Automating Mortgage Lending for Banks
Newkirk, Kristine M., Independent Banker
Security Bank in Coos Bay, Ore., last winter began using an automated underwriting system, called Loan Prospector, from Freddie Mac. Within six months, the bank increased the volume of mortgage loan originations it normally handles by almost 50 percent.
That growth has made the $168 million-asset rural bank the most active mortgage originator in its market.
Loan Prospector has significantly reduced the time, costs and hassles of mortgage financing at Security Bank, says Lyn Paris, the bank's vice president and assistant manager of real estate. Where it took Security Bank four to six weeks to process a secondary market mortgage, it now takes about two to three weeks. Some mortgages have been settled by the bank in three days.
Moreover, flexible secondary market criteria applied by Loan Prospector allow Security Bank to originate loans that would not have previously qualified for sale. "Freddie Mac, through the software package, has changed their criteria from the old-school standard to one of common sense," Paris says.
The traditional debt-to-income ratios of 28 percent to 36 percent no longer eliminate a borrower whose ratios exceed these limits. As a result, Security Bank has originated some loans through Loan Prospector with debt ratios in the 50 to 60 percent range, Paris says.
Freddie Mac and its competor, Fannie Mae, are government-sponsored enterprises. They purchase mortgages from banks, trust companies and other government and nongovernment institutions to help distribute funds for home mortgages. After purchasing mortgages, Freddie Mac and Fannie Mae bundle those mortgages and sell them as investments in the secondary market.
Freddie Mac's formal name is Federal Home Loan Mortgage Corp.; Fannie Mae's formal name is Federal National Mortgage Association.
Loan Prospector, and Fannie Mae's comparable product Desktop Underwriter, saves time in the underwriting process by providing a point-of-sale credit decision and accelerating the appraisal process. That time savings, according to Freddie Mac and Fannie Mae, can directly translate into cost savings for mortgage lenders.
With more time available to loan officers, more mortgages can be processed and originated. The bank's increased productivity can lower its origination costs (as costs are spread over a higher volume of loans) and generate higher profits.
Mortgage scoring makes the pointof-sale credit decision possible. Credit scoring models are designed to give a rapid, consistent and statistically derived assessment of an applicant's creditworthiness. Through mortgage scoring, the underwriting software makes a point-of-sale decision within minutes of whether to accept a mortgage or pass it on for further evaluation by a loan underwriter.
And because the mortgage-scoring equation is forgiving to borrowers, loans that would be rejected through a more traditional evaluation process may be approved with statistical modeling. As a result, fewer people are disqualified for mortgage financing by having a few minor credit blemishes.
Loan Prospector, for example, accepted a 20-year refinancing with debt-to-income ratios of 44 to 55 percent, based on one borrower's excellent credit history and on the nature of the mortgage product. Another borrower with a debt ratio of 35 to 43 percent, a salary of $28,000 and a history of four late credit card payments was also approved for financing on a 30-year fixed mortgage because of otherwise responsible use of credit.
Once mortgages are approved with either Loan Prospector or Desktop Underwriter, they no longer require complete verification of all areas of the application. …