How to Tackle 2023 as a Mortgage Lender

2023 is changing things up in the mortgage industry. From rising credit reporting costs to new mortgage credit scoring models, mortgage lenders need to stay on top of the upcoming changes and adjust their business models accordingly.

To help mortgage lenders prepare for 2023, we spoke with Kevin Peranio, Chief Lending Officer of PRMG, about his mortgage industry predictions in our Talk Data to Me podcast.

In this article, we’ll discuss some of the predictions he has for 2023. We’ll also suggest some ways that mortgage lenders can tackle this year’s changes and thrive.

How Will 2023 Differ From 2022?

2022 was a volatile year for the mortgage industry. The first half started out strong—interest rates were low and volumes were high. Once the Federal Reserve started increasing rates, the industry came to a sudden halt, leading to layoffs and increasing uncertainty.

Fortunately, many experts predict that 2023 will be a better year for the mortgage industry. Many people are looking for homes—they’re just waiting for interest rates or home prices to go down first. Since interest rates have likely peaked already, these hesitant homebuyers may enter the market very soon.

According to Kevin, many originators have reported an influx of prequalification applications, giving lenders that much more reason to be optimistic.

3 Major Credit Reporting Updates For 2023

Despite these turning tides, 2023 also brings with it some new challenges. Here are some noteworthy changes affecting the credit reporting space:

1. Credit reporting prices are increasing substantially – According to the National Consumer Reporting Association (NCRA), mortgage lenders are going to see their FICO credit score costs go up this year. Depending on the lender, this price spike can range from 10% to 400%.^[i] The majority of lenders will fall on the latter side of that spectrum.

Incurring these inflated costs in the wake of a record-setting tough quarter isn’t the news most mortgage lenders want to hear. However, savvy lenders can mitigate the impact on their margins by proactively cutting costs in other areas. They can also pass some of these costs on to their borrowers, rather than absorbing them entirely.

To learn about some origination cost-reduction strategies, check out this article here.

2. New credit scoring models have been approved for GSE-backed loans – In October 2022, the Federal Housing Finance Agency (FHFA) approved the use of two new credit scoring models for Fannie Mae and Freddie Mac: FICO 10T and VantageScore 4.0.^[ii]

Transitioning to these new credit scoring models will take place over the next few years. Once the transition is complete, mortgage lenders will only be able to sell loans on the secondary market that use these scores.

Here are a few noteworthy things about these credit scoring models:

- - They include alternative data – FICO 10T and VantageScore 4.0 were developed to make mortgages more accurate, inclusive, and innovative. As a result, they take into account new types of payment history information, such as rent, utilities, and telecom payments.

By factoring in this data, VantageScore claims that their new model will score 96% of the adult population.^[iii] In turn, many historically credit-invisible consumers can finally generate a credit score, increasing their access to mortgages and homeownership. According to the Urban Institute, black families have the most to gain from this change.^[iv]

The enhanced accuracy of these models should also mitigate the risk of default. FICO estimates that it could lower the default rate by 17%.^[v]

- - They use “Trended Data” – Another notable difference with FICO 10T and VantageScore 4.0 is that they use Trended Data, which includes borrowers’ credit balances over the past 24 months, rather than just their balances today.^[vi]This change will likely benefit borrowers who have a consistent history of good credit management, but it may decrease the scores of borrowers who have only recently started implementing such habits.

3. Fannie Mae and Freddie Mac will only require two credit reports – Another upcoming change is that GSE-backed loans will require bi-merge credit reports instead of tri-merge credit reports. The goal of this change is to reduce credit reporting costs and inspire innovation amongst the credit bureaus.

In addition to these changes, mortgage lenders and borrowers can expect to see at least a modest drop in interest rates and housing prices. While no one knows exactly what will happen, conservative predictions place interest rates around 5.25% to 5.5% by the end of the year.^[vii]

How Can Mortgage Lenders Prepare For These Changes?

As the saying goes, forewarned is forearmed. As you anticipate these changes coming down the pipeline, it’s important to prepare for them proactively.

Here are a few recommendations:

#1 Streamline Costs Where You Can

Of all these changes, the most immediate applies to credit report pricing. Mortgage lenders can adapt to this inevitable change by cutting costs in other areas.

Here are a few cost-saving strategies to employ this year:

- - Mitigate manual work – Automation can help you save time and money by taking tedious tasks off your salaried staff’s plates. Here at Certified Credit, we offer automated solutions for the following processes:
    - Borrower retention and lead generation – Cascade Alerts
    - Prequalification – Cascade Prequal
    - Verification of income and employment (VOE) – Cascade VOE
    - Undisclosed debt monitoring – Cascade UDM

Employing solutions like these can boost your business’ efficiency and save you money along the way.

