How the Digital Mortgage Democratizes Loan Accessibility
Dan Sogorka is CEO of Cloudvirga, Irvine, Calif. He has more than 20 years of experience leveraging technology to remove inefficiency and lower costs in the mortgage space. The company’s website is https://www.cloudvirga.com/.
Mortgage lending is too expensive.
In the first quarter of this year, the cost of originating a single mortgage reached a historic high of $9,584. That’s up from a still-pretty-high $8,611 in Q4 2018. And maybe if all this money translated to lightning-fast turnarounds that got borrowers from application to homeownership in a couple of days, I wouldn’t be here writing this.
But the average mortgage still takes about 42 days to close, according to Ellie Mae’s latest numbers. That means mortgage lenders are spending more money than ever to get borrowers in houses, and the process hasn’t gotten any faster since the pre-internet days.
Even a super-fast mortgage origination process isn’t worth the near-$10,000 price tag borrowers are currently facing. That’s just too much to pay for the “privilege” of getting a loan.
It’s too much because it means that first-time and lower-income homebuyers are being priced out of the market. It’s too much because lenders are barely able to make mortgage lending profitable. And it’s too much because we have the technology to do better.
A true digital mortgage has the power to significantly reduce the cost of mortgage origination, therefore making home loans more accessible to a larger swath of American borrowers. Until recently, though, we’ve only been able to digitize certain parts of mortgage origination, and that piecemeal approach has added cost and complexity to an already cumbersome process.
Here, I’ll outline what a true digital mortgage looks like and explain how lenders can embrace it to reduce origination costs, cut the time it takes to close loans, and expand access to mortgages.
Anatomy of a Truly Digital Mortgage
When I use the term “digital mortgage,” I’m referring to an origination process that is fully integrated, within a single digital platform, from borrower application to closing.
That is not, for the most part, what the industry uses today.
Most often, what we see is a digitized front end stuck onto a back end composed of a handful of poorly connected systems. So while the borrower may be able to fill out an application online in a matter of minutes, the originators and loan processors still rely on a hodge-podge of disparate systems to translate the borrower’s information into a mortgage loan.
The back end hodge-podge causes two main problems. First, it’s highly inefficient. When unconnected systems have to work together to process something as complex as a mortgage, there are too many gaps that have to be filled by slow manual processes, which reduces the total number of mortgages a lender can process.
The second problem is cost. When you have multiple systems supporting every mortgage loan, you’re paying multiple software providers and forcing your staff to bounce between multiple systems. Every time a new provider offers to digitize one part of the mortgage process, lenders are forced to decide whether the efficiency they’ll gain from that technology will be worth the additional cost in dollars and the time lost to context switching; research shows that every time a task is interrupted, it takes more than 23 minutes to regain focus.
Already, depository institutions note that pure technology costs account for 10 percent of their loan origination costs. A single software solution that sits on top of the LOS to digitize and fully integrate the entire process would both reduce those costs and improve operational efficiency, thus reducing the high cost of interrupted work currently plaguing mortgage lending. It’s hard to overstate the impact that will have on stakeholders.
Increased Mortgage Accessibility
The high cost of mortgage origination hurts everyone involved in home buying.
Borrowers end up paying more for the mortgage itself, which means they have less money to put toward a house. In Illinois, where the median value of a first-time home is $80,300, the cost of loan origination equals 12 percent of their home’s value. Let that number sink in.
But borrowers aren’t the only ones hurting. In Q4 2018, lenders were losing as much as $200 per loan. As of Q2 2019, that number was safely back into positive territory, at $1,675 per loan, but most analysts agree that this likely reflects the surge of refinancings we’ve seen, thanks to historically low interest rates, rather than a substantive change in lending costs. When appetite normalizes, lenders will still have to reckon with the underlying issues that have kept per-loan profits inching downward since 2012.
So not only are borrowers forced to pay more to borrow the money they need to buy houses, lenders lack the incentive to make mortgages more accessible.
The digital mortgage would solve both of these problems:
–Single-platform lending technology would reduce back-end costs for lenders, bringing down their per-loan expenses and increasing per-loan profits.
–Borrowers would therefore have to pay less to borrow money, which means they could afford more house.
–The efficiency introduced by integrating the back end would mean that every employee could process and close more loans more quickly.
It’s also conceivable that the lowered cost and hassle of mortgage borrowing made possible by a digital mortgage would inspire homeowners to refinance more often: a lower-stress and lower-cost process would mean that smaller fluctuations in interest rates could make refinancing worthwhile. For lenders with smart, customer-friendly engagement strategies, this could lead to better client retention. The key here is to put serious energy into those engagement strategies: as of this year, only 18 percent of customers stayed with their lender after a refinance, which is as low as the number has been.
With streamlined technology and processes, though, Loan Advisors and others would have more time to engage in the kind of relationship-building activities that build customer trust and loyalty.
Better Lender-Borrower Relationships
The opportunities for such activities are plentiful. The high cost of mortgage origination isn’t the only thing keeping people from buying homes today – there’s also an education gap about what it takes to become a homeowner.
In Ellie Mae’s 2019 Borrower Insights Survey (https://static.elliemae.com/pdf/2019_borrower_insights_ebook.pdf), most respondents who weren’t homeowners said they’d like to own a home – in fact, 57 percent said they’d even relocate to another state to make homeownership possible.
So why aren’t they buying? The single biggest reason cited by the youngest (and least experienced) borrowers was that they hadn’t saved enough money. But this might be a misconception: more than a third of renters were under the impression that they had to have at least six to 10 percent of a home’s purchase price for a down payment.
The lesson here is that there is significant untapped demand for mortgages. To access that demand, of course, lenders would have to invest resources in educating potential borrowers about the many options available for buying a home without a traditional 20 percent down payment.
That kind of education takes time and engagement–but it also builds loyalty over the long term. Lenders have to be ready to step into conversations with customers who aren’t yet thinking about mortgage loans and be willing to engage meaningfully with customers in the years between mortgage loans.
Without a digital mortgage in place, that kind of time just doesn’t exist. Loan officers have to spend their time following up with processors and underwriters on a near-constant basis. They have to hustle everyone involved in the lending process to make sure their loans close.
With the infrastructure to make digital loans possible, though, loan officers will have that time. The streamlined backend means fewer follow-ups, fewer emails, fewer phone calls. It means loan officers can spend time chatting with and educating prospects rather than hurrying back to the office to check in with their support staff.
And more lender-borrower conversations means better relationships. It means more trust. It means a stronger tie between would-be borrowers and their financial institutions, which means a greater lifetime value for every customer.
Facilitating the American Dream
Homeownership has long been a cornerstone of the American Dream, but for decades the process of becoming a homeowner hasn’t meaningfully evolved. In fact, even as the rest of our society has been deeply transformed by digitization, change in mortgage lending has largely been skin deep.
It’s time for that to change.
By embracing technology that streamlines the mortgage process end to end and creates a true digital mortgage, we can lower the cost and burden of mortgage origination, make lending more profitable, and reduce the cost of buying a home by reducing the cost of the mortgage itself. We can make the American Dream achievable for a greater portion of the country’s population.
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