In 1984, Glenn Frey released the song “The Heat is On” to support the movie Beverly Hills Cop. Growing up in the ’80s I only need to hear the title of this song and can still immediately conjure up the tune and even the lyrics. The song’s intro builds into an up-tempo catchy tune that speaks to pressure, shadows, and the omnipresent “heat” on the street. While the mortgage lending industry of the 1980s does not bear a lot of semblance to our experiences today, one thing everyone can agree on is that there is a great deal of pressure and heat on our streets.  

In the residential mortgage environment today, we are seeing a unique set of circumstances that have layered on top of each other. This has created pressure and urgency that has not been seen to this extent before and which brings a palpable “heat” to every segment of the industry. 

Throughout 2020 and 2021 we have seen skyrocketing loan volumes resulting from historically low rates, spiking investor activity and a large cohort of available first-time homebuyers. Compounding this are critical shortages of building materials necessary to support consumer demand and limited housing inventory driving home prices to levels never seen before.  All this with a dizzying year over year price appreciation at nearly 20% according to the most recent Case Shiller Index. The heat is definitely on. 

Impact of remote work

The great success story of early 2020 was the mortgage lending industry’s pivot to working from home, providing a strong boost to the overall economy, embracing the refinance boom, and keeping the American Dream of home ownership alive and well. But the pressure to innovate and adapt has never been greater. Lenders are balancing the need to manage historic volumes while moving quickly to adopt technology advancements necessary to remain competitive. Many lenders’ shops feel as though they have been stretched to the breaking point. With no slowdown in sight, the pressure to maintain market share and manage consumer expectations is only going to increase the heat on the street. 

Managing high volumes and holding off the competition are seen by most lenders to be the biggest threats to profit margin, according to the Fannie Mae Lender Sentiment Survey released in Q3 of 2021. The lack of inventory and affordability is weighing on borrowers, as evidenced by the National Housing survey recently published by Fannie Mae.

Fraud is increasing

In a market environment where it is increasingly difficult for borrowers to qualify for a loan, the pressure to falsify income, employment, liabilities or occupancy are increased. Loan level defects are increasing, as are the number of Suspicious Activity Reports being filed by the lending industry which may be attributed to qualification misrepresentation. This activity may rely on witting or un-witting participation of the consumer or other parties to the transaction.  

Similarly, we are also seeing fraud for profit schemes recently in the courts where unscrupulous builders and brokers have taken advantage of consumers who are desperate to purchase property. Recent cases have seen instances of advance fees, wire fraud, money laundering and Ponzi-scheme activity which all resulted from maintaining a lifestyle built upon fabrications. These crimes often resulted in the consumers and lenders alike being defrauded and losing significant sums of money.  

Bottom line

Regardless of the attack vectors, our industry relies on confidence in the integrity of its transactions. Ensuring the safety and soundness of residential mortgage originations is a pillar of lending today. As lenders navigate through the many pressures they face, it’s going to be crucial that they look for solutions that balance workflow improvement without paying the cost of taking on additional risk. So, this reminder, to remain focused when the “Heat is On,” will serve our industry well in the coming months. 

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