- - Right-size your staff – As you employ more automation, you may discover that you don’t need as large of a team as you did in the past. Optimizing your staff size now can ensure you maintain the means to operate profitably into the foreseeable future.
  - Reevaluate your ordering process – You may also be able to save money simply by switching up the order of your processes. For instance, you may want to hold off from initiating VOE until you’ve made sure that an applicant meets all of your credit criteria. This way, you can avoid wasting money on VOE orders for applicants who fall out of your sales pipeline prematurely.
  - Prepare for a heavier reliance on prequalification – As credit reporting costs increase, many lenders are going to turn to soft pull credit reports to cut costs. That’s because soft pull credit reports are considerably cheaper than traditional tri-merges.However, there’s a higher bar of compliance for getting authorized to order a soft pull credit report. Most notably, the customer must initiate the process. You can inspire your prospective applicants to do so by offering prequalification on your website. You can also create educational content about the benefits of prequalification.To prepare for an increase in prequalification applications, consider implementing an automated prequalification solution, like Cascade Prequal.
  - Select the right solutions provider – As you analyze your costs, it’s important to look for a solutions provider that can meet your need to cut costs halfway.At Certified Credit, we offer discounts on bundled packages of solutions that are designed to work together. We can also take a look at your current workflows and help you identify worthwhile opportunities for cost savings.

#2 Diversify Your Loan Portfolio

Since interest rates have been so high, mortgage-backed securities haven’t been selling like they used to. These higher-rate loans aren’t worth as much to end buyers who are aware that rates will likely decrease soon.

As a result, many lenders are manufacturing loans at a loss. The average loss per loan was $624 in the third quarter of 2022.^[viii] This figure is the largest it has been since the 2008 housing crisis.

Lenders facing such steep losses have either sustained their businesses on past profits or relied on their servicing portfolios to get by. With this in mind, you may want to get into the servicing game if you’re not already.

#3 Focus on Borrower Education

As you learn more about the upcoming changes to credit scoring models and interest rate adjustments, you should pass on this information to your prospective borrowers.

After all, lenders are ultimately the people who are teaching financial literacy at scale. Most aspiring homeowners rely on their realtors and lenders to hold their hands through the home-buying process.

You can bring borrowers up to speed and earn their trust by teaching them about credit, fluctuating market conditions, and other fundamental financial topics. Even if you don’t secure their business right now, they may reach out to you again down the line.

#4 Manage Your Reputation

Lastly, Kevin talked about the importance of reputation management. Since distrust is so rampant in the industry right now,^[ix] your reputation can make or break your ability to attract new applicants.

For this reason, you’ll want to take stock of your online reviews. If they’re not as positive as you would have hoped, make sure to implement their constructive criticism. You can also encourage your happy borrowers to write reviews online to boost your rating.

Another way to bolster your reputation in the industry is to be active on social media. Building a professional presence on multiple platforms can help you grow your personal brand and strengthen your reputation as an industry expert.

Certified Credit: You Don’t Have to Tackle 2023 Alone

In summary, this year’s success hinges on finding solutions to inefficient processes, rising prices, and changing procedures. If you need some support navigating all of the challenges of 2023, you can always turn to Certified Credit.

As a leading mortgage solutions provider, we’ve helped countless lenders update their processes, cut costs, improve efficiencies, and scale up their businesses. Some of our solutions include:

- Automated loan manufacturing solutions
- Lead generation tools
- Affordable credit reports
- Flood zone determinations
- Fraud and risk support
- Settlement services

See how we can support your goals in 2023 by scheduling a credit consultation today.

Sources:

^[i] NCRA. November 22, 2022.

https://www.ncrainc.org/cmss_files/attachmentlibrary/2022-11-Price-statement-4871-3419-6543-v-1-Final2.pdf

^[ii] FHFA. FHFA Announces Validation of FICO 10T and VantageScore 4.0 for Use by Fannie Mae and Freddie Mac.

https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Validation-of-FICO10T-and-Vantage-Score4-for-FNM-FRE.aspx

^[iii] VantageScore. Fannie & Freddie to Use New Credit Scoring Models.

https://vantagescore.com/press_releases/fannie-freddie-to-use-new-credit-scoring-models/

^[iv] HousingWire. Black households have most to gain from inclusion of rent payment data: report.

https://www.housingwire.com/articles/black-households-have-most-to-gain-from-inclusion-of-rent-payment-data-report/

^[v] FICO. FICO® Score Migration Resource Center.

https://www.fico.com/en/ficoscore10