Tech-Empowered Correspondent Lending - Black Knight Financial ... [PDF]

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were corrected in order to achieve high data-integrity standards. 4) Robust analytical tools were re- quired to systematize the evaluation of loan quality—not only ...
TECHNOLOGY

Tech-Empowered Cor Today’s technology has ushered in a new breed of correspondent lending. It allows market participants to sensibly manage both the risks and the opportunities of this channel.

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VIEW-ONLY REPRINT WITH PERMISSIO N F ROM T HE MORTGAG E BANK ERS ASSO CIATIO N (MBA)

respondent Lending —— b y J E R RY H A L B R O O K ——

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robably going as far back as the 1940s, the correspondent lending model of originating mortgages has been a business built upon the principles of mutual confidence and dependence. The approach involves funding loans internally or through a warehouse line of credit and then selling them to larger lender “sponsors” or investor partners. One can see how trust in every step of the process is critical.

Each side of the business transaction has operated under the belief that the business relationship offers beneficial outcomes and can help meet the needs of the other as part of a mutually agreeable business transaction. In the decade leading up to the mortgage meltdown of the mid-2000s, correspondent lenders experienced a healthy period of growth. It was driven in part by the increase in refinance activity that occurred as interest rates dropped. Investors purchased correspondent loans as a means of replenishing loan run-off in their servicing portfolios, and correspondent lenders provided a steady stream of closed loans to help them do just that. However, like the rest of the industry, the correspondent lending segment was negatively impacted by the steep decline in the mortgage market that started around 2006. As the mortgage lending environment went from boom to bust, the purchase of correspondent loans also slowed dramatically. Capital was no longer cheap or abundant, and as mortgage defaults began to pile up, some financial institutions grew increasingly concerned that their lack of visibility into the origination practices of correspondent lenders might be part of the problem. The bursting of the mortgage bubble made it painfully clear that dramatic change was needed

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in the industry, on many levels. By 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act had passed, and the industry began its long struggle to get soaring losses under control. Risk aversion was at an alltime high and much of the mortgage industry walked away from participating in the correspondent model.

The paradigm shift In response to the tremendous disruption and uncertainty that existed in the mortgage industry at this time—as well as the passage of DoddFrank—many lenders ramped up their hiring in order to supplement existing quality-control processes. Organizations became hypervigilant and spent countless man-hours checking and rechecking the quality and accuracy of the information they relied upon to make decisions. They utilized many of their newly hired employees to manually “stare and compare” mortgage documents to ensure accuracy; re-review loan files to determine if packages were complete; and help scour internal policies and external rules to ensure that approval/decline decisions were appropriate. This period of staffing up was understandable, but not necessarily efficient or foolproof. For lenders that had to develop new decision-making

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terms and conditions have been adhered to, mortgage loan rules to adhere to evolving regulatory requirements—and purchasers are able to proceed with correspondent transactions ensure that processes were in place to consistently and accuwith greater confidence. rately follow those rules—more advanced technology solutions They can also track the performance of the loans they have would be required to replace manual checklists and layering obtained from correspondent lending partners over time, and of review cycles. make future buying decisions based upon the track records of the Workarounds were certainly put into place as stop-gap correspondent lenders they have done business with in the past. measures, but in order to reliably ensure compliance with Given the capabilities that are available through a mortgage strict regulatory requirements while helping to relieve operations loan origination platform that can deliver a systematic, rulesthrough efficiency gains, much more would be needed on the driven approach for correspondent lenders, buyers can be technology front. more confident that the loans they purchase reflect the As technology firms grappled with the immense needs of quality they expect. In turn, lenders can sell their loans more the industry—including compliance with evolving regulatory efficiently and attract even the most cautious buyers on the change—five vitally important requirements emerged, especially secondary market. as it related to the correspondent lending model: With correspondent programs historically accounting for 1) Rules-based, event-driven technology was needed to faabout one-third of all originations (33 percent in 2015, according cilitate a more systematic exchange of industry-standard data to Inside Mortgage Finance), and the fact that there are a (MISMO®) and documents between sellers and buyers, with tremendous number of variables in what different lenders secure, manageable, repeatable (auditable) and efficient “push need and expect in terms of the reof a button” processes designed to keep quirements their institutions have in both parties current. place, robust technology is vital to the 2) The automation of mortgage success of this production channel. It processes was needed to ensure that allows operations to be standardized, seller and buyer decisions—such as reinforces data integrity and provides loan qualification and pricing—were echnology was the necessary tools that are required both compliant and aligned with each to assess loans for compliance with organization’s profitability goals and certainly not the only purchaser rules. All of this is critical risk tolerance. for a stronger, more sustainable corre3) Automated access to reliable answer to helping the spondent channel. “sources of the truth,” such as public By taking advantage of the configdatabases, was needed to ensure that mortgage industry— urable rules-based decisioning automaany errors in mortgage loan documention that is now available—combined tation were detected and, once validated, correspondent lenders with data accuracy checks, comprewere corrected in order to achieve high hensive risk analysis and compliance data-integrity standards. in particular—shift to tools—the correspondent lending chan4) Robust analytical tools were renel is not only able to operate with quired to systematize the evaluation a new paradigm. greater efficiency, but it is better posiof loan quality—not only on a loan-bytioned for growth as a result of the loan basis, but with the ability to quanstrong confidence that these conditions tify loan quality on hundreds or even engender in both buyer and seller. thousands of loans in a portfolio. 5) Automated document management that was capable of A collaboration gateway for secondary market participants recognizing each individual form in a mortgage package, determining if each element on the form was correct and autoFor many years, technology compatibility between parties matically pushing that information into the right queue or associated with the mortgage process has been an ongoing folder was also needed to drive efficiency and accuracy. concern in the mortgage industry, often making it unnecessarily Technology was certainly not the only answer to helping difficult for correspondent lenders to access critical information. the mortgage industry—correspondent lenders in particular— Such information might include program and pricing details, shift to a new paradigm. And certainly all the needed technoor for secondary market buyers the ability to verify compliance logical advances didn’t come at once. But over time, it has with regulatory requirements and other conditions that are proven to be a central catalyst in enabling lenders and investors unique to each purchasing institution. to comply with evolving regulations, better identify and Today technology advancements have enabled more streammanage risk, drive uncertainty out of the mortgage process, lined collaboration between diverse systems by using standard and help the industry transform into a more stable and susformats—such as Fannie Mae Desktop Underwriter® (DU) 3.2, tainable market. the Uniform Loan Delivery Dataset (ULDD), Uniform Closing Dataset (UCD) and Uniform Appraisal Dataset (UAD). Stronger technology, stronger correspondent markets Data and documents are exchanged securely using enToday correspondent investors are turning to specialized cryption technology to protect sensitive information, and technology to help them take advantage of the profitable metadata can index documents for delivery from the loan benefits of working with trusted correspondent lending partorigination system—so there is no need for manual uploading. ners. With the ability to automatically confirm that their This facilitates a more industry-standard exchange of data,

