The Shifting Digital Tides of Mortgage Underwriting- Part 1
Underwriting is the backbone of mortgage lending and will always be a necessity. While its importance remains undiminished throughout housing market cycles (perhaps because of the nuances of market cycles), underwriting has changed quite a bit in recent years, in part due to external market forces, health crises, changing customer demands, and macroeconomic forces. Overlay these characteristics with rapid innovation in mortgage technology, you have a new breed of underwriting: one that is intermingled with some of the latest and greatest technologies, from loan decisioning tools to breakthroughs in machine learning, RPA, and intelligent automation. Although there is still a need for greater modernization in mortgage, the underwriting function has advanced significantly. Let’s explore.
Changing Tides and Digital Tentacles
Only a decade ago, loan underwriting decisions were primarily based on an evaluation by underwriting professionals who spent countless hours analyzing hard copies of borrower documents and making a risk evaluation and approval decision in the context of the borrower’s credit, assets, income, and collateral. While the fundamentals of mortgage underwriting are still the same as they were in the past, underwriters can now access borrower information more quickly by pulling electronic documents from Point of Sale (POS) Systems and outside technology providers. Further, today’s lenders are adopting automated underwriting and loan decisioning systems that automatically process documents, extract data, and even analyze that information to reach a final decision. While we can’t say digital change “happened fast” in the field of mortgage underwriting, we can at least say change happened and that it happened in what some might call a “stubbornly traditional” industry.
What motivated the change? Can we pinpoint the exact moment when the mortgage underwriting process was embraced by the quickly spreading tentacles of the digital revolution? When Fannie Mae’s “Custom Desktop Underwriter” was first introduced in 2004, the concept of underwriting systems was somewhat new but in the following years several more underwriting “systems” entered the market. However, system adoption was slow and trust for new innovations was not easily won. A decade (or two) would pass before many lenders would even consider a tech-enabled underwriting approach. Perhaps it was concern for system sophistication or innovation readiness. Or perhaps the 2008 housing crisis led to general distrust for all things underwriting. More probable, the mortgage community was idling in the status quo; shying away from any change that could disrupt operational stability or add risk and cost. No one wants to be the first to dip their toes into the murky water of new technologies.
Supercharging Digital Adoption
While we can’t pinpoint a deliberate movement to embrace RPA, ML, automated decisioning and other underwriting technologies, there is reason to believe that the low-rate environment of recent years, combined with the Coronavirus pandemic contributed to high-volume lending. This, in turn, catalyzed interest in digital transformation, with automated decisioning among one of many transformation initiatives. In some cases, workers moved to the suburbs when they realized they were no longer reliant on their commute. In other instances, school closures and working from home made people realize their smaller apartments and homes were not adequate. And, as volumes increased and rates remained low, the pursuit of mortgage underwriting talent became highly competitive. In fact, underwriters could “name their price” leaving lenders paying astronomical salaries to ensure they had the staff to keep up with loan demand. After emerging from the pandemic and watching rates creep up, lender layoffs and staff cuts occurred and the exhausting cycle of “hire/fire” began again.
Of course, well before the pandemic, lenders were on path to digital transformation, but the interest in leveraging automation in underwriting and loan decisioning most certainly made the top charts of mortgage industry chatter over the past year or two. If you enjoy self-punishment, you might find it amusing to consider whether mortgage lenders would have been better prepared for such drastic volume shifts if they had pursued automation and technology for underwriting earlier. There were undoubtedly reasons to accelerate digital transformation going back 10, even 20, years.
In part two of this blog series, we will explore three other factors that have contributed to the increased interest and adoption of automated loan decisioning and underwriting systems.