Stu Scott: Technology helps lenders maintain loan quality during volume peaks

PERSON OF THE WEEK: It’s well established that technology and automation can help mortgage lenders process loans faster and reduce operational costs – but how much does it help lenders reduce the overall risk of loan defects during high volume periods?

This was put to the test during the pandemic when lending volumes soared; not only did the volume of lending increase dramatically, but so did the average loan size, due to rapidly rising house prices. As a result, the pandemic proved to be a huge test of how lenders’ technology investments would hold up to the massive influx of volumes.

What’s more, it was a huge test of how this technology would work during a period when many lenders were hiring new underwriters and additional staff, thereby increasing the risk of loan defects.

To learn more about how technology has helped lenders handle the load while keeping loan quality in check, MortgageOrb interviews Stew Scott, vice president of product management for ICE Mortgage Technology.

Question: We know that after a period of high lending volumes, credit problems appear. The GSEs and FHA are beginning to make requests to repurchase loans due to defects. Did we increase the potential for error as volumes increased? And if so, how can technology help address this loan quality problem?

Scott: During the early stages of the pandemic, when volumes were at historic highs, lenders struggled with capacity. Existing technology, as implemented in many institutions, could not handle the workload. Processes were tweaked to save time, and for many, hiring new talent seemed like the most viable option. Lenders’ profitability has shrunk as they have been forced to pay exorbitant wages to a dwindling pool of signing talent.

On the other hand, amazing as it may sound, many underwriters with no previous experience have received on-the-job training. All of this ended up in a high-cost loan production process fraught with potential risk and inconsistencies.

But for several lenders, we saw market share gains then and now because they invested in understanding and refining their current process before implementing technology. Taking advantage of this opportunity with reduced volumes is an excellent time to prepare for the future.

We often hear our company president, Joe Tyrrell, talk about how our mission is to automate everything “automatically.” By embracing technology, lenders can quickly process complex transactions at a reduced cost with higher levels of consistency. The underwriting oversight provided by the technology creates loans that are highly sought after in the secondary market because of their accuracy.

Q: With origination costs rising and the housing shortage still at risk, many lenders and investors are looking for ways to eliminate the 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 reduced foreclosure risk?

Scott: Underwriter time is spent on unrelated and error-prone manual tasks, and almost all operating costs are labor-related, costing lenders hundreds of dollars per loan margin. According to Freddie Mac’s analysis of mortgage industry compensation data and lender loan operations, they estimate that every hour eliminated from performing specific processing and underwriting tasks for a given loan results in cost savings of $132 per loan.

There are a few footnotes to these statistics, but they specifically highlight the time spent getting the client’s W2 or other financial statements, and the time spent signing can take between one and two hours. So using technology to eliminate manual preparation and sorting of inbound documents with automated recognition and data extraction, combined with manual yield reduction and credit scoring tools, can reduce time to close by days – not just hours.

Q: The volume of information and tasks expected to be brought to market is monumental. The manuals are thousands of pages long; non-QM and other niche products are less formulaic and more labor intensive. Is it unrealistic to expect an insurer to maintain quality standards without some form of oversight?

Scott: Yes, non-QM and other products now demand more than even a very experienced underwriter, so it’s extremely unrealistic. Some of the most successful lenders I’ve worked with have standardized and tailored their processes to address low-hanging fruit and free up their underwriters to focus on less formulaic solutions. Applying automation to tasks that lead to a credit decision, including applying guidelines, validating data points, clearing conditions, and seeing everything displayed on a dashboard of red and green flags is utopia. This type of supervision is 100% achievable.

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