Beyond COVID-19: Digitizing the mortgage business for future success has been saved
Beyond COVID-19: Digitizing the mortgage business for future success
The pandemic presented the mortgage industry with the unprecedented challenge of digitizing core functions almost overnight to keep pace with record levels of origination and forbearance activities. Now many mortgage banks are looking to digitize other parts of the business to create better customer experiences with lower operational costs.
The mortgage industry postpandemic
The pandemic presented the mortgage industry with the unprecedented challenge of digitizing core functions almost overnight to keep pace with record levels of origination and forbearance activities.
The industry was largely successful in adopting digital solutions to perform tasks that were typically completed face-to-face, including e-verification of income and assets, drive-by and automated appraisals, and hybrid closings. In many cases, lenders were forced to accelerate tech projects that were planned for 2021 or later to support these new practices.1
Now that they’ve overcome initial shocks of the health crisis, many mortgage banks are looking to digitize other parts of the business that are still impeded by paper-based, manual processes. These outdated functions continue to make the lending experience more inefficient, expensive, and time-consuming than needed for employees and the customers they serve. For instance, it still takes almost two months to process a loan.2
By scaling up initiatives and building on progress made over the past year, banks can get closer to full-scale digitization. This should result in a shorter and more streamlined process for fulfilling mortgage loans that can lead to a better customer experience, all while lowering operational costs, mitigating risks, and delivering superior financial performance in the long run.
Many traditional mortgage lenders and servicers are also feeling ongoing competitive pressure from nonbank institutions, especially fintech firms that can generally offer a simpler and more convenient mortgage experience. According to a recent study, fintech lenders process applications about 20% faster than traditional lenders, and yet account for 25% lower default rates in the US mortgage market.3
Customers’ heightened demands for quicker service and more timely updates, coupled with the pressure on lenders to compete profitably in a crowded marketplace, further accentuates the need for a full-scale digital transformation. That said, the journey from traditional to digital is not an easy one. Creating a differentiated experience often requires overhauls to the front and back office, as well as a renewed focus and commitment to employees and the customers they serve.
Mortgage lenders and servicers should act now, since the industry is at an inflection point that can leave slow movers behind. They should focus on alleviating five major hurdles that continue to inhibit progress.
1. Customer journey and employee experience remain subpar
Many customers expect a consistent engagement throughout the mortgage life cycle, and, in some cases, will rank lenders negatively for sporadic communication, even if the loan closed on time.4 Moreover, when choosing a lender, homebuyers place almost as much emphasis on word-of-mouth testimonials about service as they do on rates.5 As a result, mortgage lenders should iron out any kinks in the loan origination process, especially issues that aren’t immediately addressed with personalized outreach.
In particular, many mortgage providers tend to overlook a fundamental lever—the employee experience—which precludes them from delivering superior customer service. Loan officers stuck using outdated systems, for example, may not be able to follow customers through the mortgage process, and will fail to offer guidance or intervene when applicants hit a roadblock. Further, employees who are not familiar with newer technologies and digital tools may miss out on opportunities to form deeper relationships with customers, putting their brand loyalty and lifetime value at stake.
Customers’ lending experiences can be elevated through the development of a single digital platform that addresses all of their home purchasing needs with add-on services. For instance, an integrated mortgage “storefront” can offer self-service options for obtaining appraisals, insurance, etc., and online tools such as affordability calculators that can help make the homebuying and lending process feel more cohesive. Moreover, the platform could provide real-time updates when developments arise and keep borrowers informed of their loan status and progress toward key milestones. Further, lending platforms could display a single “internal” view that allows employees to provide seamless, integrated support through customers’ preferred communication channels, as indicated by data on how often they interact using phone, web and mobile devices.
That said, employee engagement should be an equal focus of all digitization efforts, with an aim to make technology as user-friendly as possible. Firms should strive to create “journey owners” who are accountable for the homebuying process, instead of producing narrowly focused product managers. These employees could focus on customer interactions and cross-selling opportunities and let technology handle routine tasks. In some cases, they may incentivize those relationships, such as by offering lower refinancing rates in exchange for opening a brokerage account. Similarly, when underwriting, employees can focus on complex loans or high-risk deals that require human judgment. In the end, it is important that each mortgage interaction reinforces an exceptional experience that breeds a “customer for life.”
