Overview
The Real Estate and Mortgage industries are driven by Fannie Mae (FM) and Freddie Mac (FM). Together they back over $5T in Mortgages on Real Property (link/link). When a family tries to purchase a new property or refinance their existing one, the process takes a significant amount of time and cost. Due to this volume, FM/FM have an overwhelming ability to make changes for good.
Problem Statement:
Too many people are involved, too much cost is incurred and too much time is spent when a mortgaged property changes ownership or is refinanced.
Current Process/Workflow:
Home Purchase: To start the workflow we need to start where the money is. Generally, the seller has a mortgage which is held by FM/FM or sold through a Mortgage Backed Security (MBS). We can notice that after the workflow (shown in the image below) is completed, a mortgage has gone back to exactly where it started, with just the change of the owner. So much work to get right back where we started!
Home Refinance: The refinance is a similar process as the home purchase but in this case the start and end with the same owner. Again, significant work is incurred just to change the rate and/or terms of an existing loan.
A good image of this from mortgagesupermart
Proposed Solution (for Home Purchases):
Home Purchase: Fannie Mae/Freddie Mac could remove nearly all of the barriers and costs by allowing individuals to sell their existing property with just a quick update to the MBS with the new property owner and mortgage terms.
Here is an example of how the solution would work:
- Property Owner has mortgage backed by FM with Unpaid Principal balance of $375k and 4.25% interest rate (in a MBS pool)
- Owner enters into agreement to sell this property for $425k
- Buyer completes online assessment from regional FM/FM Subsidiary Servicing Company and qualifies for the mortgage at the interest rate of 4.15%
- FM/FM reviews online electronic application and determines if new appraisal is needed based on market conditions or time lapsed since previous mortgage
- FM/FM contact MBS Investors and requests change of the one mortgage within pool electronically with investors. When MBS pool agrees then transaction is approved pending documentation completion
- FM/FM submits information to regionally based subsidiary Title company which submit loan information to County
- Loan is completed and updated across County, Servicing Company and MBS Pool
- FM/FM fund new mortgage, pay off old mortgage and remit balance to previous owner
Requirements/What needs to be done:
- FM/FM take ownership of end to end process by creating the following regional subsidiaries:
- Servicing Company – Drives significant cost savings and link between Customers, Counties and the entity holding mortgage
- Title Company (why are they needed?) – Drives cost savings and time savings
- Appraisal Company
- FM/FM creates online portal for property owners to access their mortgage information which is used by FM/FM and Servicing Subsidiary
- Master database of all properties in USA linked to County records linked between FN/FM and counties
- When new property created, a unique ID is generated by FN/FM and provided to County which then updates information
- Integrations/API’s created with MBS Pools, Title Companies, Counties, and Servicing Companies
Efficiencies Created:
Time. Updating information across multiple ledgers simultaneously would mean that all of the information needed to fulfill this transaction could take place electronically in a matter of hours, not days or weeks.
Effort. This puts FM/FM in a better position to be integrated with their subsidiaries many more efficiencies can be accomplished to make FM/FM even more lean.
Cost. By replacing manual effort by multiple parties with electronic data transmissions, the entire effort will naturally cost less.
Truth. This enables a single ledger for the source of truth.
Proposed Solution (for Refinances):
Refinances:
A new mortgage product needs to be created that will provide Homeowners the best interest rate while also providing the security of fixed rate mortgages. This new mortgage product is a secured line of credit with the ability to switch between a variable rate mortgage to a fixed rate during the life of the loan.
Here is an example of how the solution would work:
The existing mortgage (or new mortgage) is created at the existing variable interest rate of 2.4% with an underlying 30 year fixed rate of 2.8%. The variable rates are updated each quarter and at that time the homeowner is given the option of selecting whichever rate is the most beneficial. The payment is adjusted at this same time.
The entire balance of the mortgage, however, is essentially a line of credit that can increase with local market conditions yearly or be lowered if the borrower elects. As interest is charged only on the current balance the borrower can use the mortgage in anyway that suits. The value of this new mortgage product is lies in the fact that the amount of the mortgage product is equal to 100% of the value of the property.
Efficiencies Created:
By developing this product, there is no longer a need for a separate second mortgage or home equity line of credit because the full value of the home is already secured through this new mortgage product…..and at the best rate available.
Other improvements needed:
These additional improvements are small but will improve the overall experience.
- Allow for payments to be made via stored Credit or Debit Card
- Allow borrower to specify date for payment
- Allow for borrower to specify multiple dates for payment (as some people are paid weekly, bi-weekly, bi-monthly, or monthly) – By allowing more flexible ways to pay (see above) benefits of the timing of payments is also increased
- Eliminate Private Mortgage Insurance (what is it?) – This would be able to be added to the interest rate
- Reduce Appraisals to only New Purchase loans (what is it?) – This removes that requirement for a refinance. Additionally, from the time that an Appraisal is completed, an annual rate increase should be applied so that when a buyer is purchasing the house, if the price paid is equal or less than the prior Appraisal plus the annual increase rate, an appraisal should not be needed.
- Allow borrowers to refinance annually, without cost
- Allow for additional escrow account for Homeowners Association or other property relevant needs
- Allow Servicing company to manage collection of rent (for properties that are held by FM/FM and are being rented out) for a small surcharge. This would help the owner of the property and help the renter feel confident that the rental income is being used to pay the mortgage
Results
The results of these changes above would significantly reduce the large companies and complex process of simple lending. This improves each customers experience and establishes a direct link between the customer and the lender.
Finally, these reforms will allow for electronic completion of New Mortgages and Refinances to be completed with little cost and virtually minutes.
Can you help this idea become a reality? If so, please email me here: chris@crossett.net
Thanks