I doubt many of us thought on April 22, 1970, that mortgage lenders would or could make an 'Earth Day' contribution. Sure, maybe through mortgage loans that encourage or reward energy efficient homes and/or homes constructed using sustainable techniques and materials but not in any other meaningful way, right?
Not quite. The mortgage industry, as it turns out, has a large carbon footprint due to our reliance on paper. We use between 21,750 and 36,250 tons of paper per year. How much is that? By way of comparison, the Statue of Liberty is a relatively lithe 24,634 tons. Let's not forget paper is made from trees. Our appetite for printed matter means that as many as 620,000 are chopped down every year. Making paper emits the fourth largest amount of carbon dioxide of all manufacturers. And, if that weren't enough, it takes 390 gallons of oil to create every ton.
We can make a much bigger contribution to Earth Day by taking the entire mortgage process completely paperless. As Prime Alliance was being created in 2001, one of its Big, Hairy, Audacious Goals (BHAG) was to eliminate all paper within 10 years. Technology to support the BHAG fell into place by late 2006, while industry support came along shortly thereafter. The end result: the first fully paperless, completely electronic loan closed in October 2008. Now it happens every day.
A note about paperless and electronic loans. Paperless loans are those that are originated, processed and underwritten without the use of a single piece of paper. The entire process up until closing is done on-line rather than using the traditional legal-size file favored by traditional mortgage lenders everywhere. Electronic loans go further. They are closed, funded and delivered without the use of paper. Going paperless is a step lenders everywhere can take. Going electronic requires the cooperation and participation of title/escrow companies, recording authorities and investors.
BECU, Prime Alliance's founder and leading edge customer, was the first to go fully paperless, then electronic, closing the first 'PE' loan last October. Since then this new style of mortgage manufacturing has become the norm. During the first quarter of this year that meant approximately 1,300 loans were closed electronically, saving about 3.25 tons of paper and 55 trees.
And that's just the beginning. The PE Lending wave is taking hold throughout the Alliance. Numerica Credit Union, on the eastern side of Washington in Spokane, is paperless and will be electronic when the county recorder is ready. Ent FCU, CO, American Airlines FCU, TX, Travis, CA, GTE FCU, FL and Purdue Employees FCU, IN, are all making the move to paperless as well. It won't be long until we're sparing 55 trees per day rather than 55 trees per quarter. That's a significant contribution from a non-smokestack industry like ours, and it's something of which we can be proud.
PE Lending is undeniably Green and makes perfect business sense from that standpoint alone. It is also in complete alignment with Prime Alliance's original guiding principles of improving the member experience and improving lending efficiencies. We'll be publishing a White Paper on PE Lending in late May or early June. Look for it; it will be Green.
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TARP, CU HARP, HASP, HVCC. Surely you've heard of each of these new plans, each designed to either stimulate the economy or make mortgage lending safer for borrowers, or both. The rate at which we've been subjected to new plans, programs, legislation and regulations in the past 12 months is stunning. Trying to stay abreast of every change and how those changes affect our credit unions and our members has been challenging, especially in light of the lowest rates and highest volumes we've experienced in several years.
Heard of SAFE? The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 is Title V of the Housing and Economic Recovery Act that was signed into law on July 30, 2008. Amidst all else that was happening at the time, and all that has happened since, we thought it a good time to bring SAFE back to your attention as it applies to all individuals who originate mortgage loans, including credit union and CUSO staffs. In short, every 'originator' must either be registered and/or registered and licensed by July 31 or December 31, 2010, depending on the State.
'Originator', in the context of the law, means anyone who assists a consumer in obtaining or applying to obtain a residential mortgage loan by, among other things, advising on loan terms (including rates, fees, other costs), preparing loan packages, or collecting information on behalf of the consumer with regard to a residential mortgage loan. Routine clerical tasks, defined as the receipt, collection, and distribution of information common for the processing or underwriting of a loan in the mortgage industry and communication with a consumer to obtain information necessary for the processing or underwriting of a residential mortgage loan, don't count. 'Residential mortgage loan', in the context of the law, means any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling (as defined in section 103(v) of the Truth in Lending Act) or residential real estate upon which is constructed or intended to be constructed a dwelling.
Registration and Licensing under SAFE is the responsibility of the NCUA, in conjunction with the Federal Financial Institutions Examination Council (FFIEC). They are charged with developing and maintaining a system for registering bank and credit union employees, in coordination with the Conference of State Bank Supervisors (CSBS) and an affiliated group, the American Association of Residential Mortgage Regulators (AARMR), which started working on such a system in 2008. The program is to be in place by August 2009.
Registered? Licensed? What's the difference? Originators who work for a credit union, not a CUSO, must be registered. Registration involves the following:
- Provide fingerprints for submission to the FBI and other agencies for a state and national criminal history background check;
- Provide personal history and experience, including authorization for the System to obtain information about any administrative, civil or criminal findings by any jurisdiction; and
- Be assigned a unique identifier that will facilitate electronic tracking and public access to his or her employment history and enforcement action record.
While this seems onerous, these requirements are not unlike registration and licensing requirements that have been in place in several states for a number of years. The difference, however, is credit unions were typically exempt since they are closely regulated and examined. While being regulated financial institutions helps in this case, it no longer gets us a free pass.
