The mortgage industry in the US has undergone a significant transformation post the global financial crisis. As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Consumer Financial Protection Bureau (CFPB) was formed in 2011. The CFPB has been very active in rule-making since then. One of the landmark events was the coming into effect of the changes to the Truth in Lending Act on 10th January 2014. The changes included the Ability-to-Repay and Qualified Mortgage Standards rules, which are expected to bring uniformity in the products offered by various lenders to borrowers.
Government-sponsored enterprise (GSE) reform
A majority of the mortgage loans today are guaranteed by GSEs Fannie Mae and Freddie Mac. The various policy announcements clearly indicate that there is clear consensus among authorities about reforming GSEs, reducing the role of government in guaranteeing mortgages and bringing private players back in the market. Work is already underway on building a new Common Securitization Platform (CSP) that will replace the two disparate platforms from Fannie and Freddie. This is another major event that is being tracked closely by the mortgage industry since it will require them to make significant changes to mortgage securitization and investor accounting practices.
Shift in originations from re-finance to purchase
The originations sector of mortgage lending faces headwinds after enjoying years of strong growth led by re-financing due to low interest rates. With rates expected to rise, lenders need to shift their focus to purchase loans, which require different sales techniques as compared to re-finance. In this challenging scenario, mortgage companies will need to show innovation to achieve growth. The role of IT will be a differentiator as newer channels, such as the Internet and mobile, will be critical to increase volumes and reduce cycle time to close a loan. As we see an increase in the millennial generation as first time buyers, lenders will need to look at these channels, which will have higher adoption rates with this demographic. The Qualified Mortgage rule from CFPB, which took effect in January 2014, and the soon to be announced Know Before You Owe rule from CFPB, scheduled to come into effect on August 2015 makes it even more critical for mortgage lenders to build the right processes and systems for originating and closing mortgage loans in compliance.
Choosing the right technology and business partner for mortgage lenders is now more critical than ever given the significant challenges expected in the future. We are already witnessing churn in the mortgage industry, leading to some companies gaining an edge over the rest of the pack by being more agile in responding to the changes in the market and leveraging innovative technology and business solutions to differentiate themselves.