Are Digital Technologies the Elixir to Resuscitate the Mortgage Industry?
The mortgage industry is inherently volatile, swayed by emergent regulations, heightened customer expectations, and global policy shifts. More than ever, it faces unique challenges amid the sea of opportunities unlocked by the accelerated use of digital media.
Deloitte’s report on the Covid-19 impact identified meeting faster turnarounds and the digital end-to-end mortgage origination process as the two key “customer experience” challenges for the long term (6-12 months). It pinpoints demand forecasting and improving digital capabilities for mortgage closures as critical “operational” challenges.
Rising competition is another ongoing challenge in the mortgage industry, keeping the different categories of lenders in a constant “zero-sum” game of survival. Lenders who adopted technology early on or were natively tech-savvy have gained market share by leveraging the ongoing digital revolution.
McKinsey insights reveal that non-depository originators have doubled their market share to 50% in the past decade, taking a significant lead over traditional banks. Additionally, digital mortgage players and direct-to-consumer originations constitute over 25% of the market.
Sustainment and growth in the highly volatile and competitive mortgage markets depend on the lenders’ ability to operate processes efficiently and adaptively while keeping costs low and customers happy. Additionally, complying with the toughening regulatory mandates is imperative for mortgage businesses’ success.
However, these conditions for transforming back-and-mid-office operations and front-office customer services remain unmet due to the lack of digitization and supportive technology infrastructure. The entrenched legacy infrastructure replete with manual, fragmented processes bogs down mortgage lenders in the transformative digital age led by intelligent technologies.
Lack of Digitization – Key Implications for Mortgage Lenders
High costs, low process efficiency, underwhelming customer experience, and lack of transparency and agility are among the main challenges for traditional mortgage lenders that operate manually in a non-digitized ecosystem. The following is an outline of these challenges with implications:
1. Exorbitant operating expenses
According to McKinsey, the origination cost per loan was $7000–$9000 in 2021. In addition, the average closing cost per loan, including the transfer taxes, amounted to approx. $6,905 in 2021 as per Business Insider. To quote the article from McKinsey, “many origination and servicing processes are still slow, manual, labor intensive, and fragmented—in other words, ripe for disruption.”
2. Prolonged closing cycle times
A benchmark study by FreddieMac informs that the overall closing cycle time in 2020 was 44 days. Similarly, the purchase and refinance closing cycle durations were 42 and 45 days, respectively. According to the McKinsey article cited earlier, customer satisfaction dips by 15% points if the application processing exceeds 10 days, a major drawback aside from the poor efficiency and high costs mentioned earlier.
3. Poor data transparency and responsiveness
Mortgage lenders need accurate and consistent data to verify borrowers’ financial records and creditworthiness. They also need to maintain accurate records to respond to customers’ queries and regulatory audits.
However, the prevailing physical and siloed recordkeeping practices affect data consistency and accuracy while impeding the lender’s agility to respond to auditors and customers. The hampered data transparency and agility can affect customer experience and result in regulatory risks. Additionally, without data-driven analytics, lenders might not understand market trends, customer preferences, optimal pricing, competitor strategies, and other vital business parameters.
Transforming the Mortgage Industry with Digital Technologies
Digital technologies, including intelligent automation, have broad applications in the mortgage industry. These technologies are transforming key business outcomes, namely customer experience, operational agility, process transparency, and data-driven business intelligence.
Here’s how digital nativity can revolutionize the mortgage industry:
1. Omnichannel lending experience
Customers expect a seamless and connected experience across touchpoints, including in-person, voice, mobile app, web portal, chat, email, paper, and kiosks, across their loan application journey.
An omnichannel approach to mortgage servicing can provide a significant advantage to lenders, considering that customers have grown increasingly digital savvy and prefer choices to apply for a loan while expecting a “cohesive” and platform-agnostic experience.
Research by McKinsey informs that approx. 60% of borrowers look forward to fully online mortgage applications, and about 30% of the prospects are comfortable with an online application combined with phone and in-person engagements.
A fully digitized ecosystem with integrated digital and physical touchpoints can help lenders serve a broader market while enabling superior customer experiences. Another benefit of omnichannel platforms is lead tracking and nurturing using tools such as online calculators, intelligent bots, and augmented reality across the touchpoints, irrespective of the entry point.
