Lykken on Lending

The mortgage industry is largely human-forward, and it has been that way over the decades. But that doesn’t mean there is no room for technology to take center stage in solving some of the problems in the industry. In fact, there are so many emerging use cases for financial technology that are only just coming to the fore. One example is how Candor helps in eliminating repurchases, which can be a real headache as anyone who has been in the industry long enough knows. Chief Strategy Officer Earl Thomas Booker III joins in on the show to talk about the unique insurance policy that Candor uses to prevent and resolve repurchases. He also talks about the advantage of using Candor as an underwriting software itself. Join in and learn more about how Candor and other AI-backed software are changing the game for professionals in the industry.

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Watch the episode here

 

Compete More Effectively By Eliminating Repurchases With Earl Thomas Booker III

I’m excited to have someone that I have gotten to know and enjoyed. His name is Earl Thomas Booker III. We affectionately refer to him as Books. Books of Candor, good to have you here. That almost sounds like something from The Hobbit, Books from Candor. Anyway, Books, it’s so good to have you joining in.

Thank you, David. It’s great to be here.

You’re a veteran in so many aspects of this. I want people to get to know you. One of the things that intrigued me is your futures and options trading background. Give us a little bit of your journey to where you’re at.

It’s been a long ride. I went to school at the University of Wisconsin. I’ll tell you a secret. I was a football player at the University of Wisconsin.

When they meet you in person, you’re this big teddy bear of a guy. Your size would say that, and then you say you’re too nice to play rough and tough football. You played football? Good.

 

 

Yes, I did, and that led me to the IBM company. I worked at the IBM company for a period, did a little startup, and then moved over to Fannie Mae. I worked at Fannie Mae for a total of nine years. I did a lot of things there. Most of it was in what was called the eBusiness in those days. In the single-family arena around counterparty risk, I had a fantastic time there that led to a stint at First American, then CoreLogic. I worked with a consulting firm, The Collingwood Group, and ended up now with Candor, so it’s been a lot of player’s long ride.

One of the things we talked about earlier is there are a few Toms in there. Did you say there were three Toms inside?

Yes, I was the last Tom hired, so I got to change my name. It was very interesting sitting on Zoom calls and having to figure out which Tom you’re talking to.

I like Books. It works well. I’m excited to have you here. You’re a Chief Strategy Officer at Candor. That can include a lot of things, Books. If you could explain, at Candor, what does a Chief Strategy Officer do?

Chief Strategy Officer at Candor is primarily about business planning. That’s the planning part of the job. The execution part of the job is you’ve got to figure out how to get into new areas, new products, new markets, new distribution channels, and new ideas about how to use the product. A part of that is competitive assessment and understanding where the markets are and where they’re going.

When you look at a chief strategy officer, what was it that attracted Candor to you and you to Candor?

David, that’s a wonderful way to put that because I do think it was a mutual attraction. I’ve known Tom Showalter for quite some time. Frankly, at the time that Tom reached out to me, I was doing other things in the investment world with small companies. I became very enamored with Candor as a product first. Tom is a wonderful amazing human being.

He is such an amazingly wonderful human being. If you could sit and listen to him forever in how he approaches life, it’s exciting.

I do get an opportunity to do that now more frequently than I have in the past.

After my time with him, I’m jealous of you because I can’t get enough of Tom Showalter. Let’s talk again a little bit. That mutual attraction there, did you start out as a Chief Strategy Officer, or did you evolve into that?

I was hired as a Chief Strategy Officer at Candor, but I’ve done this role in other organizations. I had a similar role to this when I worked at Fannie Mae in the Fannie Mae eBusiness. The eBusiness has been since subsumed into the single-family line of business of Fannie Mae. It’s gone through a number of iterations, and it was some time ago. I had done this for a company that was in the business of helping tough to serve and debt-burdened borrowers. I played this role before, but it meant something different in each place.

I’d love to get into that and study that, but we’re wanting to be Candor centric, but that would be a fun discussion to have with you sometime. We may have to come back and do our session on just the role of a Chief Strategy Officer. I’m interested in what it means to Candor what you brought in. Your background in Fannie Mae, did that have a role in that where they uniquely positioned you?

It helped considerably. I was one of the people who launched Desktop Underwriter. I was the tip of the sword on that one. It was an interesting challenge. I was new to the industry. I had just left the IBM company. That was my first experience in the mortgage business.

I can understand that IBM going into that particular role. What are the issues that you and the folks at Candor are thinking about, especially in light of current market conditions?

We talk about the market conditions a lot. We can get a little focused on the concerns about inflation and where interest rates are. What I’m focused on now is how to serve borrowers, how to use our technologies and capabilities to get more borrowers into homes, and to discover new borrowers. Frankly, to help our lenders think about how to organize around technology. Those are the big three in my mind.

