Building a better mortgage.

AuthorCorr, Jonathan

For decades, automation has been used to speed mortgage production. Now let's use it to make the actual loans better.

By the 1970s, Americans began to grasp the consequences of carbon emissions when big-city skylines began to disappear behind a thick, gray haze of smog. It was during this era that vehicle smog regulations got started, and decades later these rules are now common in all but 11 U.S. states. Eventually, automobile manufacturers began to evolve to meet the new emission standards, and consumer demand grew for cars that were smaller, cleaner and more fuel-efficient. [paragraph] Something similar is happening in the mortgage industry. One only needs to look back seven years to see what happens when mortgage quality is left unchecked, and the damage is still being felt today. Today, however, the majority of residential mortgage loans are much safer in terms of risk. [paragraph] Quality is the new name of the game, and mortgage investors and the Consumer Financial Protection Bureau (CFPB) are helping make sure of it. But at what cost? [paragraph] If today's mortgages are of higher quality, they 5 are also more expensive than ever to produce. Spurred by fears of audits, buybacks and violations, lenders are pouring tremendous amounts of time, money and staff resources into loan quality and getting little in return except lower margins. Yet, just like the automobile industry did, a growing number of innovators are surfacing--and are increasing profits along the way.

Origination technology: Then and now

When it comes to technology, it's very easy for our industry to see the glass half-empty. In the 20 years since Freddie Mac introduced its Loan Prospector[R] and Fannie Mae introduced its Desktop Underwriter[R] automated underwriting systems, and the Internet emerged as a new medium for communication and commerce, technology remains a large source of frustration for lenders.

There are many different solutions on the market, and lenders are challenged to identify the ones that are safe and meet their needs. Even if they find a solution that fits, the introduction of a new regulation or even a change in the lender's business model can quickly render it obsolete.

There have been many as-yet unfulfilled promises when it comes to technology as well. For example, almost everyone agrees with, supports and trusts electronic signatures. The technology is available and has been validated by the federal Electronic Signatures in Global and National Commerce Act (ESIGN) and most state laws. Yet the vast majority of borrowers cannot close a loan without signing mountains of paperwork in ink. There are reasons why this is so, of course, but it doesn't make the whole thing any less frustrating for the people who have to go through it.

Despite the challenges, we have made technological progress. Compared with 20...

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