The following is an excerpt from Chapter 8 of Volume II of The Mortgage Professional's Handbook:
"Human Spackle Syndrome"
By Jonathan H. Corr, President and CEO, Ellie Mae
As the mortgage industry continued to build new technologies to keep pace with new compliance requirements, something interesting began happen. Every year, there were more new rules and regulations took place affecting lenders—not just from the CFPB, but from other federal and state agencies, even city and county ordinances involving how properties were to be maintained and conveyed. In the wake of the housing crisis, lenders first had to contend with a soaring number of buybacks and repurchase requests from investors and the GSEs. Now they had one rule after another to worry about. Meanwhile, fewer Americans were getting mortgages, many of them too jittery after watching the housing market go up in flames, others unable to quality due to stricter lending requirements. Mortgage origination volume plummeted. The lenders that had survived the crash were making hardly anything, so they had no money to waste. In the midst of all this, some lenders developed a level of concern about fines and audits that approached paranoia.
They were right to worry. In the CFPB’s short history, the agency has demonstrated little patience for lenders that choose not to play by the rules. Over a recent one-year period, the agency has tagged and fined numerous mortgage lenders and servicers for redlining, failing to honor loan modifications, running deceptive ads, violating loan officer compensation rules, conducting discriminatory mortgage pricing, and steering borrowers into costlier mortgages that they didn’t need. In one particular case involving a lender accused of illegally referring borrowers to mortgage insurers in exchange for kickbacks, the lender filed an appeal after a judge ordered it to pay $6.4 million in damages. The CFPB raised the lender's fine to $109 million.
Driven by such concerns, many lenders got very, very careful about the underwriting process and began to scrutinize every detail in a loan file. Yet rather than utilize the technologies that were already available to track, review and red-flag incomplete or missing data, saving time and money, they went on a massive hiring spree. More inexplicably, some lenders actually invested in technology, yet did the same thing—they hired more people.
This was great news for all the mortgage professionals who lost their jobs in the housing crash. However, it did little for lenders when it came to their bottom lines. Between 2009, according to the Mortgage Bankers Association, pre-loan costs doubled between the years 2009 to 2015, rising from roughly $3,500 to $7,000. Again, the goal may have been respectable—lenders needed to serve the needs of investors or regulators or else their businesses would face heavy losses and penalties. It also needs to be pointed out that, even when lenders leverage automation to maintain compliance, there is still value in having human expertise overseeing the process. But is there any proof that automation can actually lower a lender’s compliance costs?
I had suspected that lenders would save money when they applied automation to the task of scanning loan documents for errors and incomplete or inconsistent data, just as they save money by using Desktop Underwriter or any other automated process. I wasn’t sure we could put a dollar amount on it, however. With many forms of technology, analyzing the exact ROI can be difficult, but particularly difficult given the inherent complexities of the mortgage business and its dozens of moving pieces. So many factors were bound to come to play, including the differences between how one lender does business compared to another.
Ultimately, we felt that identifying the value behind automation in dollars and cents would help make the case for its adoption, which would be good for the entire industry. So we asked MarketWise Advisors LLC, a leading mortgage consulting firm based in Florida, to measure the potential ROI generated by Encompass, our all-in-one mortgage management solution. MarketWise chose to look at the activities of five different lenders, each of which used Ellie Mae’s solutions in different ways. The five lenders had 2014 origination volumes that ranged between $269 million and $1.32 billion, and the number of Encompass users at each one varied from 61 users to 410. The questions were simple: Did an all-in-one solution reduce origination costs? Did it improve profits? And did it help lenders raise the quality of their loans?
MarketWise conducted extensive surveys with each lender and learned how they used Encompass. Because it is not a single system but a suite of solutions under one platform, understanding our clients’ usage was important to the study. However, a common thread among all five lenders was that each used Encompass Compliance Service. This is a service inside Encompass that runs automated compliance checks on every loan in a lender’s system.
In the end, MarketWise found that the five lenders saw an average savings of $970.14 per loan, including an average savings of $446.64 in origination costs. Put another way, the lenders in the study were achieving a total average savings that was 14 percent less expensive than the current average cost to produce a loan. To be clear, this was not a full-scale study of the entire mortgage industry’s use of automation, only one provider and five lenders. But at least we were able to confirm that automation saves money.
In spite of such evidence, many lenders are continuing to pile on loan processes and underwriters, believing that this is the key to avoiding hefty fines and jail time. The reality is that they are actually increasing these risks by clinging to manual processes, which amplify the likelihood that mistakes will be made. In fact, in some ways, the mortgage industry went from a world in which electronic, paperless mortgages seemed like a viable, near-future reality 15 years ago to one that is now filled with what I call “human spackle.”
Calling human beings “spackle” may sound harsh, but that is the basic function they serve. Spackle doesn’t fix anything; it’s used for patching holes. Adding bodies is simply adding manual processes, and when you have more manual processes, you invariably have more mistakes.
Once again, I don’t believe technology holds all the answers. In fact, Ellie Mae is not only a technology provider. We also provide consulting services through AllRegs to mortgage lenders, and have made it a goal to build the best and brightest team of mortgage compliance experts in the industry. In a post-Dodd-Frank era, we wanted our clients to have access to the education and resources they need to conduct business safely. But not every mortgage lender can build a top-notch compliance team, so they add warm bodies. As a result, there are more underwriters working on loan files today, more processors, more back office staff and more “double-checkers” in our industry than ever.
But the worse thing about human spackle is that it’s not helping lenders with the biggest regulatory challenge to hit the industry in many years.
Read the rest of this chapter in The Mortgage Professional's Handbook!
Jonathan H. Corr, President & CEO of Ellie Mae, has served as the Company’s chief executive officer since February 2015 and president since February 2013. Mr. Corr has also served as a member of Ellie Mae’s Board of Directors since February 2015. Previously, Mr. Corr served as the Company’s chief operating officer from November 2011 to February 2015, executive vice president and chief strategy officer from November 2009 to November 2011, as chief strategy officer from August 2005 to November 2009 and as the Company’s senior vice president of product management from October 2002 to August 2005.
Prior to joining the Company, Mr. Corr held executive and management positions at PeopleSoft, Inc., KANA, BroadBase Software, and Netscape Communications. Mr. Corr holds a Bachelor of Science degree in Engineering from Columbia University and a Master of Business Administration degree from Stanford University.