When you talked about organizing around technology, it almost begs for a workflow discussion because a lot of people approach this the way they have for decades. I’ve been in this industry for many years, which is hard to believe. A lot of it hasn’t changed as much until more recently with the introduction of technology, and we’re starting to see how that’s playing out. Give us your thoughts on that.

The first thing I’d say is over the period I’ve been in the business, probably the single thing I’ve noticed is there’s no one way to make a mortgage, but there are 1,000 ways to make a mortgage. Maybe better said, there are 1,000 ways to make a mortgage, and there’s no one way. The challenge that I’ve seen, and I still feel is pretty prevalent, and it’s been the same thing for the last years is, in this business, the making of a mortgage requires human cognition.

Meaning, if a human doesn’t see something, say something, or do something, a mortgage doesn’t get made. Some would say, “Isn’t that the way it should be?” I would argue that if you’re looking for a process that’s going to be flawless and precise, you probably don’t want it based purely on humans. Humans can do a lot of things, but it’s very difficult to hold a human responsible for being able to do all of those very precise repetitive tests exactly correctly for all of the different narratives that come through the door around a mortgage store.

Over that period of time, I have thought that there’s got to be a different way to organize yourself where, in effect, you can use humans for things that make sense around what humans can do. We can talk about that a little bit. Frankly, you organize them around a process where a system performs all the repetitive, precise, consistent, and uniform things that need to occur every day and every time you touch a mortgage. If you have to say a guiding light, that’s the guiding light that brought me to Candor.

 

 

First of all, I share your philosophy or your approach. It should be all about the borrower because when we lose sight of the borrower, which is ultimately what we’re doing, which is creating home ownership, you really do this. I agree with everything you said. One possible exception I might say is that a loan doesn’t get done or it gets done, but it’s done poorly and is not saleable. That’s the part that starts getting expensive for the lender. The borrower got the loan.

That’s what Candor plays a huge role in, and I can’t wait to get into that a little bit later because you work on the defense part when a repurchase is being suggested that needs to happen. You guys play a great defensive role on that. I want to talk a little bit more when you were talking about how should someone look at bringing in, from a strategic standpoint, a product like Candor.

Candor is a game-changer. Sitting in a strategy seat, I use that term a lot. When I say it’s a game-changer, it’s a way you can begin to organize your business around a central process, and more importantly around what I’m going to call a galvanizing technology. Galvanizing in the sense that you can have a platform that you can array the expectations of what people do around what that platform does, and use that to drive very high levels of precision and a tremendous amount of speed, and you can reduce the amount of time.

When you organize around a system in that way, you’re less exposed to changes in volume. You’re less exposed to changes in requirements. Requirements mean underwrite guidelines because they’re implemented every time, the same way, uniformly, and the systems take care of that. Systems don’t do everything. They need to be programmed. Don’t let me lead you into thinking that we do everything for everyone all the time, and that’s all you have to do. You do have to change your thinking because, now, the system is leading you down the path instead of the humans leading the system down the path. That’s a different way of thinking. It’s not right or wrong, it’s just different.

 

If you have a piece of technology that is built with an ability that adds efficiencies, you’re going to want to pay attention to how you integrate that into your current workflow process and get the benefits out of it. There is a give and take in that for a successful implementation of any technology. It’s just understanding where the benefits are, how that work, and making the appropriate adjustments from there. Joining the conversation is my co-host, Marc Helm. Marc, good to have you here.

Glad to be here, David. Based on what you do every day, can you give us an idea of where technology is playing a role in the low-volume market that might be helpful for the clients, and also, in a tough time for them when they need more volume?

Many times in a low-volume market, people think that technology is not needed, less needed, or one of those things that you can begin to spend less on and use less. It’s counterintuitive, but many people think that way. I would say technology infrastructure is more important now than it’s ever been. I’ll give you two big reasons.

Technology infrastructure is more important than ever in a low volume market. Share on X

The first is when the business and the volumes are in high demand, and we’re about to go into mortgage season now. It’s a very seasonal business. March through September is when you’re going to see the peak in the business. You’re going to have no time to do anything. You’re going to be looking to make hay while the sun shines. That is going to be how this works.

In markets where you don’t have high levels of volume, you need to take advantage of that opportunity to build the processes that are going to allow you to scale efficiently and effectively. Most mortgage manufacturers think that way. The point I would make about technology, and I’m using this term generally, but I would say information technologies are the central part of your operation.

