RegFi Episode 51: Streamlining Mortgage Origination Through Digitization
30 min listen
The Majority Group Partner Anne Canfield joins Sasha Leonhardt and Jerry Buckley to explore legislative changes that could facilitate digital mortgages and cut thousands of dollars from the cost of mortgage origination. Anne, a long time Washington insider, also shares her perspective on potential legislative and regulatory developments to anticipate over the next few months.
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Jerry Buckley:
Hello, this is Jerry Buckley. I’m here along with my RegFi co-host, Sasha Leonhardt. We are joined today by Anne Canfield, who is a partner in The Majority Group, a public policy and advocacy consultancy based here in Washington. Anne has for a long time had a voice in shaping public policy in a number of areas, but particularly with respect to housing finance, going back to her days at GE Capital when we first met each other.
Anne, I know that our listeners will be very anxious to hear your take on the electoral results and the implications for financial services regulation. And we’ll get to that later. But let’s start with a more specific, concrete example of how policy changes might impact the cost of home purchase transactions, which is a major issue, as we all know, in today’s world. Could you share with our listeners how you see digitization of the mortgage process as a cost saver and what steps Congress and the regulators might take to facilitate this?Anne Canfield: Thank you, Jerry, very much for inviting me to your call today. I appreciate the invitation and the opportunity to speak to your listeners. First, as you mentioned, we have a new administration, so it is exciting here in Washington. They are very focused on taking costs out of government processes and using technology, where appropriate and when you can do so, to take those costs out. So, I think the mortgage industry has an opportunity to lean into their agenda. And there’s a couple of different ways that we might take advantage of that opportunity.
One is in the area of reducing the cost of mortgage originations. Right now, the mortgage origination process is more costly than it needs to be. At the MBA convention, the mortgage bankers put up a chart saying that for non-bank mortgage lenders, the average cost of originating a mortgage was $13,000 plus, for regulated bank lenders $17,000 plus. Today I noticed they came out with a reduced cost number. It was over $10,000, so it’s dropped a little but it’s still needlessly expensive.
Those costs can be shrunk dramatically by fully digitizing the mortgage process. You can do so by using SmartDocs and accessing a government database that most people are not aware of to verify W-2 wage earners’ incomes. As you know, 80% to 85% of the mortgage applicants are W-2 wage earners, so being able to digitally verify, using this government database, their current year incomes up to the latest quarter will speed up the process and dramatically reduce the cost.
So, let’s go through the current process. As most people know, if somebody applies for a mortgage, they have to submit their pay stubs, give access to their bank accounts or submit their bank accounts, all that. The underwriters then, in trying to verify their incomes, have to call their employers to make sure that these are not falsified pay stubs. And that process takes at least a week and it’s very inefficient. So, there is a database called the National Directory of New Hires. It’s housed at the Office of Child Support Services at the Department of Health and Human Services, and it collects W-2 wage earner information up to the latest quarter from every employer in the country.
The database was put into effect in 1997 by Senator Grassley, who wanted to make sure that deadbeat spouses made child support payments. So, every employer in the country submits their W-2 wage earner information to their state office employment offices. It’s done digitally. That’s rolled up to the NDNH database in Washington, D.C.
So, if we can access that database with the signed written consent of the consumer, we can digitally verify their income because it is a trusted source and not have to go through the paperwork and the rigamarole of trying to individually verify everybody’s income. Then when you think about it, when you combine that with SmartDocs — think about it — at the beginning of the mortgage transaction, you use SmartDocs all the way through the whole mortgage process, out to the securitization. So, there are huge quality control benefits to this proposal. And the QC benefits would enable guarantors, Fannie, Freddie, and others that should have access to this information and the rating agencies, to be able to electronically view that immutable record that’s in the SmartDocs out to the investors.
So right now, as a mortgage is securitized, each loan file has to be redigitized. It costs about $800 a loan, $100,000 a pool. Those costs would be eliminated. And so, you know, back to my, I guess my GE Capital days and Jack Welch just saying, “Take costs out and streamline those processes.” It was drilled into all of us. And so, this basically would really enable, you know, that process to be greatly streamlined.
