Tough Hill To Climb For Mortgage Industry In 2014

As 2014 dawns, the mortgage banking industry is facing a crossroads. New regulations from the Consumer Financial Protection Bureau will require banks to have even more extensive documentation on the loan process from beginning to end. Meanwhile, a market downturn means banks will be trying to increase mortgage revenue — or even keep it flat — with a decrease in customers.

However, there are also some signs that technology can help mortgage bankers through these turbulent times. The promise of increased automation and use of e-documents means more efficiency and cost savings for what has always been a paper-intensive process. If banks can hold steady through 2014, there could be light at the end of the tunnel.

According to Jay Brinkmann, chief economist for the Washington, D.C.-based Mortgage Bankers Association, loan origination levels are predicted to drop around 32 percent less in 2014 compared with this year. This is largely because of a “big drop-off” in refinanced mortgages, he notes. This means banks, which have relied heavily on refinanced customers over the past several years, will have to change their focus to attracting purchased mortgage customers, he says.

But Brinkmann says independent mortgage shops have been much better than banks at acquiring that segment of customer, because they attract more aggressive loan officers by generally offering better commission compensation.

“There’s a perception that banks have simply relied on their name brand to bring in refinance applications,” Brinkmann says. They will have to invest in retraining their lending workforce or recruiting loan officers with different skills.

All of this upheaval has left many in the industry simply looking for a degree of predictability, says Clayton Baker, national banking practice leader for Ernst & Young https://www.ey.com.

“With the market shifting from a refi to a purchase market, it’s caused everybody to step back and look at the large picture and say, ‘How are we really gonna make money in this business?’ ” he adds.

While the mortgage banking industry is most concerned with “stabilizing the environment,” there will be a need for institutions to invest more in their loan architecture going forward. That’s not happening right now, but Baker says the next two to three years “will really move the needle” in that regard. He says data management, document management, and mobile will be likely areas of investment in the mortgage industry.

The MBA’s Brinkmann also believes technology will play a large role in helping banks do “more with less” in the current mortgage landscape. Some banks, he says, are investing or looking to invest in better quality-control systems, such as those that can capture errors or inconsistencies in paperwork automatically, rather than having to wait for an underwriter to discover it. This can lighten the workloads of internal employees and lead to greater efficiency among the workforce, he notes.

The industry also is looking at how to better use imaging in the mortgage origination process, says Brinkmann. While e-documents and mobile image capture technology are widely used in other parts of banking, the mortgage process is still one that is paper-heavy. Banks have begun to use imaging somewhat in the mortgage process, but “it usually involves scanning documents that start as paper,” Brinkmann notes. “We have been working on a true electronic mortgage [where even the original document isn’t paper], but we’re not totally there yet.”

That’s a goal that First Niagara (Buffalo, N.Y., $33 billion in total assets) is working toward as well. The bank implemented Fiserv’s Unifi loan origination system last year in order to gain efficiencies in servicing loans by capturing pertinent data earlier in the process and automating certain processes, says Tom Faughnan, senior director of residential mortgage for First Niagara.

Faughnan says First Niagara is seeking to explore how imaging and automation can be brought further into the mortgage process. He says there’s a “considerable amount of automation” that can be used in the loan origination process. Regulatory statutes require that banks keep physical paper records of certain key documents, such as a title policy, but many of the documents can be electronic.

Faughnan hopes to be able to invest in new imaging technology that can do just that with an eye toward making the entire mortgage process less paper-heavy and eventually introducing e-signatures for loan documents.

“From a workflow perspective, having an imaged work file is critical and something we are working toward,” he adds.

New CFPB Rules

However, the problem Faughnan and mortgage bankers around the country face is having to allocate an increased portion of their budgets to comply with new regulatory statutes, which means that investing in innovation may have to take a back seat for the time being.

Among the major regulatory standards set to take effect in 2014 is the Consumer Financial Protection Bureau’s “qualified mortgage” rules, which the agency says is designed to limit an institution’s ability to lend to consumers who may be unable to repay the loan — which was the case during the subprime mortgage meltdown that preceded the financial crisis. The rule requires creditors “to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for ‘qualified mortgages,’ ” according to the CFPB.

Also, the rule requires banks to “retain evidence of compliance with the rule” for three years after a covered loan is consummated.

Scott Hansen, executive VP, business development for technology vendor Harland Financial Solutions, which was acquired by Davis + Henderson Corp. earlier this year, says the new mortgage rules “are the biggest challenge facing the mortgage industry in the coming year. These rules affect everything from the application and underwriting stage through loan servicing, loss mitigation, and foreclosure. There is not one aspect of the mortgage process that will not be impacted by the CFPB’s new rules.”

Among other things, Hansen says, the CFPB’s new rules will affect what types of products mortgage lenders can offer and also could tighten access to credit for some consumers, as well as place an additional burden on IT providers and servicing systems.

He believes one way for banks to deal with the new compliance standards is to prepare their staffs thoroughly for them.

“Knowledge of the rules’ requirements will be required at every level of the organization — from senior management to call center representatives,” Hansen adds. “Servicers will have to go to great lengths to ensure that staff members are adequately trained to deal with at-risk borrowers, in particular. Mistakes in the handling of loss-mitigation applications and other inquiries could carry serious consequences.”

Amy Brachio, a partner in the advisory services practice of Ernst & Young, says these new regulations are not surprising, as they are a continuation of the federal government’s focus on “fair and responsible lending and enhancing transparency in the mortgage process in general.”

“The big thing [about the new mortgage rules] for banks is being able to demonstrate the process that they followed, not just from a broader process perspective, but on a transaction-by-transaction basis,” she says.

Faughnan says First Niagara has between 20 and 25 employees dedicated to helping the bank comply with new mortgage-related regulations next year, including the new qualified mortgage rule. As such, noncompliance-related technology investments he’d like to make “aren’t probably all going to get done right away.” In particular, the new requirement that lenders retain documentation of each loan for three years will take up resources, he says. Still, Faughnan acknowledges this regulatory environment is the “new normal” and believes the extra steps regulators are requiring banks put into the mortgage process will ultimately make “the end product much better.”

Industry Cooperation

The Mortgage Banker’s Association’s Brinkmann says the group is trying to help member banks navigate these new regulatory waters through its Mortgage Industry Standards Maintenance Organization. MISMO is a technology standards development body intended to maintain voluntary electronic commerce procedures and standards that allow mortgage lenders, investors in real estate and mortgages, servicers, industry vendors, borrowers, and other parties to exchange real estate finance-related information “more securely, efficiently, and economically.”

MISMO “is working jointly with almost all of the significant government agencies to make sure we’re all speaking the same language,” Brinkmann says. He hopes MISMO also can result in cost savings for its members by following the same technology standards.

The specific initiatives that MISMO is pursuing include developing an XML architecture that encompasses data origination, secondary market, and servicing data, and creating a data dictionary to provide business definitions and corresponding architecture data element tag names.

First Niagara’s Faughnan believes industry cooperation such as the MBA’s MISMO efforts are helpful, but he doesn’t sugarcoat what is likely to be a difficult outlook for the mortgage industry in 2014. “It’s more costly to write mortgages, there’s less opportunity to do so, and at the same time we’re still trying to attract a quality sales force, so it’s a bit challenging,” he says.

Bryan Yurcan is associate editor for Bank Systems and Technology. He has worked in various editorial capacities for newspapers and magazines for the past 8 years. After beginning his career as a municipal and courts reporter for daily newspapers in upstate New York, Bryan has ... View Full Bio