q: The amount of information and tasks that underwriters have to market is enormous. Travel guides are thousands of pages long; Non-QM and other niche products are less formulaic and more labor intensive. Is it unrealistic to expect an underwriter to maintain quality standards without some form of oversight?
Scott: Yes, non-QM and other products are now demanding more from even a very experienced underwriter, so it’s extremely unrealistic. Some of the most successful lenders I’ve worked with have standardized and customized their processes to address low-hanging fruit and free up their underwriters to focus on the less formulaic decisions. Applying automation to tasks that lead to a credit decision, including applying the guidelines, confirming data points, clarifying conditions, and displaying all the results on a dashboard with red and green flags is underwriting utopia. This type of supervision is 100% achievable.