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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 40 May 2023 F E A T U R E systems is one of the key ways to manage the volume of loan programs and volume of loans effectively while reducing cost and ensuring quality—the trifecta. Consideration 2: Increasing investor expectations of greater precision. In effect, no investor besides the GSEs with their rep/war- ranty recourse construct will accept anything less than 100% compliance with their criteria. Fannie Mae and Freddie Mac allow for interpretation of their guidelines and affirm the compliance with post-closing reviews of 10% of each month's volume, where many non-GSE investors in jumbo, correspondent, and non-QM assets require 100% review and compliance prior to sale. The path to higher gain on sale is a function of withstanding higher scrutiny. Whether surviving repur- chase reviews in the future or assuring an ability to sell at origination, surviving 100% review is the most reliable path to predictable revenue recognition and margins. Consideration 3: Macroeconomic volatil- ity—what can I do about rates? We are in a period where the rate of change on very low interest rates is a step change. A 50 basis points (bps) increase on a base rate of 5% is a 10% change in the cost of a loan, and we are digesting those regularly. The scale of increase of rates and the frequency of the rate increases are the sources of unpredict- ability that roil secondary market execu- tion. The best hedge is not a fancy Treasury trade where the actual Treasury security is experiencing the same volatility as the securi- ties you are attempting to hedge. Instead, the originator's best hedge is collapsing the time to originate as the best way to minimize the exposure to rate volatility. It is possible to close loans in 15 days or less now and to sell the loans within 48-72 hours of closing. My advice is to operationalize the macro risk by closing faster and controlling the length of your exposure to the volatility in execution. The reality is that repurchase risk is grow- ing as the loans are becoming more complex. Loans are also getting more difficult to obtain, and it is becoming harder to get people ap- proved or to calculate the most liberal qualify- ing income possible without breaking any guidelines. More attributes must be managed more precisely to originate a loan cost-effec- tively and sell that loan at the forecast price. An example would be what sources of income and what assets are eligible to qualify a borrower for—a loan eligible for sale to the GSEs, a loan eligible for FHA insurance, or a non-QM loan where cashflow may be the basis of a judg- ment about income or reserves. The inability to document the care and diligence employed by the lender during origination would make a big difference—just one more reason for embracing systems. Complexity Is Increasing, but Human Tools Are Not Keeping Up R esolving the problem of eligibility for sale and the best fit for a borrower is a uniquely human task. Humans have the unique ability to engage the borrower to solve for solutions, when supported by tools that organize, present, and validate the data necessary. The challenge is that humans need better systems to support performing this valuable service uniformly, accurately, and inexpensively. The key to managing complexity is organizing humans to perform high-value tasks like pathfinding, organized around systems that support data capture, data validation, and decision-making. Humans are incredibly flexible and able to perform creative tasks in ways even chatbots can only talk about. When humans are asked to repeatedly perform highly precise tasks or to consistently interpret highly variable data correctly, they do not perform as well as ma- chines. Leverage the skills of humans to solve creative tasks that drive effectiveness. Organizing your operations in a fashion where the division of labor suits the task is critical. Use the machines to perform what must be precise and consistent to assure uni- form interpretation of unique situations. The machines must be better at more complex but repeatable tasks to allow humans to contribute more to achieving a desirable outcome for the borrower and the owners of the originator. Mitigating Risk T here is a range of responses to having to mitigate risk daily. Most lenders try to spend a tremendous amount of time and investment on processes and workflow tools. Originators can buy tools, organize a process, or invest in trying to train their people, but the real driver here is how to integrate automated tools into what is still a manual process. In manual workplaces—which most workplaces still are today—people are required to have cognition and to make judg- The key to managing complexity is organizing humans to perform high- value tasks like pathfinding, organized around systems that support data capture, data validation, and decision- making.