Mortgage Due diligence in today’s rising rate environment: Why is it more important than ever?

Millions more Americans have recently been priced out of their dream of buying a home as mortgage rates surpassed 7% hitting their highest level since the early 2000s. The spike in rates, coupled with a lack of resale inventory and a tougher approval process, poses unprecedented challenges to home hunters today.

Naturally, mortgage lenders and servicers are in the line of fire too–for the first time since the 2008 economic collapse. The RMBS world is struggling to survive a sharp decline in both purchase and refinance (refi) volumes as 84% of homeowners are celebrating mortgage rates below 5 secured during the pandemic housing boom. This means a lot of homeowners are staying put in their current homes, dampening repeat buyer activity. Research reveals that for every one percentage point increase in mortgage rates, moving rates go down by 9%. Experts expect the ‘mortgage lock-in, — and the consequent decline in new listings (-35% in April 2023 vs 2016-19 period), to shape the housing market in the near term.

The rising rate environment naturally increases the risk of borrowers defaulting on their obligations. Unsurprisingly, a recent report by the Mortgage Bankers Association revealed that in a shocking reversal, lenders lost an average of $301 on each loan they originated in 2022, down from an average profit of $2,339 per loan in 2021.

With some analysts predicting the rate to climb further, the need for lender scrutiny related to sellers and warehouse clients, thorough diligence requirements are at an all-time high today.

Powering due diligence with the right solutions

The rising rate environment is driving a shift away from conventional loans in favor of HELOCs (home equity line of credit) and closed end seconds, The GSE’s are forcing buy backs at a time of distress for many lenders. In this dynamic and uncertain environment, originators, conduits, and investors need the assurance of well-tested solutions and proven tools to reduce risks, improve quality, and ensure compliance:

• Precise pre-and post-closing quality control solutions (across newly originated loans as well as seasoned assets) to maximize profitability.
  These solutions run the gamut from pre- and post-funding quality control to securitization, asset, collateral, compliance, and fraud reviews.
• Stringent, timely litigation and fraud reviews to power the commercial lending and investment strategy.
  Whether it’s performing/non-performing loan reviews, CMBS loan origination underwriting, pre- and post-origination credit review, or lender operational/servicing review, using structured methodologies, thorough analysis, and powerful tools is key to success.

• Operational risk management solutions to mitigate risks in a volatile rate environment.
  Acting as the first line of defense, these solutions include counterparty risk assessments; process improvements; QC and compliance evaluation; recommendations for improvement, and GSE compliance audits.

• Servicing due diligence testing solutions to keep pace with regulatory demands and the growing shift towards higher risk loans.
  These span three core areas (i) Operational Reviews such as loan boarding, default management and servicing compliance; (ii) Traditional Servicing across transfers, payment processing, customer inquiries and credit reporting; (iii) Default Servicing in compliance with FDCPA, TILA and RESPA for collections, loss mitigation, and foreclosures.

Automation for better outcomes

While deploying the right solutions is an important first step, leveraging automation, RPA, and AI to rapidly recognize and process vast amounts of structured and unstructured data is equally important. Blockchain technology also holds significant potential for lenders. It enables them to access highly efficient financial distribution and execution networks; and create shared ecosystems with their customers, partners, suppliers, and regulators. By establishing seamless and secure coordination between agents and intermediaries, it reduces operational costs and fees.

Mortgage originators that still follow traditional processes across the loan lifecycle run the risk of eroding profitability amid today’s ever-tightening regulatory landscape and unpredictable market conditions. Owing to low processor and underwriter productivity (10-14 mortgages are typically closed per month by 1 FTE, requiring 4-5 underwriter touches per file), traditional mortgage operating models incur between USD $7,000-9,000 origination costs per loan, with upwards of 45 days needed to obtain an initial or refi mortgage.

State-of-the-art mortgage technology can significantly reduce the cycle time and costs by digitalizing and automating the entire loan cycle, including due diligence, for greater transparency and data control.  Besides the clear benefits mortgage technology offers to lenders in the form of greater control over data and processes, information security and compliance, real-time decision making, and deal clarity, customers are welcoming the modern technology. FinTech’s and banks that are leveraging mortgage technology report 20-30% higher customer satisfaction scores with Gen X and Gen Y consumers as opposed to traditional lenders.

Navigating the evolving environment

Driven by higher regulatory scrutiny and the need for rigorous due diligence, many forward-looking lenders are turning to experienced outsourcing partners that bring a strong digital focus and specialized services. Doing so places them at a distinct advantage in today’s tough market, empowering them to cost-effectively drive quality at scale for sustained competitive advantages.

Opus CMC provides a full suite of services and tools that helps capital markets participants navigate the complex financial and regulatory environment. Our comprehensive menu of due diligence, risk management, valuation, title, and consulting solutions offer end-to-end support, enabling our partners to minimize risk and maximize profitability.

To learn more about how to minimize your risks in this challenging environment and take advantage of the opportunities in non-QM lending, contact us today!