PERSON OF THE WEEK: Automated asset and income verification services are proving to be a God-send for the mortgage industry. Not only do these automated services greatly speed up the mortgage application and underwriting process, they also deliver more current and accurate borrower information and help reduce mortgage fraud.
Because automated verification services electronically verify borrower income and liquid asset data through integration with a borrower's bank accounts, it would seem that the industry is fast-approaching a day when it will be almost impossible for a borrower to falsify or improperly report their personal information. In theory, misrepresentation of personal data in loan applications should soon be a thing of the past, but as we've seen, there are other ways in which borrowers can present false information and fraudulently take out loans (for example, occupancy fraud and property condition fraud are types that are difficult to address through technology such as auto-verification).
So, just how much has automated income/asset verification helped in terms of stomping out fraudulence and misrepresentation in the mortgage application and underwriting process? To find out, MortgageOrb recently interviewed Greg Holmes, managing partner at Credit Plus Inc., a third-party verifications company serving the mortgage industry.
Q: Would you say that the recent advancements in automated income/asset verification have made it nearly impossible for application fraud to occur in the area of income and assets? Which types of application fraud are most likely to rise these days and why?
Holmes: There's no doubt that the increased use of automated verification systems has helped mortgage companies dramatically reduce risk and prevent fraud early in the process. I would argue that it has never been more difficult to commit income or asset-related fraud. While that is certainly something to celebrate, we must continue to be vigilant – individuals who are committed to perpetrating mortgage fraud will always be working to find flaws and gaps in our systems, procedures and policies.
Despite the gains we've made as an industry, we still face challenges and threats. In particular, we've seen the difficulty in verifying income/assets of foreign nationals, due to the unreliable nature of financial systems and government systems in unstable countries.
Another area of vulnerability is the advent of Millennial buyers, due to their tech-savviness and inconsistent job history. A potential borrower who has used digital systems since childhood is intimately familiar with them and, if determined, to commit fraud is a possible threat.
Additionally, a Linkedin survey found that Millennials may change jobs twice as much in their first decade out of college as the previous generation did. That's even more pronounced in high-tech and emerging industries (including "gig" economy jobs), and income verification becomes more difficult as borrowers hop from job to job.
Finally, the industry-wide shift from refinance to purchase activity is likely a driver of application-related fraud, as there is typically more motivation to commit fraud in a purchase transaction. In particular, lenders are fighting against a significant increase in income falsification – up 22% over the past year, according to CoreLogic.
Fraudulent borrowers have sophisticated, new online resources that previous generations did not. Services that falsify pay stubs and even answer phone calls from fictitious companies are, unfortunately, widely available. Smart lenders are ensuring their loan officers and compliance/risk teams are keeping a close eye on current fraud schemes and trends as they evolve.
Q: How do you see automated income/asset verification (and also artificial intelligence) changing the mortgage process in the years to come? How will lenders differentiate themselves, technologically? Do see the possibility of "homogenization" of the online mortgage market due to all lenders having the same technical capabilities?
Holmes: One of the biggest advantages of the revolution in automation is the ability companies now have to better align and maximize the efficiency of our workforce. By utilizing bots and applying new AI technologies to existing processes and systems, we can move employees away from repetitive functions and rededicate our "human" capital into more valuable and productive areas.
I have no doubt that this trend will continue as AI systems become ever-more capable of taking on decisioning roles, which will dramatically improve the customer experience. In an age where borrowers (particularly Millennials) take for granted the ability to order virtually any consumer product with the push of a button and have it arrive the next day, mortgage lenders need to take advantage of every opportunity to ease and streamline the complicated mortgage process.
Will this trend lead to homogenization in lending? Yes and no. I do think that as lenders continue to grapple with multi-state compliance challenges, the improvements in automation will begin to make back-end processes very similar in nature. That means that the differentiating factor for LOs and their lenders will be on the front end, with the battle being waged in product diversity, marketing tactics, lead generation systems and user experience.
Most consumers will experience their lender primarily through their mobile site or app, and lenders can ill-afford to neglect investing in this area.
Q: The housing market is in a strange spot right now: On the one hand, we have a strong economy with low unemployment and rising wages, plus mortgage rates have stabilized in the past two moths. And yet, lack of inventory and high home prices are almost completely stagnating the market. What do you see as being the main challenges in getting the residential housing market moving again? If it was up to you to fix the housing and mortgage markets, what would you prioritize?
Holmes: The mortgage market is still recovering from the black eye it received during the financial crisis and its aftermath. The general public has some trust issues with the mortgage industry, and specifically, our main borrower cohort – Millennials – have the dual challenge of having watched parents go through the trauma of the crisis and being weighed down by student debt.
A recent survey shows that 80% of Millennials don't own their home, and of those, 83% note student debt as an impediment to homeownership. Policy makers must begin to address the high cost of education or more borrowers will continue to be forced to delay homeownership.
In order to heal that trust, it's crucial to meet the needs of today's borrowers. They want ease of use, transparency and value. If we continue to get back to those values, Millennials will reward us with their trust. As for their financial obstacles, lenders must meet that need with flexible products that reflect their realities, including "gig economy" jobs.
The economy is indeed strong right now, despite the ups-and-downs of the stock market over the past few months. Rising rates are typically a sign of a healthy economy, but since rates have been historically low dating back nearly 20 years, this generation of borrowers doesn't have a perspective that includes interest rates north of 5% or 6%.
One way that policymakers can help the housing market is to prioritize reform of the GSEs. When we have some long-term stability with Fannie Mae and Freddie Mac, we might even see a recapitalized version act more aggressively with their products and give the market a boost.
A revitalized Fannie and Freddie would spur more competition, which would lead to more appealing loan terms and rates in the broader housing market – something all borrowers could get behind.