2. Mortgage transformation efforts disconnected from the bank’s overarching digital transformation strategy
Digital initiatives often fall short due to a lack of clear, holistic strategy and a failure to communicate the overarching plan to internal stakeholders, business partners, third parties, and vendors. Quite often, many digital transformation efforts are undertaken at the local, business-unit, or functional level without properly aligning them with other units (such as payments or wealth management) and the broader organization. Further, while digital transformation may be a top agenda item for boards and executives, implementation often languishes at the middle management level. These supervisors tend to lose sight of digital transformation goals and may neglect to check for progress on goals or hold team members accountable for deficiencies.
The institution’s core values should promote behaviors conducive to digital transformation, including cross-functional collaboration. Further, leadership should convey what these efforts entail and sync their messages and specific measures of success with the technologists driving transformation initiatives. In addition, mortgage providers should embrace upgrades that have a compounding effect and celebrate efficiencies gained by thinking big but acting small. For example, efforts to use simple bots that check whether documents meet regulatory requirements should be encouraged and acknowledged for the value they provide by eliminating manual tasks. Also, managers should conduct regular “pulse checks” that help expose culture-related risks that might jeopardize the transformation agenda.
3. Silos persist across the mortgage life cycle, from front to back office
For many traditional mortgage banks, customer-facing systems have been the focus of digital transformation, while middle- and back-office processes have been relegated to the sidelines. A recent survey reveals just 1% of nationwide mortgage lenders consider their back offices to be fully digital.6 The disconnect can create a ripple effect of inefficiency, since errors in manual back-office tasks often create multiday delays that slow down each step of the origination process. Outdated infrastructure can also create blind spots that pit the mortgage institution against itself. One foreclosure group at a bank, for instance, often foreclosed on the properties that another department was trying to save.7 Further, data silos can make it difficult to mine insights such as web users’ likelihood of purchasing a home and “share-of-wallet” indicators that can gauge whether existing customers are spending money in other parts of the business, or soliciting services from the firm’s competitors.
It is only by digitizing the value chain end to end that traditional mortgage providers can create a seamless mesh between front-, middle- and back-office processes that allows data to be instantaneously shared with processing, underwriting, and closing teams. Standardized data flows typically contain fewer errors than those filled out by hand, and automatic upload of critical paperwork reduces the possibility that documents will fall through the cracks. Moreover, systems should be redesigned to accommodate the entire workflow, so that all tasks, up to and including qualification decisions, can be performed internally using easily accessible data. To do this, mortgage banks can migrate applications to the cloud and create a centralized “hub” that includes property data and reporting tools, document management services, customer relationship management software, and other technology assets. This platform can analyze performance metrics of third-party suppliers and display the typical timelines for loan approvals, loan certificate applications, and other tasks. If the processor sees that a supplier has fallen behind schedule, they can warn customers about the delay and share other options to proceed.
4. Managing demand volatility remains a challenge
Unlike fintech lenders, those traditional institutions that have not invested heavily in digital technology and automation find themselves constrained for capacity when it comes to accommodating increased demand. This is not a new challenge, but pandemic-induced demand highlighted that the problem continues to exist. A recent study reveals that a doubling of application volume adds six more days in loan processing time for traditional lenders than it does for fintechs.8 This can cause some firms to rush to fill the gaps. For example, last year, some large mortgage lenders had to reallocate resources and hire more staff, in addition to tightening eligibility criteria for new loans, to handle the flurry of incoming applications.9,10
Nearly every step in the mortgage life cycle, from application origination to underwriting, can be automated, reducing the need for manual intervention (see sidebar). Using technologies such as cloud, artificial intelligence (AI), and machine learning (ML) to fast-track the mortgage process can enable mortgage institutions to alleviate capacity constraints when demand peaks.
Automating the mortgage value chain
AI/ML is a powerhouse when it comes to automating the mortgage value chain. At present, most traditional mortgage providers have deployed mature technologies such as chatbots and optical character recognition (OCR) at scale, which has improved efficiency and reduced human error. The industry should consider improving its uptake of AI/ML-based models, especially in the case of credit underwriting, which has often lagged as a result of insufficient data on nonperforming loans.