Licensing and registration is more involved, and it applies to employees of CUSOs that originate mortgage loans. To be issued a license and to become registered, employees:
- Can never have had a loan originator license revoked in any part of the country;
- Cannot have been convicted of, or pled guilty (or nolo contendere) to a felony in any court during the 7-year period preceding the date of application -- or at any time if the felony involved an act of fraud, dishonesty, breach of trust, or money laundering;
- Must demonstrate financial responsibility, character, and general fitness to warrant a determination by the System that the person will operate honestly, fairly, and efficiently in handling mortgage loan applications;
- Must complete the pre-licensing education requirements described in detail in the new law (with a continuing education requirement for licensing renewal);
- Must pass a written test described in the new law;
- Must meet either a net worth or surety bond requirement, or pay into a state insurance fund, as required by the law; and
- Must be assigned a unique identifier number. CUSO loan originators will have to provide fingerprints which will be submitted to the FBI and other government agencies to receive a state and federal criminal history background check; and a personal history and experience, including authorization to obtain a credit report and information relating to any administrative, civil or criminal findings by any jurisdiction.
What's next? The process of becoming registered and/or licensed hasn't yet been defined or published. We do know that it is NCUA's opinion that registration applies to all credit union staff who perform more than routine clerical tasks. In the old days registration would have applied to everyone in the mortgage department but to no one else in the credit union. Today, however, it applies to everyone in the credit union who discusses rates, terms, loan programs and the like, which could mean member service representatives, tellers, call center staff, branch staff and others. We've moved mortgage lending off its island, which strategically makes sense. The proof, of course, is our industry is gaining market share, a trend we want to continue on its upward trajectory. Our advice? Watch carefully for more information on SAFE implementation in the next several months. This process will take time and will be time consuming. As difficult as this is, however, the upshot is this: this law creates a significant barrier to entry. Gone are the days anyone who knew mortgage is spelled with the letter 'g' and owned a pencil and a calculator could become an originator, earn fast money, and then disappear before the chickens came home to roost.
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Opportunity. We've been saying for 18 months what a remarkable opportunity credit unions have been presented with as a result of the mortgage crisis. By the end of 2008 our industry achieved market share exceeding 4%. During the final quarter of the year we topped 5%. Good for all of us. Our market share has grown by more than 300 basis points since December 2006.
And opportunity keeps knocking. While it's too early in the year to have updated market share statistics, we do know that Prime Alliance credit unions, through the first quarter of 2009, took almost 90,000 applications for an estimated $1.8 billion. Granted the lowest rates in almost six decades have helped a great deal, as have government programs designed to help homeowners get out of and stay out of trouble, but the fact is we've never been through a refinance cycle like this in our history. Sure we've done high volumes in earlier refinance booms, yet we never gained market share as a result. This time is very different for many reasons. We'll be exploring this dynamic in an upcoming White Paper.
In addition to originating record numbers of loans, we've been selling record volumes, too. Fannie Mae reports that during the first quarter of the year Prime Alliance credit unions sold $3.2 billion, an increase of more than 200% over the same period one year ago. As we said in ‘Refi Readi©’, one of our latest White Papers, make all the loans you can in this market and then sell every one of them. Rates this low invite future interest rate risk if they're placed in portfolio.
Where'd we get the capacity for such drastic increases in volume? Last week we read with interest an article in Mortgage Technology Magazine by Ravi Varma, CEO of LendingSpace. In it he asks just this question. His answer is in present and future technologies. Here's an excerpt:
"As for capacity, LOS sophistication has increased to make the true “enterprise lending system” a reality for companies that once had to settle for desktop PC systems and bolted-on components. The new breed of LOS is big without being complicated, is available via the Internet and always running, includes back-end reporting and tracking that was once available only as an extra-cost service from a third party, and is designed to save labor at the point-of-sale with integrated pricing and product eligibility automation. Rules-based processes have taken some of the manpower requirements out of the origination routine, replacing it with advanced image and document management tools that quickly move the loan file-building process along with less handling. In sum, this all means you can originate more loans with fewer people when using the more modern LOS systems."
While this may be mortgage industry news, it's old hat for Prime Alliance's customers. We built our technologies starting nine years ago with these design features in mind, including paperless and electronic lending. It's another reason credit unions are ahead in this market and will stay there in the years ahead.
It's important to note, though, that while technology is important, it remains but one part of the equation. Strategy, people, process and technology (SPPT©), each have a role to play. Miss one of the four, efficiencies lag as does the ability to rapidly manage ever-increasing volumes. For three case studies of the SPPT equation, read 'Scalable Lending', Prime Alliance's latest White Paper. It's being distributed to all of our customers before the end of April.
As for volume, there's no near-term end in sight. In their April forecast, the Mortgage Bankers Association of America revised their 2009 origination prediction to $2.7 trillion. Some analysts put it as high as $3.2 trillion. In either case, 2009 may possibly be one of the biggest lending years in history. Tempering this enthusiasm slightly is the economic outlook. Although there are some early signs the economy may have hit bottom, we've still got a rather steep slope ahead of us. Consequently, rates are projected to stay down through the year while housing is more affordable than it's been in years: the National Association of Realtors® Housing Affordability Index stood at 173.5 in February. An index above 100 signifies that a family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment. By way of comparison, the index was 107.6 in 2006 and 131.2 at the end of last year.
What market share gains will we register this year? How many members will we help with current housing issues? How many first time homebuyers will we turn into lifelong credit union members this year? Stay tuned, it's going to be big.
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