The debate over the merits of online or paper-based mortgage processing is over – and technology is the clear winner. The question now is how far can the industry move towards full online processing, what practical benefits will it bring and what could the future hold for this area of the industry?
Online processing in the business-to-business environment is firmly established, both among mortgage and insurance brokers.
Now the debate has moved on. The rapid advance of technology has massively raised expectations among brokers. They are hungry for new enhancements, and lenders are equally keen to deliver them.
Pressing ahead
Several lenders are already pressing ahead with plans to launch instant virtual mortgage offers, possibly before the end of this year. This will allow brokers to log on to their sites, apply for a mortgage, wait for credit scoring checks – which can be done almost instantaneously – and receive a decision-in-principle (DIP) within minutes. Instant virtual offers could become reality as early as January 2007, if that’s what introducers want.
Of course, lenders still have a duty of care to their borrowers to lend responsibly, which means ensuring that core information for which the mortgage will be based on is correct and verified – such as property value, customer information and salary details. With techology advancing at breakneck speed, there’s no reason why lenders can’t continue to meet these obligations and, at the same time, help further streamline the mortgage process for brokers and borrowers alike.
The growing popularity of automated valuation models (AVMs) will accelerate the trend for virtual offers. Many lenders now use AVMs for loans up to 60 per cent or 75 per cent of property value, and more will follow.
The accuracy and reliability of AVMs will steadily improve as technology develops, further boosting lender confidence. Within a couple of years, lenders could rely on them to produce instant virtual offers for higher loan-to-value (LTV) business.
HIPs driving AVMs
Home Information Packs (HIPs) are likely to help to drive the use of AVMs. HIPs have proved controversial, and less than 12 months away from their proposed mandatory introduction, many brokers and lenders remain sceptical about the government’s initiative, but they might bring some unexpected benefits.
One common criticism of HIPs is that sellers must pay for the Home Condition Report (HCR). However, this doesn’t contain a valuation, which means most lenders will still insist the buyer pays for their own survey, increasing the overall costs.
But these critics ignore the fact that HIPs give lenders a real incentive to boost their use of AVMs. The government has promised them access to the databank of HCRs, which offers extensive details on every property on the market. If the lender can carry out an AVM rather than dispatching a surveyor to view the property it will further speed up the whole process.
If HIPs do become compulsory, we can expect lenders to invest in better third-party technology that allows them to embrace AVMs much more robustly. This could happen sooner than you might think. Some of the more forward-thinking lenders could be regularly using AVMs within just 12 to 18 months of the introduction of HIPs on 1 June 2007.
Lenders might then have finally cracked something that was just pie in the sky a few years ago – online straight-through processing at point-of-sale.
Speeding up the process
Lenders are looking at other ways to speed up their systems, this time in the back office, where staff often still have to laboriously check through bank statements and payslips to verify whether an applicant could afford to service their loan. Many lenders have accelerated the process by using scanning devices, and this is producing real savings, particularly in the non-conforming market.
Many mainstream lenders have simplified their processes for low LTV loans by using fast-track processing. They don’t require any paper verification for loans below 75 per cent LTV, although the lender reserves the right to probe further if the application doesn't stack up. The quality of client data they receive from credit reference agencies such as Equifax and Experian gives them a much greater degree of comfort in underwriting these loans, confirming the client’s ability to service their debt and other commitments.
We have seen enormous leaps in online processing in the past five years, but the revolution is by no means over. Now the industry is looking for a step change. Online brokers are increasingly hungry for that virtual offer. Once that has been achieved, they will be keen for the lender to verify the applicant as effectively as possible.
But lenders still need to be cautious. At the moment they have a responsibility to retain an element of paper verification to detect and monitor fraud and financial crime, and to comply with Financial Services Authority (FSA) anti-money laundering regulations.
If proper technological checks and safeguards can be put in place and offer absolute certainty, lenders will be able to move towards full online processing while continuing to identify customers properly and to satisfy the FSA that they are taking appropriate steps to prevent financial crime.
The future
Virtual mortgage offers are only the beginning. One day, we could reach a point where the broker is able to self-certify their client’s entire mortgage online from start to finish.
In the future arranging a mortgage could become rather like buying a holiday online. When the customer is ready to complete on their property, they could log on to the lender’s website with a reference number and PIN, and tell head office that they would like the funds in 24 hours.
If lenders fully embrace technology, as they are increasingly doing so, and the necessary advancements are made, there is no reason why this won't be possible. This should give both brokers and customers greater control over their applications and make the experience faster and smoother for all concerned.
Faster processing is another area which will continue to make strides forward where clients are looking to raise extra funds against their property. Currently, applicants for personal loans to buy a car can get hold of the cash within 24 hours. In the future we may see funds raised against a mortgage operating in the same timescale.
It could become possible for lenders to allow borrowers to log onto either broker or consumer websites, apply for further borrowings, get instant approval and have the funds in their account within 24 hours. Lenders may restrict this service to low LTVs and borrowers with a proven history of servicing their loan, but it could be done.
True, mortgage processing is more complicated than personal loans, but if we now have the technology to move towards virtual offers, there is no reason why clients can’t borrow more money on their mortgage within shorter timescales, such as 24 hours, in the future. Lenders could then extend the principle to remortgage business, authorising the funds within 24 hours of receiving a virtual offer.
There is one potential obstacle. Are solicitors ready for straight-through processing? The answer, for many, is no, but that could soon change.
HIPs will radically alter the conveyancing system, because much of the work currently done by solicitors after an offer has been made, such as chasing the title deeds, and doing Land Registry and local searches, will now be done before a property is even marketed. Could the same principle apply to remortgages? If all the legals were done before the application, then lenders could swiftly move to 24-hour processing of remortgages.
Anecdotal evidence suggests that solicitors have been slower to move towards online processing than brokers and lenders, but with e-conveyancing set to be introduced in 2009, this area will naturally align itself.
Online processing has come a long way in the past five years. When it comes to straight-through online processing at point-of-sale, the technology is pretty much there. But apart from a handful of innovators and go-getters, most lenders continue to carry out a large amount of manual processing after the client gets their offer.
Online processing is the future, and it should benefit everybody. The ultimate goal of the industry should be to process all offers online and complete mortgages within days rather than weeks. It’s within our grasp, but we must all continue to rise to the challenge and embrace technology.