The below graphic outlines a few use cases across the mortgage life cycle.
AI/ML-based models can identify target customers using multiple data sources to predict their conversion rate. Employees can also allocate their time and resources better by focusing on leads that are more likely to close on a loan.
|Origination and underwriting
Advanced AI/ML models can predict loan applicant behavior and flag potential at-risk loans. These models can also be triggered at later stages to detect fraud. In addition to FICO score, lenders can arrive at a custom credit score using multiple data points to assess borrowers’ creditworthiness.
AI/ML-based call prioritization models can recommend which borrowers to call and the best days of the month to send them reminders. Moreover, predictive models can help identify borrowers that are likely to switch to other providers for better rates or repayment terms.
Default and prepayment models can be trained to forecast loan performance by analyzing historical data on borrower behavior, loan characteristics and macroeconomic factors. These tools can indicate when portfolio managers should consider hedging strategies to mitigate emerging risks.
5. Proactive communication with regulators when introducing new solutions is often lacking
Innovation in the mortgage industry is often shaped by regulatory considerations. Consequently, when it comes to adopting new technology, mortgage institutions should err on the side of caution to avoid unwarranted risk. Take migration to the cloud, for instance. Many institutions should carefully weigh data security and privacy concerns with their legal and compliance teams. Similarly, the opaque nature of AI-based credit underwriting models is drawing more scrutiny from regulators due to its implications for customer protection and should receive heightened attention from risk departments. Furthermore, executives should acknowledge the need to follow regulators’ instructions to the letter for newly digitized practices (i.e., e-notes and e-closing). Concurrently, modernizing the compliance infrastructure and strengthening controls could be key to a successful digital transformation effort.
Regulators are embracing new technologies, and mortgage institutions can engage with regulators before and after piloting applications to drive more meaningful and effective innovation. Transforming processes that are least affected by regulation would be an ideal starting point. It is important that firms keep compliance as a priority in tech and data initiatives and bring risk managers into each step of planning and deployment processes.
Accelerate the digitization journey
As traditional mortgage banks begin their quest to accelerate digitization, they should focus on prioritizing the considerations outlined in this article. The end goal is to streamline the mortgage process, making it faster, more efficient and enjoyable for the customer. That said, there is no time better than now to embark on this transformation journey.
Homebuying continues to remain a fairly stressful process. It is important for organizations to reimagine customer and employee experience to grow and maintain market share in an increasingly competitive and evolving market. Mortgage institutions should consider digitizing end to end to drive efficiency and profitability. Learn more about digital transformation and our offerings on deloitte.com.
1 Nathan Stovall, “Coronavirus jumpstarts digital adoption at US banks,” S&P Global Market Intelligence, June 22, 2020.
2 ICE Mortgage Technology, April 2021 Origination Insight Report, https://static.elliemae.com/pdf/origination-insight-reports/ICE_OIR_APR2021.pdf.
3 Andreas Fuster, Matthew Plosser, Philipp Schnabl, and James Vickery, “The Role of Technology in Mortgage Lending,” National Bureau of Economic Research, April 2018.
4 “Record Low Interest Rates Mask Underlying Problems in Mortgage Industry, J.D. Power Finds,” J.D. Power, November 9, 2020.
5 Based on GLG interviews.
6 Bill Millar, “Turning Crisis Into Opportunity: Five Insights Into The Lending Industry’s Accelerating Pursuit Of The Digital Mortgage,” Forbes Insights provided by Freddie Mac, 2020.
7 Tom Groenfeldt, “Silos Can Be Costly In Banks,” Forbes, December 28, 2015.
8 Andreas Fuster, Matthew Plosser, Philipp Schnabl, and James Vickery, “The Role of Technology in Mortgage Lending”, National Bureau of Economic Research, April 2018.
9 Tara Siegel Bernard, “Interest Rates Are Low, but Loans Are Harder to Get. Here’s Why.” New York Times, August 13, 2020.
10 Leticia Miranda, “With mortgage rates at record lows, banks and brokers scramble to deal with refinancing rush,” NBC News, March 14, 2020.
The views expressed in this article are those of the author and not official statements by Deloitte or any of its affiliates or member firms.
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