FEATURED ARTICLE: DATA-FED DISRUPTION IN THE MORTGAGE MARKETPLACE
to look at the products available to them to make the right decision,” he said. “It doesn’t mean that these lenders are going to cut corners and say ‘woo-hoo’ let me go from a $500 appraisal to a $10 AVM.” Lenders shouldn’t think of AVMs as a wholesale replacement of apprais- als, but rather as just another option on a spectrum of property valuation tools that can be plugged into their decision-making process depend- ing on the type of property, type of loan and other factors, according to Cliff Lipscomb, vice-chairman and co-managing director at Greenfield Advisors, a Seattle-based firm that provides litigation and data analytics services to the mortgage industry. “AVMs have their place, just like appraisals completed by humans
have their place, and like appraisal reviews have their place,” said Lip- scomb, whose 42-year-old company recently introduced a new lend- er-grade AVM developed in part- nership with ATTOM Data Solutions. “Each of these tools has a role in mitigating the risk involved in a real estate transaction.” INNOVATION GRAVITY Since it was founded 17 years ago, Clear Capital has been operating in the tension between risk mitigation and optimized efficiency, according to Marshall, who noted that the company unsuccessfully tried to launch a prop- erty valuation Software as a Service (SaaS) soon after opening its doors. “We actually couldn’t sell it,” he
ing market. “We all have to be very mindful not to blindly accept analyt- ics that will negatively shine light on these progressive methods.” Marshall is an unabashed advocate for industry innovation — “What used to take weeks to do, we can now do in hours; it’s pretty cool,” he said — but argued that introducing untested innovation into the marketplace could backfire. “We are really big fans of keeping humans in the loop to make sure our methods are sound and be aware that any untested analytics could shine a very bad light and set back innovation in the industry for years,” he said. “We want the mortgage marketplace to be better and more efficient but we have to be really careful to pair analytics with humans as the market turns.” FLAG THE FRAUD Increasing fraud is also driving inno- vation in the mortgage space, accord- ing to Mark Richard, president with Foresight Information Services, a Co- lumbus, Ohio-based technology firm that provides data-driven products to the mortgage sector to help reduce the cost associated with application verification and fraud detection. “A recent study found one out of every 120 mortgage applications contained signs of fraud,” said Rich- ard, whose company was founded in 2011. “And this fraud rate is increas- ing. At the same time, the margins on loan applications are being squeezed. So, you have this situation where deeper and more thorough ex- amination and verification of applica- tions is necessary, but the economics dictate less time being spent.” Echoing both Lilly and Marshall, Richard believes a smart combina- tion of data-driven automation and human expertise will be needed to successfully combat rising fraud in a tight mortgage market. “I’m convinced the reliance upon
I’m convinced the reliance upon data-driven automated verification solutions will continue to expand so that manual examination can focus on the areas which are most suspect and prevent bad actors from walking away with a fraudulent loan. At the end of the day, we all pay for mortgage fraud through increased rates or even government-funded bailouts. Foresight’s mission in the mortgage space is simple: flag the fraud.
AVMs have their place, just like
appraisals completed by humans have their place, and like appraisal reviews have their place. Each of these tools has a role in mitigating the risk involved in a real estate transaction.
MARK RICHARD
CLIFF LIPSCOMB
data-driven automated verification solutions will continue to expand so that manual examination can focus on the areas which are most suspect and prevent bad actors from walking away with a fraudulent loan,” he said. “At the end of the day, we all pay for mortgage fraud through increased rates or even government-funded bailouts. Fore- sight’s mission in the mortgage space is simple: flag the fraud.” A sustained tension between risk mitigation and optimized efficiency is a hallmark of a healthy mortgage industry, according to Marshall with Clear Capital. He explained that a market too heavily weighted toward efficiency will be extremely bor- rower-friendly but could result in a housing bubble — exhibit A being the easy mortgage available in the run- up to the 2008 financial crash. On the other hand, a market too heavily weighted toward risk mitigation — which often comes in the form of heavy-handed regulation — can have a chilling effect on the market by introducing excessive friction in the loan origination process. “We always live in a tension of making sure we are pioneering for what the customer expects and THE RISK-EFFICIENCY TENSION
needs and wants, while also making sure we are not introducing systemic risk,” he said. “As long as we live in that tension we are pretty good.” The risk-efficiency tension is be- ing tested with a recent regulatory push away from full appraisals and toward automated valuation models (AVMs). A November 2018 proposal from the Office of the Comptroller of the Currency, the Federal Depos- it Insurance Corporation and the Federal Reserve calls for increasing the minimum home value for which a full appraisal is required as part of the mortgage origination process, from $250,000 to $400,000. Even if the proposal is adopted, it will be a bit of a non-issue for the industry in the short term given that Fannie Mae and Freddie Mac — which back the majority of U.S. mortgages — will still require ap- praisals in most instances, accord- ing to Marshall. “It’s not a mandate that you can’t get an appraisal, but it gives you op- tions for valuation, and maybe that’s an AVM,” he said. Even if appraisals are not required by regulatory agencies, lenders should carefully consider the prop- erty valuation options available and appropriate for a given situation, according to Marshall. “The lenders are going to continue
TOP 10 MORTGAGE ORIGINATORS: CHANGE IN MARKET SHARE
2018 MARKET SHARE
2017 MARKET SHARE
PCT CHANGE IN MARKET SHARE
6.00%
47%
5.00%
30%
4.00%
27%
3.00%
13%
10%
5%
3%
2.00%
-3%
-15%
1.00%
-22%
0.00%
Quicken
Wells Fargo
JP Morgan Chase
United Wholesale Mortgage
LoanDepot
Bank of America
Caliber Home Loans
Fairway Independent Mortgage
Guaranteed Rate
US Bank
6 think realty housing news report
february 2019 7
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