There’s additional benefits. We can accelerate the period between application and closing for the consumer. The rough rule of thumb is that for every month that you can shave off the up-to-close period, you can save the consumer maybe a quarter percent on their interest rate, which is significant today. And I might also add that a version of this proposal was put into effect in the mid-90s using dial-up modems. That was way back in the day. And it was put in effect in the states of Texas, Iowa, and Minnesota. And Wells Fargo was one of the companies that led the way in doing that. Everybody thought they would catch a lot of fraud. And what they found is that they were able to qualify a lot more borrowers, particularly low to moderate income first-time homebuyers, for a mortgage because the underwriters had traditionally thought that those borrowers only were working overtime or having a second or third job in order to qualify for a mortgage and that wouldn’t continue. What they found is that these borrowers typically work overtime or multiple jobs consistently, so they actually could count that extra income towards assessing whether or not they’d be able to repay their mortgage. So that really opened up a lot more homeownership opportunities for many low to moderate first-time income homebuyers. So, we think that’s another benefit here.
It does require legislation, I should tell you that, unfortunately, getting access to this database. But there is interest on Capitol Hill because of the cost that it can take out. Right now, as you know, people use other data sources. It costs several hundred dollars per loan. We think we can, by accessing the NDNH database with the consumer signed written consent, we can reduce the cost to maybe $25 a loan. And so that’s significant.Jerry: And maybe you and Sasha could share with us, because I know you’ve talked about this, what is required as a legislative matter to facilitate this? I recall back to the days, now it seems like yesterday, but it was in fact over 20 years ago when I worked with others to get the E-Sign Act through. It was a struggle, but wow, has it facilitated — it shouldn’t have been, but it was — it facilitated so much, not only through the pandemic, but it has facilitated so much of the mortgage space. It’s foundational for what you’re trying to achieve. But let’s talk about what are the legislative requirements that you envision, the hurdles or whatever, that you have to get through. Anne: Well, it does, unfortunately, as I mentioned, does require legislation. The idea originally was developed by Dr. Mike Stegman when he worked for Secretary Jack Lew at the Treasury Department at the end of the Obama administration. And he was able to get FHFA and Fannie and Freddie all on board this proposal, but then the administration ended, and it sort of fell away. So recently, we have a lender that’s very interested in getting the legislation enacted. This proposal is being supported by the Mortgage Bankers Association, the Mortgage Home Lenders Association. Fannie and Freddie, although they can’t lobby, they’re supportive of it and have provided us good feedback on making sure it would work. And the regulator is fully in support, Federal Housing Finance Agency. So it does — the database is controlled by the tax writing committees, the House Ways and Means Committee, and the Senate Finance Committee. So, it does require that those committees pass legislation to allow access to the database, but only with a consumer signed written consent.
In addition, because it impacts housing, so far the Senate Banking Committee, House Financial Services, appropriate members on the tax writing committees, everybody seems to be in support of this idea at this time. We haven’t really met with opposition, but you never know. Getting anything passed in Congress is always a chore. You run into obstacles you don’t envision until you get into the process, but hopefully this will go smoothly.Sasha Leonhardt: No, that’s great, Anne, and thank you again for joining us today and for being willing to speak to us again. And to loop back to Fannie and Freddie, as the GSEs, they’ve been in conservatorship for just about a decade and a half now. With the changes in the political landscape that we’re seeing in the wake of the election, do you expect there to be changes in their status as GSEs? Anne: Potentially, yes, and it’s a little complicated here. But as you know, the GSEs have been in conservatorship, and in order to come out of it, they need to build their capital. They’re supposed to pay back Treasury for their investment. Recently, there’s been interest by Congressman Andy Barr, who is running to be the next chairman of the House Financial Services Committee, to basically add a provision to the upcoming reconciliation bill in 2025 that would take GSEs out of conservatorship. Because of the unusual way that the government scores the budget savings, it’s thought that maybe they could pick up $100 billion in budget savings if they added that provision to the reconciliation bill. And I won’t get into all the mechanics of how the scoring is done, but I certainly can send and share with you an analysis that was done by Compass Point, and you can send it out to your listeners if you’d like to do so.
