A Spoonful of . . . Clarity

This select print feature originally appeared in the June issue of MReport magazine, available now.

UMDP®, UAD, UCDP®, URLA, UCD … the mortgage industry often refers to these acronyms as “alphabet soup.” Though the jargon may be somewhat confusing, the alphabet soup represents industry-wide efforts to create uniform data standards. While the work to adopt them has been a pain point for lenders over the past few years, these efforts reflect a long-overdue investment in data quality and efficiency. Now, we are beginning to see the return on that investment.

Data standardization and uniformity, combined with the power of Fannie Mae’s big data and advanced analytics, is helping lenders achieve Day 1 Certainty™—freedom from representations and warranties on key loan components, plus more speed and simplicity. Mortgage borrowers benefit, too, with an easier digital experience that aligns with how they conduct other business transactions.

Something Simmering

The mortgage industry’s digital journey began more than two decades ago. In 1995, Fannie Mae took some of the first steps on that journey when it introduced Desktop Underwriter® (DU®). It was the first automated mortgage loan underwriting system, and it came on a set of seven floppy disks that Fannie Mae employees delivered to lenders. Training was part of the service.

Around that same time, the internet began to catch on and become broadly available, and the mortgage industry saw the possibilities for increased speed and efficiency. But it also soon recognized the need for some kind of industry standards for the electronic exchange of information, and MISMO was born. MISMO—the Mortgage Industry Standards Maintenance Organization—developed “a common language for exchanging information for the mortgage finance industry,” according to the MISMO website. It was the original entry in the “alphabet soup” of mortgage data standards.

But in the early 2000s, mortgage lending went crazy. The industry was living in the moment, with little focus on the future. Then the bubble burst. Once the industry caught its breath, data standards again became a priority. There was renewed interest in loan quality, and the post-crisis regulatory climate tended to drive up costs, fueling a quest for efficiency and willingness to invest in it. The industry could not continue to meet quality requirements and embrace changing consumer expectations without end-to-end digitization of the mortgage life cycle.

Enter UMDP®. The Uniform Mortgage Data Program® was developed by Fannie Mae and Freddie Mac in collaboration with their regulator, the Federal Housing Finance Agency. Introduced in 2010, it triggered the new wave of data standardization, which in turn opened up a world of opportunities for the industry.

Consider appraisals. Less than a decade ago, residential appraisal reports were not even digitized, and there were no standard formats even for simple things like dates. Property condition was described in wildly nonstandard free-form terms such as “Average New,” “Average Old,” and “Typical.” The number of bathrooms in a property might be listed as 1.5 or 1.1, both meaning one full and one half bath. And the appraisal reports in loan files? Often they were handwritten, and not necessarily legible.

One of the first UMDP outputs was the Uniform Appraisal Dataset (UAD). It standardized appraisal data, and since 2012 Fannie Mae has required digitized appraisal reports.

Refining the Recipe

With the foundation of standardized appraisal data, Fannie Mae developed Collateral Underwriter® (CU™). Pairing advanced analytics with a database of more than 23 million appraisals and growing, CU is a powerful appraisal risk assessment tool that Fannie provides free to its lenders. Now, as the GSE announced late in 2016, there is even more. Leveraging the appraisal database assembled in the past five years, CU enables Day 1 Certainty in two ways:

Lenders receive freedom from representations and warranties on the appraised property value on eligible loans with a CU risk score of 2.5 or lower—about 60 percent of all appraisals submitted to Fannie Mae.

Property Inspection Waivers provide offers to waive an appraisal on about 20 percent of limited cash-out refinances. Lenders get freedom from representations and warranties on property value, condition, and marketability; borrowers can save the cost of an appraisal; and a shorter origination process benefits everyone.

Supplementing with Big Data and Advanced Analytics

Data standardization becomes even more powerful when combined with big data and advanced analytics. Consider the potential benefits. Advanced analytics refers to “a broad category of inquiry that can be used to help drive changes and improvements in business practices,” according to TechTarget. That last phrase is key—“drive changes and improvements in business practices” is a common objective across the housing finance industry today.

To offer Day 1 Certainty, Fannie Mae combined big data and advanced analytics with data standardization to develop a new approach that allows for a move away from manual processes prevalent in the industry today—a clear business practice improvement.

Data standardization and “big data” analytics are the key ingredients behind the DU® validation service—another Day 1 Certainty offering. Leveraging standardized datasets enables a more accurate, simpler digital process. With electronic validation of income, assets, and employment, lenders and their borrowers benefit by moving away from the manual processes prevalent in the industry today.

Lenders are realizing meaningful savings with DU validation:

Pilot lenders who test-drove the DU validation service told Fannie Mae it shortened loan origination timelines by four to seven days (on average) with quicker preapprovals and meaningful time savings for loan processors, underwriters, and quality control teams.

One large nationwide lender recently reported significant efficiency gains: The average number of days from loan application to close was reduced by 50 percent.

A lender reported closing a refinance loan in 10 days from loan application using the DU validation service and a Property Inspection Waiver.

Lenders can be more efficient, give their borrowers a simpler experience, and get Day 1 Certainty with freedom from representations and warranties on validated loan components.

The validation service is the newest innovative feature in DU. In 21 years, DU has come a very long way from that first software distributed on floppy disks. An early step forward was the ability to pull in credit reports using standardized data. And advanced modeling analytics that leverage characteristics of actual Fannie Mae loans power DU’s increasingly sophisticated risk assessment.
Embracing a New Menu

Fannie Mae’s digital innovations are part of the larger industry digital journey. The mortgage industry has taken key steps toward modernization and efficiency in the past seven or eight years, but we certainly haven’t done it alone. Innovation by players in the industry or those serving multiple industries has been instrumental in making possible the independent third-party validation of mortgage borrower data. Data and tech pioneers have done critical work—assembling big databases of employment and salary information; developing efficient yet secure ways to pull bank account and other asset information; building the infrastructure to support complicated integrations of lender, investor, and third-party systems—and much more.

The mortgage industry may have lagged other types of financial services in adopting new technologies, but we are catching up. We have our own visionaries—they are lenders, service providers, and others.

A Healthy Dose of Certainty

The Edelman Trust Barometer’s 2017 sector report on trust in financial services shows an 11 percentage point increase in trust in financial services from 2012 to 2017—likely reflecting recovery from the financial crisis. But that trust level is still low. The Edelman Barometer shows trust in financial services at 54 percent while “technology” is one of the most trusted sectors, with 76 percent trust.

So how to improve trust in financial services? Edelman says to “do things differently,” and one of the recommendations is to “solve real problems with tech.” The Edelman Barometer also looked at “financial products/services most in need of innovation or new ideas.” In that category, “loans to support the purchase of a home” came in third with 31 percent (behind “education financing” and “financial support for small businesses”). The time for innovation and new ideas to make home finance easier for everyone is now.

The housing finance business is moving in the right direction. Fannie Mae is definitely trying to do things differently to bring the mortgage industry up to date, make it easier for its lenders to originate and service mortgage loans, and help them give borrowers a better experience. Fannie Mae looks forward to continuing its leadership role toward the industry’s future vision. It’s a central part of the company’s quest to be America’s most valued housing partner.