As electronic mortgage teeters on the precipice of widespread acceptance, early innovators in the space have already started to reap the benefits of Digital Transaction Management (DTM) to streamline the cumbersome mortgage process.
Not All Mortgages Are Created Equal
In the wake of the financial crisis, the Consumer Financial Protection Bureau (CFPB) established the Ability to Repay (ATR) and Qualified Mortgage (QM) Reforms to help protect borrowers from harmful practices and unexpected surprises.
There are a number of feature requirements for a mortgage loan to be considered QM, including; points and fees must not exceed 3 percent of the loan amount, negative amortization, interest only or balloon loans are not allowed, and the loan term must not exceed 30 years. Additionally, QM loans must fall within a defined Debt to Income (DTI) limit, be eligible for purchase by a GSE, FHA, VA or USDA, or be originated by a small creditor.
By originating a Qualified Mortgage (QM), lenders are afforded a set of protections that reduce the risk of financial loss due to buy-backs and borrower lawsuits.
However, there is still borrower need and demand for Non-Qualified Mortgage (Non-QM) loans, and if originated correctly with good analysis of a borrower’s ability to repay, a Non-QM loan is not inherently higher risk to the borrower or lender. In fact, Non-QM loans are often a strong fit for borrowers with excellent credit scores, stable employment and income history, and plentiful assets. What is critical to liquidity on the secondary market for Non-QM loans is being able to give full transparency into the data that drove the underwriting decision.
Emerging Products: Mitigate Risk and Provide Digital Advantage
Technology can empower transparency for securitizing digital financial assets. From the presentment, execution, post-closing management, to pledging, collateralizing or securitizing on the secondary market, each document, transaction, and portfolio or pool must be treated as a financial asset. The document needs to be trustworthy, legally compliant, enforceable, and verifiable as unaltered, both at the document level and the data utilized to create those documents, transactions and portfolios.
Most importantly to an investor, the data must reflect the underlying financial asset documentation. Fortunately, technology now exists in significant production volumes across the asset classes, including in marketplace lending, to make all of this possible. Furthermore, regulators are able to conduct audit procedures on any asset with a much higher level of efficiency and transparency.
The Non-QM Opportunity
While there is still skepticism around turning to technology for highly-sensitive origination/lending processes, the fact is that going digital adds layers of security that current paper processes simply cannot offer.
The increasing adoption of DTM for mortgage assets, whether QM or Non-QM, provides several benefits, including:
- Managing the interactions between all parties of the loan process in a thorough and auditable manner to reduce the risk for the lender;
- Providing a more informative and transparent home-buyer experience to improve customer satisfaction;
- Managing the assets as transferable records within the secondary market; and
- Providing visibility, security and auditability to assure proof and verification of the final disposition of documents.
Mortgage has always provided the greatest challenges for going digital. However, with sophisticated DTM solutions, like eOriginal’s eAsset® Management Platform, innovative firms are able to use FinTech and meta-data to streamline the process and provide greater insights into the quality of the asset. The future of mortgage in the digital age is here and the time for acceptance is now.
Meet Us in Miami!
If you are attending the 22nd Annual ABS East Conference next month, please include eOriginal in your itinerary. We would love to schedule a demonstration of our mortgage platform with you in Miami. Additionally, on Sunday, Sept. 18 at 3:45 p.m., our President and CEO, Steve Bisbee, will serve as a panelist on the “FinTech Developments Affecting the ABS Market” presentation.