But the bottom line is, that if they added that it might pick up $100 billion. It would require, however, that the Treasury walk away from, write off, a $194 billion investment in the GSEs. Now, since Trump is in his second term here, he’s not influenced by, you know, reelection concerns. So, potentially they would support that in a reconciliation bill. However, the members of Congress would, you know, be impacted by adding that to a reconciliation bill. Just not sure how, you know, they would look at writing off, you know, writing off a $194 billion investment in the GSEs. But that’s complicated.Jerry: Well, Anne, but aren’t Fannie and Freddie delivering revenue to the Treasury from the profits of their operations? Anne: They have been, but they’ve also needed to add capital. So, what this would do if this got added to the reconciliation bill is that it would accelerate their ability to meet their required capital levels to come out of conservatorship. And so, it would be done instead of maybe in 10 years, it would be done maybe in four years or three years, something like that. So, we’ll have to see, as I mentioned, the calculus on this is very complicated because you get into how the budget scoring rules work, you know, and reconciliation bills, etc. But the bottom line is, that Congressman Barr might be the next chairman of the House Financial Services Committee. He has spoken to Congressman Jason Smith, who is the current chairman of the Ways and Means Committee. And he will remain chairman of the Ways and Means Committee. So, you’ve got very senior members that are talking about adding this to reconciliation. So, it does bear consideration. Sasha: And to switch slightly from Capitol Hill to Main Street, as you well know, housing affordability is a major concern right now. The Fed’s decision to use monetary policy and its quantitative easing to keep interest rates low has resulted in a mortgage refi boom. And as a result, many borrowers are enjoying low rates and are reluctant to give up these low-rate mortgages. This, combined with some other features in the economy, are creating a shortage of homes for sale. And that itself is potentially another inflationary item. And while we’ve seen inflation easing in other parts of the economy, it’s remained stubborn in the housing and rental markets. But with all of that there, I guess, are there any policy initiatives underway to address this phenomenon? Or do we just have to wait until the laws of economics and the invisible hand resolve the situation? Anne: I think, unfortunately, in this area, there’s not a silver bullet solution. You know, people always want that, you know, let’s go with the silver bullet. There isn’t one here. So, it’s a combination of things to try and increase the supply of housing. You know, a lot of it is going to be dependent on local zoning laws and communities deciding to change their zoning laws to allow — let me give you an example.
There is a project, Southern Wisconsin — Racine and Kenosha County — it’s a huge area. It’s right over the Illinois border. Mount Pleasant is the name of the town. Microsoft is building a $20 billion facility there. Many corporations are headquartering there. There is a severe shortage of housing. So, there’s a development underway that has been approved. The first part of the development are single-family homes, and the local community agreed to smaller lot lines for that development so that the houses will be in the range of $400 to $450,000 for a single-family home versus $1 million.
Adjacent to that community is a multifamily apartment and condo complexes with amenities for both communities. Again, that’s an example of two counties basically deciding to change the rules a little bit in order to allow smarter development, and more affordable development. I would say the problem right now is the banks really aren’t making a lot of loans in this space. And so, you’re looking at private money and it’s 16%. So that’s very, very high. And it obviously will impact the cost of any development and the ultimate cost of the homes or apartments or condos. So, you know, I would say that President Trump is not necessarily opposed to somewhat of an industrial policy. So, it will be interesting to see if there are, you know, if the government’s going to partner to make some, you know, investments in certain areas, if Fannie and Freddie will be allowed to do that, in order to help bring down the cost of financing those projects. We’ll have to see.
