CABO SAN LUCAS, Mexico — Fully automating the mortgage closing and delivery process could knock 2 percent off the cost of loans for borrowers, according to Chris Peirson, founding partner in the Dallas law firm Peirson Patterson LLP. That creates a strong incentive to overhaul what is now a cumbersome, inefficient and fragmented system, but not strong enough yet to overcome the resistance to change, Peirson told mortgage industry executives who gathered in Cabo San Lucas last week to attend the “Mid-Winter Thaw” conference sponsored by United General Title Insurance Co.
The enactment of the “E-Sign” law in 2000 laid the foundation for a fully electronic process, Peirson explained, not just because it permitted electronic closings, but because it opened the door to the electronic delivery of mortgage data. “That was the signal to the primary and secondary markets that the game had changed,” she said. With e-sign in place, the electronic packaging and delivery of mortgages is no longer a distant possibility; it is an imminent prospect, according to Peirson, who cautioned industry executives not to believe those who say this innovation is still five or 10 years away.
It’s Going to Happen
“They’re only telling you that to slow you down,” she insisted. “They have the capacity to (automate the process) and they are deadly serious. They know it is going to happen.”
It isn’t the technology that is slowing implementation, she said, but rather, the need for four different industry segments – warehouse lenders, title insurers, servicers and investors – to change simultaneously. Of the four, warehouse lenders have been most resistant, Peirson suggested, because their business model is based on the slow delivery of the mortgage to the end investor. “Warehouse lenders are compensated by the positive carry” that exists between the closing of the loan and its delivery, she explained. Electronic delivery will eliminate that carry, while adding a new risk for warehouse lenders, by separating the note from the investor’s package and leaving it in the lender’s hands. This will make warehouse lenders “a target of opportunity for class action attorneys,” Peirson said. “They will be dragged into every suit.” And those risk concerns create another reason this segment of the industry has not embraced efforts to automate the end process.
But consumer demand for “faster, better, cheaper” in the mortgage industry will drive the change, Peirson insisted, whether warehouse lenders want it or not. A fully automated system will streamline the end process and reduce loan costs primarily by producing “clean data” at the closing. The post-closing effort required to correct poor data adds 1 percent to the loan cost, she estimated, and the delay in delivering the note to the investor adds another 1 percent.
“My mother used to tell me, ‘Why do you have the time to do it over, but you don’t have the time to do it right in the first place?’ If we can only do that much – if we can get the data right at the closing – all the other secondary market issues will resolve themselves,” Peirson said. The issues that will “resolve themselves” include the risks embedded in the current process, most of which, Peirson noted, are related to the erroneous data and the steps required to correct it.
“Beyond the Beyond”
A fully automated delivery system will also tame a closing process that, in its current form, “is a disaster for all parties,” Peirson said, especially for consumers. The closing is the last contact borrowers have with the mortgage lender. Improving that experience will enhance the ability of lenders to retain those customers; the potential for customer retention combined with the ability to easily capture the accurate and reliable customer data the electronic process creates will enable lenders “to cross-sell their whole array of financial products. This is huge for bankers,” Peirson said. “It is beyond the beyond.”
Mark Braden, chief information officer of Irwin Mortgage, echoed Peirson’s emphasis on the value and necessity of fully automating a process that, in its current “consumer unfriendly” form, he said, increases mortgage-lending costs “without adding any value.”
Irwin, described as “on the bleeding edge” of the electronic mortgage trend, has learned much from its pioneering role, Braden said. Primary among those lessons — the company now recognizes that the key is not, as once thought, automating the mortgage approval process, but rather, automating the closing, funding, and delivery of the loans. This is where the opportunity to reduce risks, lower costs, and improve the borrowers’ experience resides, Braden suggested.
But overhauling the existing closing and delivery infrastructure will require someone to play the role Fannie Mae and Freddie Mac played in automating the mortgage origination function by developing the standardized underwriting systems that “drove changes in the industry.”
Who Wants It?
“We need the title and settlement industries to step up and work with the secondary market to create a model that works for middle market players,” Braden said. The technology for change exists, he insisted. “The question is, do settlement agents and title insurers want it?” Braden said he doesn’t see “a lot of street level enthusiasm (from these sectors), and it’s going to take a lot of push-down effort to create it. While overhauling the existing system will be difficult without the leadership of existing players, he acknowledged, “if they don’t do it, someone else will.”
Peirson agreed with Braden and echoed his warning. Settlement service providers have “a window of opportunity” to reconstruct a broken system, she said, “but that window is closing fast.” The “push down” pressure for change Braden mentioned is coming from a new generation of home buyers, who are accustomed to seamless, efficient Internet transactions, and who, Peirson insisted, “won’t tolerate” the existing loan closing process. If the current players don’t build this (electronic) system, someone else is going to build it in their garage,” she added, “and frankly, they could. All the technology issues have been resolved.”
Steve Mase, founder and president of Dexma (a provider of technology solutions for the mortgage industry), thinks many of those technology solutions remain incomplete, primarily because the largest lenders, with the resources to invest, control the innovations. And the innovations they emphasize tend to be innovations designed to solve their individual problems. That’s why bundling and other solutions needed to drive industry-wide changes remain unfinished, Mase argued. “We’re building custom, hand-crafted solutions that serve a particular company or service provider,” but these are not the broadly applicable solutions needed to address systemic problems in the mortgage process.
“We’re spending billions on technology,” Mase agreed, but the innovations that meet the industry’s need for reliable solutions that can be replicated “are scarce.”
The development of affiliated business arrangements, a major topic of discussion at the UGT conference, illustrates that point, Mase suggested. ABAs provide a mechanism through which different industry players can legally provide and share the revenue from varied settlement services. But their primary purpose, Mase said, is to overcome the barriers created by the Real Estate Settlement Procedures Act’s ban on referral fees. The goal is not, as Mase thinks it should be, creating a “core process” that can solve systemic industry problems. Because the underlying rationale for ABAs is wrong, Mase warned, these ventures, are creating “a ticking, smoldering, and needless liability” on corporate balance sheets, “When I see a lender managing 160 different ABAs, I have to say, this industry needs to hold a mirror up and look carefully at what it is doing. I have to say, ‘Doctor, heal thyself.'”
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