Residential Magazine

Loan Quality is Crucial in Replenishing Capital

Automated income and employment data show how likely consumers are to repay mortgages

By Jordan Hamling

In today’s economy, uncertainty is the only certainty for many mortgage lenders that are working to improve efficiencies and maintain a healthy loan pipeline. Increasingly, lenders are turning to securitization as an established method to replenish funding and add more capital-sourcing options.

For some time, lenders have turned to the capital markets to raise funds by packaging loans to sell to investors, who then receive future cash flows. When mortgages are securitized, the resulting product is referred to as a mortgage-backed security. Once packaged based on the expected delinquency rate, for example, the security is then sold. The securitization process can help mortgage lenders free up funds and make additional loans or get riskier assets off their books, thus alleviating their credit risk.
In a highly competitive market, lenders may be able to improve the attractiveness of their loan portfolio to investors by leveraging automated income and employment data at the individual loan level. In a potentially recessionary economy, it is vital for lenders to evaluate the strengths of the borrowers and loans within their portfolios, and to identify potential default risks before they occur.
Mortgage originators will use the automated income and employment data during the loan processing stage. So, they’ll need to know the reasons why lenders are using technology-based risk assessments in their decisionmaking.

Underlying assets

A lender extending home loans to consumers who meet underwriting criteria can later offer a security to investors based on these loans and assets. The lending institution can serve as both the originator and the seller of loans that ultimately become part of the resulting security.
Next, credit-ratings agencies determine ratings for the offered security based on many factors, such as its default risk and any enhancements included to reduce risks. An investor then purchases the security.
The loans within the security produce cash for investors while they are in the repayment stage. This process, in turn, can allow lenders to free up capital by passing on riskier debts to investors and utilizing the proceeds from the sale to continue lending.
The appeal of investing in a mortgage-backed security bond is fundamentally tied to the strength of the underlying assets. The loan type, the financial portfolio of the borrowers and the lender’s underwriting criteria are some of the variables in the security’s ultimate performance, along with external factors such as changes in the economy.

Valuable insights

Mortgage lenders want to be aware of default risks and delinquency ratings to avoid taking on unnecessary risk when originating mortgages. Verifying income and employment is crucial to achieving this by helping to evaluate loan strength and likeliness of default.
Lenders have myriad ways at their disposal to verify income and employment, from traditional to alternative sources such as bank-transaction data, credit scores and debt-to-income ratios. Lenders also can review borrowers’ pay stubs and tax forms. All of this information can provide valuable insight into a loan applicant’s ability and willingness to repay a loan.
Lenders that incorporate income and employment information into their underwriting are increasingly leveraging more automated approaches that enable current employment and income data to be requested as needed, with corresponding updates each pay period. The disproportionate impact and constantly evolving economic circumstances of the COVID-19 pandemic — particularly on the employment status of borrowers in certain industries — have escalated lender interest in using income and employment data to make decisions.
Automated options not only help improve credit-risk management for loan application decisions, but they also can enable a better consumer experience by helping speed the time to approval. Independent, third-party, automated verifications can help lenders apply a more consistent model for each applicant when data is available. Digital solutions often deliver current and near-instant results, which can significantly streamline processes to reduce inefficiencies and friction throughout the process of making loan decisions.
When seeking to securitize loans, modern lenders may need to be prepared to present information about their verification methods to ratings agencies and investors. Fortunately, lenders may find that moving from a tedious paper-based process to an automated verification system can positively impact the quality of their loan portfolio.
In addition, the upgraded client experience and efficiency improvement can create time for lenders to increase sales efforts among consumers while lowering costs. Also, lenders that verify income and employment at the loan level may be viewed more favorably as part of a ratings agency’s assessment.

Accurate results

In response to a fluctuating economy and the potential risks, investors and ratings agencies have often focused on the historical performance of a lender’s portfolio as well as the rigor of its underwriting practices. The idea is to understand how these factors can alleviate changing macroeconomic conditions.
Verification of income and employment, along with additional steps in the underwriting process, may result in a higher rating for a lender’s mortgage-backed security offering. This is particularly true if the lender can demonstrate that its criteria for making lending decisions consistently provide more accurate results.
Automated verification of income and employment can reduce the chances that a lender takes on risky loans. And by extension, this can help investors feel confident that they will not sustain delinquencies in the underlying loans.
Automated income and employment verifications can provide financial institutions an upper hand when seeking to bolster portfolio attractiveness for investors while yielding benefits for lenders and consumers alike. Lenders and investors should fully appreciate and understand the dynamic relationship between a borrower’s income and employment status and their likelihood to repay a debt.
By using automated income and employment verifications to allow a more in-depth analysis of a consumer’s financial portfolio, mortgage lenders will be better positioned to make more confident lending decisions. This may result in asset-backed security portfolios that appear more attractive to investors. ●


  • Jordan Hamling

    Jordan Hamling serves as senior director of mortgage verifications services at Equifax. Hamling is responsible for solution sales, client management, project management, strategic planning, market analysis and negotiations. He possesses nearly a decade of experience in the mortgage industry, where he has served as an executive consultant to businesses seeking growth and expansion, and as the lead to a successful mortgage banking team. He also served as an intelligence officer with the U.S. Army National Guard. 

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