This piece originally appeared in the June 2024 edition of MortgagePoint magazine, online now.
Joseph M. Marshall, a Native American historian and author, once observed, “Life is a circle. The end of one journey is the beginning of the next.” Every homeowner can identify with this idea, as buying or refinancing their home signifies a new chapter in life. And of course, mortgage bankers and credit unions play a pivotal role in facilitating this journey.
But that work is not easy. For lenders, navigating the transition from selling loans to servicing them involves juggling diverse functions, expertise, and systems, often creating a disjointed experience for the consumer. However, the advent of new digital technologies is creating change by seamlessly connecting these disparate elements, offering a smoother, more integrated experience for both lenders and homeowners.
Dissecting the Problem
Independent mortgage banks (IMBs) and credit unions that both originate and service loans face a difficult and rapidly shifting environment in which both loan production costs and servicing costs are rising. According to the most recent data from the Mortgage Bankers Association (MBA), IMBs saw a pre-tax net loss of $1,015 on every new loan origination in the third quarter of 2023, nearly double the $534 average loss per loan in the second quarter of last year. Meanwhile, servicing net financial income fell from $94 per loan to $90 between the second and third quarter of 2023.
This decline in servicing income is particularly concerning since many institutions have relied on servicing profits to counteract fewer originations. With interest rates set to drop, however, the future looks even more uncertain. Lower rates will mean more homeowners will be inclined to refinance, leading to early payoffs. Meanwhile, the recent uptick in early-stage loan delinquencies adds another layer of complexity, as assisting distressed borrowers can be costly as well.
Compounding matters even further is the traditional divide that exists between a lender’s origination and servicing operations. One of the major reasons for this is that most banks and credit unions rely on legacy technologies, and both processes operate independently of each other. And because these products were built before the emergence of cloud-based technology, they are also poorly integrated with third-party service providers—if they are integrated at all.
While it is true that some LOS providers have added servicing functionality to their products and some legacy servicing platforms have migrated to the cloud, inconsistencies still reign supreme. Transitioning decades-old, on-premises-based software into a more flexible cloud environment takes an extraordinary amount of time and resources. More critically, these technologies have been inadequate in controlling loan production or servicing costs, nor have they effectively improved borrower retention rates.
With the housing market shifting once again, these challenges underscore the need for a more modern approach to blending both loan origination and servicing functions while enhancing the ability to build customers for life. The question is, how?
Unlocking Potential Through the Cloud
Fortunately, the advent of cloud-based digital technology is reshaping how mortgage banks and credit unions approach this challenge. In fact, it is now possible for lenders to access combined digital LOS and servicing technology through the same cloud environment, which can help streamline their operations with minimal IT or other resource investments.
At the core of this transformation is the ability of mortgage bankers to adopt a modern, digital lending platform built within the cloud. Such platforms revolutionize the loan origination process, from the point of sale (POS) to closing, by automating a range of mundane, repeatable tasks that were traditionally handled by loan officers, loan processors, and underwriters. The flexibility of cloud-based technology means that mortgage bankers can tailor the degree of automation to suit their specific needs, regardless of loan channel or their area of origination.
And after a loan closes, the journey does not end. Lenders can now deploy digital servicing platforms that can be easily integrated with the LOS and other third parties within the same cloud ecosystem. This enables them to smoothly onboard newly originated loans onto their digital servicing platform, ensuring a seamless flow of data capable of streamlining the entire mortgage lifecycle. More powerfully, mortgage bankers and credit unions can deploy a comprehensive digital strategy that incorporates every stage of the customer journey.
The main ingredient behind this transformation is leveraging cloud-native architecture. With cloud-based systems, all POS, underwriting, and servicing software is accessible via all digital devices. They are infinitely scalable as well, allowing lenders to better adjust to the fluctuating workloads that are a hallmark of our industry. Ultimately, this enables lenders to allocate their staff more dynamically and cost-effectively, which is crucial in balancing resources between the origination and servicing sides of their organization.
Digital access to these systems and platforms offers another notable advantage. These systems can help break down geographic barriers by enabling lenders and their teams to operate remotely while still ensuring compliance with regulatory guidelines and investor requirements.
Sales and customer service teams can access these systems from any location, at any time, to ensure critical decisions are made quickly, while maintaining continuous communication with borrowers.
In essence, new cloud-built digital technology represents a paradigm shift in the capabilities mortgage banks and credit unions must operate their businesses. By integrating origination and servicing into a single, cloud-based ecosystem, these technologies offer mortgage lenders a streamlined, efficient, and flexible approach that aligns with a fluctuating housing market and increasing consumer demands for speed and convenience. The result is not just the ability to do things faster, but doing them smarter, with greater cohesion across a mortgage lender’s entire operation.
Bridging the Servicing Gap
While digital lending platforms have been available for some time, the emergence of cloud-based digital servicing technology is relatively new. By leveraging digital platforms for both origination and servicing, lenders can finally create a seamless bridge between these two sides of their business.
Digital servicing platforms built and delivered in the cloud also offer additional benefits, especially when it comes to lowering the costs of servicing loans and improving borrower retention rates. For example, one of the most significant advantages of cloud-built digital servicing technology is its ability to automate workflows in key servicing processes such as collecting payments, managing escrow accounts, and handling loan transfers, reconciliations, and reporting. New digital servicing platforms also include advanced document management tools that are pivotal in reducing manual costs associated with storing, organizing, and retrieving loan documents, and they improve overall productivity.
Handling all of these servicing functions using only a user-friendly, browser-based interface is extraordinarily easy. Moreover, new digital servicing platforms include white-labeled portals for homeowners to use when submitting payments, looking up their loan and escrow information, downloading tax statements, and requesting assistance. This enables lenders to tailor their customers’ experience to align with their unique branding, which fosters a sense of familiarity and trust, and creates deeper engagements with borrowers—who are more likely to stick with that lender for their future financing needs.
Furthermore, new digital servicing platforms are equipped with essential tools for investor reporting and default management. They automate compliance checks and handle intricate processes such as year-end reporting, and generate necessary documents (like 1099s) with ease. These features, too, are crucial for ensuring compliance with regulatory and investor requirements and quickly adapting to evolving loss mitigation guidelines.
Finally, there is the ease of adoption, particularly when the cloud-built digital servicing technology comes from a lender’s existing digital mortgage platform provider. This ensures a smooth implementation process and a more cohesive, integrated digital ecosystem that is vital for onboarding mortgages with greater accuracy and speed.
Why Timing Is Ideal
The timing for adopting such technologies could not be more critical. As interest rates decrease, lenders are soon likely to face a surge in refinance demand, which not only provides an opportunity for generating immediate income but also an opportunity to build stronger customer relationships. In such an environment, cloud-native solutions that bridge the gap between loan origination and servicing can provide a crucial lifeline that enables community lenders to adapt more fluidly to pending market shifts and scale their operations with greater efficiency while keeping costs in check.
With the MBA and other housing market experts projecting delinquencies to continue rising, lenders that also handle loan servicing need to brace for these challenges. Because cloud-based origination and servicing technologies are not static, lenders that adopt them will be better able to evolve with the market. In fact, cloud-based digital lending platforms have already helped mortgage banks and credit unions swiftly launch new business lines, such as home equity loans, so they can better respond to shifting consumer needs.
Just as one journey leads to the next in the circle of life, lenders that adopt digital origination and servicing technology into the same cloud ecosystem will be better positioned to serve borrowers moving onto the next chapter of their life story—and take them wherever that story may lead.