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the level of loan performance quality they are looking for reducing barriers to participation and creating the opportunity from their correspondent partners. for a broad “gateway.” Readily available access to this kind of information enables By utilizing the power of a collaboration gateway, which is buyers to make decisions that can help them meet their specifically designed to better facilitate the needs of both the growth objectives in support of their larger marketplace correspondent lender and the purchasing institution, sellers strategy. It also allows them to focus their purchasing budget can obtain current prices, make a lock request, and take adon buying loans from correspondent lenders that have a solid vantage of a systematic and instantaneous transmission of track record of consistently delivering high-quality, compliant their loan packages. loans. In addition, a collaboration gateway is highly scalable This is an important time saver and helps to minimize to accommodate increases in volume when and if it might be frustration for both parties. It also dramatically reduces or needed. eliminates the need for manual processes that have been associated with loan file transfers in the past. A growing and healthy correspondent lending market In addition, sellers can receive current status updates and Given the strict regulatory environment and the potentially notifications to better manage their pipelines, while correhigh financial and reputational costs of non-compliant loans, spondent loan purchasers can systematically appraise each it’s certainly understandable that financial institutions are loan package to ensure that their buying decisions are profitable laser-focused on making sure they have the right technology, ones. Plus, they can do so in less time and with greater conprocesses and procedures in place to ensure that the corresistency than with existing manual processes. spondent lending model provides the Efficiency can also be greatly imgrowth benefits they are looking for— proved in terms of communication and without undue risk. remediation. For example, if necessary Unless lenders are confident they documents are identified by the system can keep up with regulations and as missing from a loan package, an achieve reasonable margins through alert from the buyer can be automatimarket ups and downs, there may still cally sent to the seller immediately, aloday’s be too much risk in the correspondent lowing the correspondent lender to model for some appetites. quickly rectify the situation to keep correspondent lending In today’s mortgage market, there the purchase approval process moving are many safety measures in place to forward. business model help protect all participants in the corAnd with the availability of optical respondent lending market. In fact, character recognition (OCR) used in has moved far beyond many of these checks and balances are conjunction with exchange technology, supported by and only functional bedata and images can be extracted from where it was in the cause of the advanced technology that loan documents and separated in order is now available. A growing and healthy to ingest data into systems—thereby early 2000s. correspondent lending market must reducing manual entry—and to run inhave a solid foundation, and that redustry-standard and lender-standard quires the kind of consistency and prerules against public records and other dictability that today’s advanced sources of truth, in order to verify data technology can deliver. accuracy and consistency. Today’s correspondent lending business model has moved By delivering speed, accuracy, comprehensive analysis and far beyond where it was in the early 2000s—not only because trustworthy findings—without the need for human intervention—a collaboration gateway enables the market for correof the dramatic advances in technology and data-driven spondent loan sales and purchases to operate at a higher analytics, but because the industry is much wiser now. It level of efficiency, with more consistent and predictable has left risk-layered products behind, and is focused on processes and fewer errors. As a result, greater trust is fostered buying and selling quality loans that benefit both buyers between buyer and seller. and sellers. When financial institutions wish to purchase loans, exThe tools are in place to help the modern correspondent change technology enables prospective buyers to review and lending model perform well, and to deliver profitable results compare the variances in loan quality that may be associated for buyers and sellers alike. These are the conditions that are with competing sellers. By looking at parameters such as the necessary for a vibrant and healthy correspondent lending number of purchased loans from a particular correspondent environment, and for helping to meet the ever-shifting needs lender that have contained errors, or by assessing the number of today’s—and tomorrow’s—home purchase market. MB of loans that have subsequently defaulted on a seller-byseller basis, buyers can make decisions that are more closely Jerry Halbrook is president of the Origination Technologies division for Black aligned with their needs by avoiding those sellers that have Knight Financial Services, Jacksonville, Florida. In this role, he is responsible not consistently met their requirements. for the direction and business operations of the LoanSphere® Empower® and This type of advanced functionality allows correspondent LoanSphere LendingSpace® loan origination technologies, as well as Loanloan buyers to make more informed decisions and gives them Sphere SalesEdge®, the company’s customer relationship management (CRM) the opportunity to reward those lenders that have provided offering. He can be reached at [email protected].

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