The retail mortgage market continues to experience continuous change. Many lends are changing the scale of their operations driven by changes in the market and regulatory conditions.
Issues in the Retail Mortgage Market
The goal of all mortgage lenders in 2016 is to overcome the issues that contributed to the financial crisis.
- Weak controls
- Inefficient processes
The crisis itself has resulted in:
- Concerns about regulatory compliance (see section below on Dodd-Frank)
- Reduced customer mortgage demand
- Difficulty in writing conforming mortgages as the result of strict government requirements
Dodd-Frank regulations are now managed on the enterprise level instead of assigning the responsibility to individual lines of business.
Issues managed by the Chief Compliance Officer include:
- Compliance tracking
- Monitoring procedures
- Extensive reporting
- Changes in the measurement of risk and levels that are acceptable to the enterprise
- Implementation of regulations defined by Basel
With increased pressure on costs, there is a greater emphasis on profits associated with loan origination, quality, customer acquisition and servicing. Support services such as technology are also being examined as other means to improve operational efficiency and process controls.
The State of Retail Mortgage Banking in 2016
Banks are successfully moving from inefficiency technologies to more current platforms. These improvements include:
- Better detection of control exceptions and adherence to regulations
- Data flow that supports program analysis and a commitment to continuous improvement
- Visibility into the loan funnel so banks can better control the number of mortgages in each stage or origination.
- Integration of all bank business teams into the workflow utilizing the data above.
- Improvements in quality control leading to a more responsive customer experience.
- Reduction in paper documents for electronic processes and recording.
- Integration of mobile technologies into the workflow.
- Lower labor costs associated with a human and technology assisted process.
The Decline of the Wholesale Mortgage Broker
Reduced volumes and margins have caused a decline in the number of broker sales outlets. In a review of the top 5 lenders, all have shown declines in loans through the wholesale channel. Causes include:
- Perception of greater risk associated with independent wholesalers
- Controls and concerns with interpretation of Dodd-Frank guidelines
The Rise of Direct Channel Lenders such as Freedom Mortgage
The operating environment has fewer qualified borrowers and even declines in available housing inventory. The result are increases in the level of competition between banks and independent lenders such as Freedom Mortgage. Quicken and Freedom are using online models and robust technology to improve the borrowing experience while reducing mortgage servicing costs. Freedom Mortgage in particular, is expanding both sides of their business, allowing for greater economies of scale.
Technology facilitated mortgage origination is popular with consumers since it provides features such as status alerts, online bill pay and faster check deposits and alerts. The same technology is used to support an e-mortgage process.
Typical services enabled by technology are:
- Online access to origination status at each stage of the process
- Centralization and cloud-based access to documents
- Alerts, when documents are late or if incorrectly submitted
- Pre-qualification process with higher levels of speed back to the customer regarding eligibility
- Better pricing controls by the mortgage company who can price based on hyper-local market conditions
- Integration of property listing sites into the mortgage process with prices immediately compared to comps
- Calendar to manage the closing process
- Online tools for virtual instead of in-office consultations and closings
- The use of mobile tools to provide banking services when and where they are needed by the customer and the banking team
Impact of Dodd-Frank Regulations
The Dodd-Frank Reform Act describes restrictions and standards that are to be used when writing mortgages. The regulations went into effect in January 2014 followed by additional standards in October 2014. The goal is greater process transparency and fair lending. The sheer number of regulations indicates that they will place pressure on costs and the staffing levels needed for timely compliance.
Areas defined by Dodd-Frank
- Disclosure and Timing Requirements for Closed-End, Consumer Real Estate
- Transactions Including the New Integrated Mortgage Disclosures
- Collection of Fees and Verifiable Information
- Proper Collection of Government Monitoring Information
- Fee Tolerances Between the Loan Estimate and Closing Disclosure
- When Re-disclosure is Required
- Proper Placement of Fees on the Loan Estimate and Closing Disclosure
- Definition of what is a qualified mortgage and what needs to be disclosed to check a customer’s ability to pay back the loan
- Compensation levels for the MLO (Mortgage loan originator). Specification of any originator compensation. Also defines any registration or licensing requirements.
- Any prohibition on incentives. This defines the fiduciary obligation of the originator to the customer.
- Procedures for mortgage examination. The act states the review and audit criteria that must be used (as defined by the CFPB – Consumer Financial Protection Bureau).
- HARP Guidelines – referred to as HARP 2.0 which provides guidelines for loans on properties that are worth less than the loan amount
- Disclosure requirements such as what needs to be shared with the customer before and during the closing.
- Required regulatory reports as defined by the Home Mortgage Disclosure Act Amendments (HMDA)
- State laws for Federally Chartered Banks referred to as the Dodd-Frank pre-emption rule
- Guidelines for the appraisal process under the Uniform Loan Delivery Dataset (ULDD)
- Disclosure requirements and GFE (good faith estimates) and requirements as defined by TILA (Truth in Lending Act) and RESPA (Real Estate Settlement Procedures Act).
Role of the Chief Compliance Officer
The chief compliance officer role has emerged as one of the most important functions of a lending institution. To achieve compliance with regulations, this person/team is responsible for:
- Workflow for the implementation of procedures that enable an organization to be compliant.
- Personnel training.
- Reports used to monitor progress include KPIs (key process indicators).
- Management of any global or domestic compliance complexities that result from operating under more than one jurisdiction.
Bank operations continue to operate under pressure. The low-interest-rate environment makes it even harder for banks to maintain margins, let alone invest in growth. Recent strength in the housing market should help maintain current levels of business. Technology will have a short-term impact as any time-to-value gains can be measured in months.