The other thing I might add is, is that Fannie Mae through its Community Seconds program, if you’re working with an employer, you can do shared equity products, which I think are a new way to make mortgages more affordable to borrowers. And Freddie Mac just approved a shared equity product for a lender. And so, I think some of the newer products like shared equity products appropriately done are ways for new borrowers to get into the home ownership market and start building wealth, through home ownership. It’s, as I said, a multifaceted problem, not easily solved. But there are things that can be done to help soften the blow.Jerry: And in fact, Ann, you know, I don’t know that the Fed anticipated that its long near zero rate monetary policy would have this inflationary effect. It’s hard to anticipate everything, but we’re certainly living with the consequences of it right now. Anne: Yes. Jerry: So, Anne, now let’s turn to what’s going to change in Washington as a result of the election. The new majority leader has been chosen in the Senate, and the House of Representatives will have a Republican majority. Would you share with our listeners what changes are likely to occur in the leadership and the congressional committees that have jurisdiction over the financial services industry? You’ve already referenced a little bit of that in our prior discussion, but could you just walk us through that as you only can? Anne: Sure. Just like to tick it off for the listeners, as you mentioned, Senator Thune was chosen Senate Majority Leader by the Republicans. Senator Barrasso is the next in line. And then Senator Cotton is going to chair the Republican conference in the Senate. When you get down to some of the key committees, Senator Tim Scott, who recently won his reelection handily from the state of South Carolina, will be the next chairman of the Senate Banking Committee. Senator Brown was defeated, as we know, so he will no longer be in the next Congress. And just because of seniority and other members’ interests on other committees, Elizabeth Warren, Senator Elizabeth Warren will become the new ranking member on the Senate Banking Committee, or at least that’s expected. And so, it’s going to be Senator Scott and Senator Warren who will be heading up that committee.
Over at the Senate Finance Committee, a key committee in Congress, Senator Mike Crapo, who is currently the ranking member and former chairman of the Senate Banking Committee, he’ll be the next chairman of the Senate Finance Committee. And Senator Ron Wyden, who is currently the chairman, will be the ranking member since the Senate has flipped control. Those are two of the key committees. Other committees are also, you know, they’re shuffling members, et cetera. But those are two principal committees and I think your listeners would be interested in.
Over in the House, Speaker Johnson was a reelected speaker and then Steve Scalise is going be the majority leader. And so, I think that, that leadership you know lineup in the House is pretty much the same as it is today but over in the House Financial Services Committee, Congressman McHenry who was the current chairman of the committee is retiring, so there is a race for the chairmanship. Congressman French Hill from Arkansas, Andy Barr from Kentucky, as I mentioned, and Congressman Huizenga are all in the running for potential chairmanship of the House Financial Services Committee. And then the ranking member will remain the same, so there won’t be a change there. Once the chairmanship is chosen, we’ll have to see who the next subcommittee chairmen are of the various subcommittees in the House Financial Services Committee.
Over in the Ways and Means Committee, Jason Smith is going to continue as chairman of the House Ways and Means Committee and Congressman Richie Neal, who has been chairman in the past from Massachusetts, he will remain the ranking member. For our purposes on the NDNH Data Project, Congressman Schweikert has been the chairman of the Oversight Subcommittee, and that’s the subcommittee of jurisdiction for the NDNH Database Project. Hope he remains the chairman of that subcommittee, but he’s also going to be the chairman of the Joint Economic Committee. And while that doesn’t have legislative authority, he’ll use that committee — he personally is very committed to using technology to take out costs in government and streamline processes. He has a great interest in that area. So, I expect that as chairman of the Joint Economic Committee, he’s going to be looking at ways to use technology to streamline processes and take out costs. So, this should be right up his alley. We hope it’s up his alley.Sasha: And moving down Pennsylvania Avenue, I mean, obviously, there’s going to be too much turnover in the various agencies to even begin to go through. I don’t want to keep you here for another two hours. But let’s just focus on the CFPB. Obviously, we expect them to have a change in leadership. There was litigation around this the last time, and I think that’s well expected that there’ll be someone new at the top of that, probably pretty quickly. Do you have any insights as to the administration’s plans, who may be the leader, or more broadly, any changes in policy direction that we could expect in addition to changes in personnel? Anne: Well, the administration, the White House has not yet announced their economic team. You know, we’ll have to see. Obviously, Scott Besant is, in my view, the leading candidate to be the next Treasury Secretary, but we’ll have to see. You know, the President has not yet announced his economic team. He’s come out with other announcements, as you know, this week, but the economic team has yet to come.
As you mentioned, the current director of the CFPB is going to be replaced. We don’t know the name of that person yet, but we’ll be finding out, I’d say, in the near future. Here’s an opportunity in terms of agenda. I think it is important, you know, a lot of the career staff will be there, but I do think there might be a change in the direction of the CFPB. First of all, the CFPB itself put out a request for information, comments were due August 1. I submitted a comment letter — Jerry knows all these issues very well — on ways to streamline the mortgage process, take out costs.