2. Robotic Process Automation (RPA)
RPA uses intelligent software bots to perform repetitive, rule-based, high-volume tasks such as transaction processing, automated responses, reconciliation, etc., with high accuracy, speed, and minimal supervision. These bots interact with other applications and IT systems at the UI level without needing system-level integration.
Once mapped to the system, the bots can automate manual, workflow-driven actions such as keyboard commands, mouse clicks, data entry, Excel data processing, Outlook use, etc. And, they can operate these processes 24x7 without limitations like fatigue, error, and clumsiness that affect manual labor.
RPA can automate mortgage operations, including loan origination, fraud detection, loan user assignment, billing reconciliation, etc. Combined with machine learning, RPA software can learn to perform more complex tasks that require near-human-level capabilities.
The key benefits of RPA for mortgage operations include increased process efficiency and accuracy, which substantially reduce the closing cycle time (faster service) and operating costs. Also, RPA helps lenders free up costly manual resources for strategic, high-value tasks.
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Here’s a case study that outlines the implementation of RPA for processing the service orders, resulting in ~ 15% improvement in the closing cycle times.
3. AI-powered document extraction and indexing
The mortgage industry relies on rigorous documentation of critical financial records, including personal information such as bank statements, pay stubs, credit history, tax returns, social security numbers, photo IDs, etc.
These records comprising physical printouts, handwritten notes, scanned images, PDFs, HTML files, and more, often exceed 500 pages per loan application. However, they remain siloed and incoherent due to the lack of digitization and manual recordkeeping.
AI-powered document extraction technology allows automatic scanning and text extraction from these disparate formats without manual efforts. For example, Optical Character Recognition (OCR) is a computer vision technique that uses machine learning (ML) algorithms to capture data from images and extract it in a machine-readable, editable, and searchable format. Likewise, AI-based document indexing uses ML and natural language processing (NLP) techniques to “sort” and organize the extracted information and metadata in a single, consistent format.
These intelligent automation solutions can offer up to 75% straight-through processing of documents using 125+ document extraction models. Additionally, they can be deployed 24x7 to deliver faster turnaround time with high accuracy and productivity at substantially low costs.
4. Smart contracts
Slow execution of contracts riddled with redundant middlemen and manual processes inflate mortgage costs and hamper efficiencies. Dependencies, lack of trust and transparency, and frauds are other common issues affecting mortgage operations, leading to poor customer experience and regulatory risks.
Smart contracts provide a solution by leveraging blockchain-based distributed ledgers that enable automated transactions through executing a code (digital contract stored as a program), once the agreement conditions are met.
Smart contracts can enable faster execution of loan agreements without human intervention and dependencies, saving immense costs and time. According to a research report by Capgemini Consulting, smart contracts can save $3-11 billion annually by reducing the origination costs for banks in the US and European markets. Further, digital technology enables transparency and security using a zero-trust framework.
5. Advanced data analytics
A mortgage player’s market survival and growth greatly depend on its ability to harvest insights from the colossus data generated with every single transaction across vast processes. There are several use cases of data analytics for the mortgage industry, chiefly in determining the market demand trends, customer insights, gaps in business strategy, optimal pricing and positioning, risks, etc.
For example, a data-informed pattern showing customers’ growing preference for a particular loan package or transaction method can help the mortgage company to tailor its offerings, accordingly. Likewise, advanced data analytics solutions can equip the mortgage industry with critical insights into a potential borrower’s credit repayment patterns, predicting the risks of default.
Digital Knowledge Operations™ (DKO™) – Digital Intelligence for Optimal Business Impact
The ocean of digital technologies is vast, and it is evolving rapidly with the advent of paradigms such as deep learning, blockchain, natural language processing, augmented reality, predictive analytics, etc.
Adopting these technologies requires a meticulous understanding of the mortgage lender’s business operations and needs. Additionally, practical and realistic implementation of the technology stack is necessary to generate optimal outcomes.
The Digital Knowledge Operations framework provides a holistic and evidence-led approach to transforming the efficiency, agility, and transparency of mortgage operations. It adopts a thoughtful, domain-led consultative approach with a practical and tailored implementation of intelligent technologies such as Robotic Process Automation and AI-powered document extraction to drive immediate business outcomes.
Want to know how DKO™ can help you leverage digital technologies and transform your mortgage business operations?
Write to us: info@anaptyss.com
B2B Marketing l Brand Management
2yvery insightful read, Harish.