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Scary Information

By
Mortgage and Lending with Corona Mortgage

Hey there!

I received this whitepaper third-hand and I'm trying to place the source.  The information seems as though the author knows enough to have an educated opinion, but I'd like to know more about this information. 

Can anybody give me information in where this came from?   The information is scary.

Thanks!

John Lillywhite

 

Section 3
 TECHNOLOGY AND COMMUNICATIONS
Industry Trends
Real Estate

 Technology is changing the real estate market in an unprecedented scale.  User-friendly front-end web sites, sophisticated database and farming techniques, and back-office systems integration are contributing in streamlining virtually every link in the real estate service chain.  The increased operational efficiency will substantially reduce the manpower overhead which currently exists.

 Information and portal websites such as Bankrate.com are responsible for making the most profound changes in home buyers and homeowners psyche.   Relevant and easy-to-access information is increasing the confidence of borrowers and sellers.   A June 2007 Datatrends report showed financial information and portal sites as the third fastest growing segment of Internet activity behind adult content and personal blog (MySpace.com, facebook.com, etc.) sites.

 The diagram below illustrates both the current and the project real estate transaction chain model.  Aside from the fact that emerging technology will facilitate a more efficient transaction process, analysts perceive the existing transaction chain structure too complicated to be maintained without cross-platform functional integration.  Note that as a result of both cross-platform and technological implementations, the transaction process flow will become more efficient and manageable.

 Real Estate Agent and RealtorÒ Services

 Research still strongly shows that buyers and sellers of residential real estate want face time and the personalized customer service.  Thus, demand for the RealtorÒ professional will remain higher than that of other service affiliates discussed below, but it will still experience a flattening in growth. 

The increasing ability for buyers to survey properties using internet-based virtual video "walkthrough" applications will significantly reduce the number of homes an agent shows a prospective buyer.  This will streamline the search - and close - process.

As buyers and sellers leverage Internet information and perform more tasks themselves, Realtors should be prepared to address the growing pressure to reduce commissions as a result of the perception of less work involved.

65% of all prospective homebuyers turn to the Internet first before speaking with anybody.  Of those, half of them "seriously consider" at least one For Sale By Owner (FSBO) listed home.  That equates to one out of three prospects.  This trend to use the Internet as a preliminary search tool is expected to explode and will not go unnoticed by home sellers.  As a result, the number of sellers that will consider selling their homes By Owner will also increase substantially.  FSBO services such as Help-U-Sell will grow in size and popularity to coordinate some of the more complicated contracts.  Combine these contract-assistance services with sophisticated Internet home search and virtual-walkthrough tools, and there is reason to support a very real FSBO growth trend.

Mortgage Brokering Services

Recent reports from Housing and Urban Development (HUD) and Government-Sponsored Enterprises (GSEs) such as Fannie Mae indicate that the Mortgage Broker chain is most responsible for the loan fraud cases.  (One report shows that of all fraudulent loans reviewed by Fannie Mae in the 1st half of 2007, Mortgage Broker were considered the source of the loan fraud 8 out of 10 times.)  As a result of these rising statistics, it is expected that additional local and federal government mandates will be imposed on the Mortgage Broker further exacerbating the already difficult condition.

The benefit of using a Mortgage Broker to obtain lower interest rates on low-risk conforming loans will be less apparent as government regulations mandate greater control over Mortgage Broker behavior and rate/price structuring.  Institutionalized and government-insured banks will have greater and lower-cost access to Government-sponsored (FNMA) and -insured (HUD-FHA) securities, which will result in a homogenized rate structure.

The Mortgage Broker profession will exist primarily in special transactions such as non-conforming and high-risk loans.   Low-risk and conforming loans will be originated and underwritten either through a series GSE web sites and branch offices or local institutional bank's branches.

Research shows that homeowners are feeling increasingly comfortable using the Internet for secure banking transactions.  This comfort will naturally extend into the on-line loan prequalification process.  Prospective homebuyers already have on-line access to user-friendly loan pre-approval tools from institutionalize banks and lenders.  Within the next year, Government-Sponsored Enterprises such as Fannie Mae will make automated underwriting services available to the general public through the Internet.  Consumers seeking mortgage loans will provide financial information on secure sites.  If approved, they will receive immediate feedback of the approval, including a list of required documentation and a list of institutionalized banks and lenders who will provide the funding based upon the information provided on-line.

The table below shows the trend toward conducting the loan transaction on line.  By the year 2010 nine out of 10 will have some form of Internet connectivity.   Of those, almost 7 out of 10 will conduct the entire transaction on-line equating to 55% of the mortgage-seeking population.

