By this fall, national mortgage lenders will be able to slash the time it takes to approve certain kinds of mortgage loans to as little as five days. The savings in production costs will be passed along to consumers in the form of lower fees, lenders say.
“Any money we save goes into better pricing. It’s a very, very competitive business,” said Mark Faris, executive vice president of Norwest Mortgage Inc. in Minneapolis.
What’s behind this change?
The Federal Home Loan Mortgage Corp., or Freddie Mac, in McLean, Va., a secondary market institution which packages and sells mortgages for investment as well as for its own portfolio, expects to go national with a new loan information system by early next year.
The new automation underwriting system (AUS) gives local lenders an instant yes or no decision about their loans. The total loan process can conceivably be reduced to five days.
“At the time when this is perfected, and I don’t think it’s that far off, you could literally walk into a lender’s office with a month’s paycheck stubs and two months’ deposit verification, and a property address, and identification of some sort, and 15 minutes later you’d know that your loan’s approved,” said Curt Eaton, vice president, secondary marketing with Directors Mortgage Loan Corp. in Riverside, Calif.
Of course, computers have often been heralded as the solution to a too-slow real estate finance system, but because Freddie Mac funds loans to one of every six homes in the country, its announcements drew attention.
The financial giant is about to roll out the AUS on a national basis, perhaps as early as January 1995. Lenders that have piloted the system say it works, and has saved their customers time and money.
Assuming that Freddie Mac also reduces documentation requirements as part of AUS, that could speed up the loan process substantially, lenders said.
AUS links lenders not only with Freddie Mac, but also with a major mortgage insurer, Mortgage Guaranty Insurance Corp. of Milwaukee, via computer technology that gives an instant evaluation of a mortgage loan package.
Adding the insurance element reduces the down payment requirements.
Loans must conform to Freddie Mac standards, or currently a $203,150 limit with down payments as low as 5 percent. Both ARMs and fixed-rate programs are acceptable; loan offerings vary by lender. Jumbo loans, those over the limit, are currently not allowed.
The local lender still makes the final decision. The AUS adds consistency to decision-making and speeds up final loan approval dramatically. Indeed, lenders participating in the pilot program reported they reduced loan processing time by as much as 20-30 days.
How was this possible? In several ways: expediting the loan process through a new computer model that predicts loan performance for lenders, reducing the number of people involved in loan processing and reducing the paperwork required from the customer/borrower.
“There will be a net reduction in the cost of the loan, a 20 percent to 50 percent savings to lenders,” predicted Peter Maselli, vice president of automated underwriting at Freddie Mac.
The cost of the computer systems will be offset by more efficient loan production and reduced costs for lenders’ backroom operations.
“It appears AUS will give us a significant reduction in cost,” said Donna Van Osten, vice president of underwriting at PHH US Mortgage Corp. in Mt. Laurel, N.J. PHH is about to start a nationwide pilot version of AUS.
Several of the participating lenders expect to see more qualified buyers in the market as a result of AUS. Said James Taylor, Midland Financial Mortgages in Des Moines: “We’re trying to open up the whole spectrum of financing.”
Midland, which serves the Chicago area, will begin making the fast-track loans in October.
“You’re taking out the element of human error. And I think that will be to the advantage of the consumer,” Eaton said.
In the old days, a borrower applied for a loan. Then, the lender’s staff of underwriters would manually do calculations, and they’d review the credit report and make a judgment.
Even a small late payment in the applicant’s credit report could stop the process cold while the borrower repaired his or her credit, a process that could take weeks.
Now the loan officer, armed with a laptop computer and a modem linked directly to the Freddie Mac system, can get a loan decision immediately, and from any location-a bank branch or a subdivision model home.
Small credit problems are simply factored out. However, if a key piece of financial information was left out, the AUS will request the missing data.
“Basically, the software will provide an acceptability measure of a mortgage for sale to Freddie Mac instantaneously,” said Eaton.
You may never have heard of Freddie Mac-they don’t make loans directly to home buyers-but they’re a bank for bankers. Freddie Mac buys loans from your local lender, funding thousands of mortgage loans with a vast reservoir of financial capital, and purchasing mortgage loans for investment purposes.
