inman.com | March 23, 2015
By Wes Miller
Home loan regulations will change in August, and we should change, too.
The broken process
The amount of time and effort it takes to close a mortgage is incredible. Many participants in the process work overtime, sometimes for over a month, or several months, per closing to make sure the customer is happy.
Unfortunately, the mortgage process itself often undermines all this hard work.
Buyers have to run all over town and deliver the same information to multiple parties so that the different players in the transaction have the necessary documentation. They are often stunned and upset by the inefficiencies and frustrations inherent in the process, and are slow to come back to the market or refer the people they worked with.
Buyers, however, aren’t the only ones suffering. Everyone involved in the mortgage process has to deal with the fundamentally flawed system.
For example, having the same conversation five different times is often accepted in the real estate agent’s line of work as simply part of the job description. First they might have to call the lender, then the title company to relay what the lender said, then inform the buyer and so on. This constant duplication of effort is exhausting, expensive and time consuming. This is a true not only for real estate agents but also for many of the people working to make sure the loan is approved.
On average, there are 25 individuals working on a single closing, and each of them are affected to varying degrees if the deal falls through. Real estate agents aren’t paid because they are based on commission. The cost of storage units, hotel stays and so on adds up quickly for the buyer or seller. And let’s not forget the wasted time and energy for everyone involved. That’s a lot of unnecessary work and cost.
Each failed closing can also create a chain effect impacting another closing. Let’s say person A is in negotiations to move into person B’s house, and person C is moving to person A’s house. If person A’s closing falls through, then person C has no place to go and the person moving into person C’s house, and so on. Each of these failed closings affects another possible 25 people.
The process is broken because everyone finds out whether or not the deal will go through at the last possible minute. That’s what the regulators are trying to change, so the consumers aren’t harmed.
This fragmented process also lends itself to the possibility of fraud. When mistakes and redundant workloads are accepted as the norm for a process, that process is an easy target for fraudsters, as evidenced by the high rate of fraud in the industry.
As frustrating and complicated as this process already is, new regulations are coming in August that are set to make it even more chaotic. One of the main changes is that the HUD-1 and final Truth in Lending Disclosure will be combined into the Closing Disclosure and will need to be provided to the consumers three days before closing. Currently, it is a struggle to provide the necessary forms the day of closing. Failure to comply will result in heavy fines from regulators.
All of this adds up to an irrefutable truth: The mortgage industry needs to rethink the process of closing a home loan in 2015 — on a fundamental level. And it needs to be ready to use that new process by August.
The phrase “It takes a village to raise a child” emphasizes how raising a child is a collaborative effort by several individuals. The separate entities involved in the mortgage process needs to work together as a “village” to make a closing happen. Instead of letting the process undermine everyone’s hard work, it needs to be reconstructed into an automated and collaborative system.
What would that look like?
- The separate entities prepare one closing document on a digital platform, where any changes are monitored and tracked for both the appropriate participants and for auditing purposes.
- Access to this platform and any particular file is controlled, mitigating the risk of fraud, and the transparent nature of the system alerts other entities if an illegal act is attempted.
- Such a platform also necessitates less information needed from the borrower/seller and completely takes away the redundant paperwork factor. Basically, it creates a one-stop shop for the borrower/seller where the required data/documents can be disseminated with proper controls to all the appropriate parties.
The current mortgage process is plagued by errors, duplication of effort and outdated processes, procedures and policies. It is a disconnected supply chain that lacks transparency. It will take collaboration on a completely different level in the real estate and banking industries to satisfy customers and comply with upcoming regulatory changes. It will take everyone involved in the mortgage process to be verified in a secure network to create a safe environment for consumers and a return on investments for industry professionals.
It will take a village.
Back to March 2015 Archive
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