 

2006

2008

2010

Homeowners with internet-connectivity

50%

70%

90%

Search(ed) for homes before talking to anybody

30%

(15 out of 100)

65%

(45 out of 100)

85%

(74 out of 100)

Research(ed) interest rates

30

(15 out of 100)

80%

(56 out of 100)

90%

(81 out of 100)

Perform(ed) their entire loan transaction on-line

12%

(6 out of 100)

35%

(25 out of 100)

65%

(55 out of 100)

Source:  DataquickÒ, DatafactsÒ 2007, RESourcesÒ

4-year projections:

Ø      500% increase in searching homes on the Internet
Ø      600% increase in researching rates using the Internet
Ø      800% increase in users performing the entire loan process on-line 

Even more conservative numbers reflect paradigm-like changes.  The changes are expected to affect the entire chain of real estate services.

Title Insurance Services

Advances in database, storage and access technology are creating significant increases in operational efficiency and cost reductions.  Large numbers of property and title specialists will no longer be needed as information is mined and collected using a wide variety of intelligent data resources. 

Further, as the title insurance process is automated using on-line ordering systems and the number of title defects requiring assistance fall, the front-line Account Executive who today offers / manages the title insurance transaction will no longer be required.  Customer service will be provided by a smaller number of data specialists and outsourced title attorneys.

Escrow / Neutral-Party Services

The trust / neutral party services will eventually be an extension of the bank/lender's service.  The flow-control service will not change dramatically, but the overhead will as documentation and funding tie-in processes are made more efficient by the lender.   This automation process will also better adapt to changes in the number of transactions, and provide a greater level of service quality, consistency, predictability, and regulatory accountability.  The personnel providing today's escrow services is expected to reduce by approximately 50% as automated processes become more prevalent.

Those providing the notary services are not expected to be negatively impacted.  This service will be outsourced.  As no brick-and-mortar escrow office will exist, documents requiring notarizing will be signed in the signer's homes and workplaces, bank branches, etc.

Appraisal Services

There is growing research that indicates that appraisers are too often influenced by affiliates in the service chain.  Reports indicate that 47% of fraudulent residential real estate transactions that did not include the borrower or seller included an appraisal which was considered pivotal to the fraud claim.[1]

The groundswell of fraud, combined with the importance of legitimate and reliable real estate valuations will eventually centralize and autonomize the appraisal profession.  Qualified and licensed appraisers will enlist in a managed "service pool" upon which lenders and banks will tap when in need of an appraiser.  Although appraisers will be able to provide specialty capabilities, (>$1MM home valuation, rural, land, multi-unit, commercial, etc.), the appraisal selection process will be randomized.

Once this service pool process is implemented, the cost per appraisal is expected to drop as the process is automated further and competitive differentiation is excluded from view.  Research on appraisal service value reductions were hard to estimate and harder to validate.

Property and Pest Inspection Services

Today, property and pest inspections are not a requirement to conclude a purchase or refinance transaction unless part of the Purchase Contract.  Inspections are rarely required on refinances and only if conditioned by the lender.  Research from lender interviews suggest a trend toward these services as being a condition for all loan funding.  Changes in building material quality, climate changes, statistical increases in pest infestations, and average home ages are only a few contributors as evidence toward this change.

Similar to the Appraisal services, property and pest inspections services will be available from a managed "service pool" upon which lenders will tap to obtain the service.  The automated nature of the business, combined with lack of competitive differentiation, will erode prices from where they are today.  This will be offset by the number of property inspections required.  This number is expected to increase substantially not because of the requirement on the purchase side, but rather from the refinance side where literally no inspection is currently performed.

Conclusion

The real estate market is clearly not immune to advancing internet and communication technology.  The last decade has shown consumers are willing and able to use the Internet and communication tools resourcefully, and there is no indication that they will resist further advances into mortgage and lending services.  Government-sponsored and -backed organizations such as FNMA and HUD are implementing internet-based user tools to facilitate a predictable and auditable lending process.  Institutionalized banks have seen a substantial increase in on-line use of their automated underwriting services.  The implementation of leading-edge communication and database technologies is creating huge service chain efficiencies.

All of these technological advances, combined with legislative changes in service chain responsibilities and accountability, are already leading to substantial reductions in front-line service and back-office human resource requirements.

Recommendation

As a result of the radical downsizing and streamlining processing at work, RCHP is currently recommending its investors and clients take a strong sell position regarding the real estate chain.  This is a significant recommendation when viewed in the scope of other RCHP market profiles.  Since RCHP's inception in 1974 there has never been a recommendation to avoid an entire market service chain.

More Information: 

Clients refer to Reflector 12A3-14009:  RCHP; MH-r-12(a).  Rev 9.01.11.c(a)

 


[1] HUD Document, Housing Appraisal Fraud Notice, June 2007.

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