Mortgage lending and the wonders of Day 1 Certainty
Both major government-sponsored enterprises, Freddie Mac and Fannie Mae, are working to streamline the mortgage manufacturing to make securing and acquiring mortgages more efficient. Both seek to enhance borrower and originator experience by offering different toolkits and resources. And one example of a loan-underwriting program available from Fannie Mae, known as Day 1 Certainty, can greatly enhance the speed, efficiency and cost-effectiveness of the mortgage process—benefiting lenders and borrowers alike.
And yet, in our experience as providers of services and solutions to the mortgage industry, many lenders fail to take advantage of this game changer. By learning how Day 1 Certainty works, and modifying some internal operations to optimize its benefits, lenders can significantly enhance productivity and profitability—and deliver a better customer experience for borrowers.
The Day 1 program was created with an ambitious goal: to transform the mortgage origination process. By combining greater speed, simplicity and certainty—along with a lower cost-to-produce and enhanced risk management for lenders—the program affords borrowers improved ease of access to mortgage credit. Key features of the Fannie Mae Day 1 initiative include desktop underwriter validation of borrowers’ income, assets and employment as well as collateral. It’s important to note that Freddie Mac’s Loan Advisor Suite also offers tools that automate aspects of the underwriting process, although the program works quite differently from the Day 1 Certainty initiative.
A major benefit of the Day 1 program is representation and warranty relief. In essence, lenders are freed from the burdens of “reps and warranties” from the first day they sell loans into the secondary market. By reducing lenders’ risk exposure to repurchased loans that develop problems later on, the program improves risk management—and may ultimately lead to lower loan loss provisioning.
Less time, cut costs
Experience teaches that the Day 1 program offers lenders considerable benefits:
- Working with designated providers to validate income, employment and assets, lenders can cut processing steps and reduce the turnaround time to underwrite mortgage loans.
- Potentially decreasing appraisal escalations through the collateral validation process.
- Utilizing more junior underwriters to process applications, thanks to these simplified processes—making for more efficient staff allocation.
By enabling fewer “touches” throughout the process, underwriting cycle times have been cut by as many as 12 days on average through the Day 1 initiative. In addition, in the course of Digital Risk’s activities as an advisor to leading mortgage lenders, we have seen reductions in the cost-to-produce by as much as $2,100 per loan.
Borrowers stand to gain from the Fannie Mae program, as well. One immediate benefit is an accelerated lending process. If you see a mortgage lender advertise loan closings in 10 days or fewer, it’s a good bet they’re doing so via the Day 1 program. Mortgage lenders tell us borrowers respond very positively to the streamlined process, with fewer documents to submit and faster closings. Over time, we would not be surprised to see some lenders pass on to borrowers part of the cost savings—the better to distinguish themselves from competitors.
Optimization, participation, initiation
Given the benefits of Day 1 Certainty, why don’t more lenders take advantage of it? We believe their reluctance may stem from unfamiliarity with the program, a misplaced concern that they’ll have to make major changes to legacy systems and processes, or the simple fact that mortgage executives’ time and attention turn to other priorities such as operational and regulatory issues. They also may not recognize that the up-front participation costs—primarily fees paid to third party data validators—will yield a compelling return on investment through lower cost-to-produce and shorter cycle times.
Taking a few relatively simple steps will enable mortgage lenders to take full advantage of the Day 1 program. The first step requires time to review the program and its features. Fannie Mae provides extensive program materials and tutorials on its website, and lenders will soon discover that implementing the program is easier than they thought.
To optimize Day 1 Certainty benefits, it’s important to train internal teams—including staff at all levels from origination through closing—to use the program most effectively. Some timeworn practices and behaviors may need to change, though. Loan officers must learn to ask borrowers to authorize data validation at application time; processors must learn to refrain from collecting documentation that’s no longer required.
Next, lenders should sign up with designated data validation providers. Developing good working relationships with such providers streamlines transition to the program and increases its value to the organization, as validation providers will often guide lenders on how to best use the system.
Finally, lenders will need to integrate the data validation providers’ systems with their internal loan operating systems. This orders validations automatically as part of the underwriting process; again, providers can serve as excellent resources.
Both Fannie Mae and Freddie Mac are making great strides to reinvent the mortgage process for a digital era with these new models. While their solutions differ, their goal is a faster, efficient and more economical process that benefits lenders and borrowers alike. We urge lenders to align their systems and operations with these new underwriting models, which will drive major enhancements in productivity, profitability, risk management and customer service. Truly, now marks an ideal time to go from “one day” to Day 1.
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Laura Williamson is the senior vice president of client services at Digital Risk.