So, it included the NDNH database proposal I spoke about earlier, but it also included reforms to RESPA that the industry tried to get done many years ago. And as we know, the design of the RESPA regulation that was implemented at the end of the George W. Bush administration —and then built on by the CFPB — was incorrect. It was designed poorly. Closing costs went from eighteen hundred and fifty dollars on average to eighty-five hundred dollars. So that’s ridiculous. And so, it’s particularly, it’s burdensome for everybody, but it’s particularly harsh for low to moderate income first-time homebuyers. So, I think that the CFPB put out an RFI for comments, for proposals, and I think it, at the career staff level, they’re looking at ways to reduce those costs.
So, I think that they should go back to the drawing board on some of the proposals that were considered a number of years ago. And I submitted a number of salient documents to the CFPB from that effort that we engaged in many years ago. But we can take closing costs down substantially if the regulations are designed correctly. They really could be reduced by many, many thousands of dollars. When you combine it with technology today, you’re looking at a drastic reduction in closing costs.
So, I think that in addition, the CFPB, there’s been a lot of concern in the industry that they haven’t provided the clear guidance that the industry needs on rules and regulations. And so, I think that not only at the CFPB, but at SEC and elsewhere across the government, there is going to be more of an interest in providing the clear guidance that the various industries are seeking so that they can have confidence that they can operate legally and not always be wondering whether or not they’re going to be subject to litigation.Jerry: That’s the decision to move from a strong emphasis on regulation by enforcement to more pre-guidance so that people know what they should be doing, whether it’s by way of regulation or other guidance. And that will be an interesting shift. I wonder whether there’s any chance that the jurisdiction of the CFPB will be impacted by the incoming Congress as well. Anne: You know, there certainly was interest in restructuring it. And so, you know, we’ll just have to see whether or not the Congress wants to move it to a five-member board, as had been proposed, or keep it with the director. There’s a lot of things for the new Congress to do. And there’s a lot of the administration has a very full agenda for the first hundred days. So that may not be on the first hundred days’ agenda, but you never know. This president is moving. This is going to be a very different presidency. President Trump was president before, he had four years to think about what he wanted to do differently in a second term, and my observation is that his second term is going to be very, very different than his first. He’s moving very rapidly to make very significant changes in the way government operates and to really streamline it, take out costs. You know his foreign policy agenda is — I think you can tell from his campaign speeches where he is on foreign policy so that’s going to be — they’re going to be very significant changes and so my impression is that the first 100 days are going to be very, very important as it is in any new administration.
I will tell you this, the lame duck session is coming up and there was some thought on some members that they’d like to clear the slate and join on to this bill, but it sort of looks to me like we might have a continuing resolution until April/May of next year. That would — since the Congress did not do an FY25 budget resolution, by lopping the effort into next year they get a reconciliation bill for each budget resolution. So that means that they can do an FY25 budget resolution next year and they get a reconciliation bill along with it — they have to do it by May 15 — and then they can get a second bite of the apple because they can do an FY26 budget resolution and get another reconciliation bill. So, they’ve got two reconciliation bills.Jerry: And our time is limited and really practically run out. However, it would be very helpful if you could just share very briefly what the significance of a reconciliation bill is as opposed to other legislative vehicles. Anne: The reconciliation bill, the bottom line is that instead of having to have 60 votes — the supermajority — to pass legislation in the Senate, you only need 50, a simple majority. So, it’s easier to get things done. The downside to a reconciliation bill is that you do have some requirements around it. And so, you have to meet certain rules of the road. If it’s in reconciliation, when you get to the tax agenda, the tax provisions expire at the end of 10 years. So, reconciliation bills are for a 10-year piece of time. So, you have a lot of provisions that expire at the end of the 10-year period rather than be permanent. Jerry: Well, Anne, it has been so good to have you. And as I think people can sense, we could spend a lot more time talking because you are a wealth of information and wisdom in this area. But thank you for joining us. We really appreciate it. Anne: Thank you for inviting me, and I’ll send over the Compass Point analysis to you. You might want to share it with your viewers, and that’s on the GSE coming out of conservatorship. We’ll see how it works. It’s complicated. Jerry: Thank you.