You want to have those technologies deployed in a fashion where you can rely on them to be a lever for productivity, time, and precision. If you don’t have a technology that you can use as that kind of lever and have a high level of confidence in, I would suggest that one of the challenges we face that a technology uniquely can solve is the expectation of perfection or the expectation of no mistakes on anything is as high as it’s ever been.

What we’re seeing as we’re in the season, as you were saying earlier, people are going to be busier. From your lips to God’s ears, may that happen. There are a lot of lenders in this current market wondering if they’re going to see a surge in volume like they have. We do have the seasonality, and Candor is going to be here through many seasons that come. We are hoping that we’re going to realize that this season.

You were touching on the fact that this can help bring about quality. One thing that I’m excited that you do is you provide support to those when there were imperfections. Let’s say a company before they had Candor is now experiencing some repurchases. Now they have Candor or consider using Candor, and they can use Candor to rebut those repurchases if I’m correct.

Let’s face it, the investors would rather buy the loans and keep them if they meet their standards. That is the primary choice. Nobody wants to come and ask them why they need to repurchase a loan. However, if there’s a set of circumstances where the loan creates a change in price because of either a mistake, an omission, or some other set of defects, you need to be able to demonstrate your diligence. That diligence should begin to be able to defend what you’ve done. One of the things we do with the Candor Loan Engineering System is to capture the thought life of an underwriter.

Expand on that. You capture the thought life. That can be scary. Someone’s trying to capture my thought life.

Think about that word picture. Think about it this way. When a loan is being underwritten, an underwriter’s got it for maybe 2 or 3 hours and may have 2 or 3 different days or more. The only record you might have of what they’re doing with that file would be their notes along with the other notes. You don’t have what they’re thinking about or what they’re doing. What the LES does is it allows you to capture exactly what the underwriter was thinking about, the path they went to drive, and the logic itself. It’s to be able to expose that later in an organized faction where you can array the facts to share with someone that demonstrates your care and diligence in underwriting this loan.

You mentioned some letters in there, LES.

Yes, Loan Engineering System.

I just want to make sure our audience stayed up on that. I knew what it was, but I want to make sure our audience knew as well.

The idea is that you now have an organized way to capture and array the facts associated with every step and every document, all of the ways you’ve interpreted the guidelines. What’s most important is you have that as data and a narrative that you can then share with another party, and take them through the entire process of making the loan by scrutinizing those documents and that data. That’s something that I would suggest most processes couldn’t do because a human is not going to capture that information in a granular enough way when you’re looking at trying to meet the production numbers and the speed. Those are all of the drivers of pressure in the current marketplace.

Marc, when you start thinking about mapping an underwriter’s thought process, that’s pretty impressive. What’s your thought?

Back in the early ’90s when I chaired the MBA technology committee, I think about where technology is now compared to back then. It’s certainly different. We’re using it in a different way. Books, one of the things I’d like to comment on that and bring back to fruition is when you’re looking at how technology is being utilized, you’ve got many years in the industry. I’ve got about more than that, but I also have worked on advisory boards of systems, companies, and other things. What we see now is so different than what we had many years ago. Could you compare and contrast what we did years ago in systems compared to what we do now? The audience would be totally amazed at how different it is over the years.

Let’s go back to 2008. That’s right in the front end of the crisis. If you think about it, that’s when the GSEs were being challenged. That’s when there was a huge amount of concern about the level of defaults. We had an economy that was in very difficult straits. I’m building this picture because if you think about it, that was a very difficult time to invest in much of anything, but that ended up being a period where a number of investments were made, which is somewhere between 2008 and 2010.

Maybe 2008 and 2015 is a better span where we didn’t have point of sales systems. We did not have internet connectivity for loan origination systems. They were built to operate out in a cloistered way where they weren’t communications tools. The whole ICR, Intelligent Character Recognition or optical character recognition, was just optical at that point, so you didn’t have intelligence.

There were a number of technologies we now use, as a matter of fact, that was not being utilized except by maybe the largest organizations. Those are now services you can purchase, even when you look at some of the technologies that we now have. For example, AI was something that people would dream about. That’s a big part of what we do right now. Our company is AI-based.

It’s a different world, and you do solve problems differently. Marc, probably the biggest comparison I would make is not so much that technology’s better or worse. It’s that it’s more applicable to this problem. We had to take a lot of technologies and find out how to apply them to this problem. That’s probably the biggest thing that’s happened over the years.

 

I would agree with you, Books. You’re right on point.

Marc, I can’t wait for you to meet Books sometime. He is an ex-football player. He is a gentle giant. He’s one of these people where you meet him and you instantly go, “I want to get to know this man.” There’s such a warmth that radiates out of him. It’s so extraordinary. It’s a real gift that you have, Books, on that.

David, you’re too generous.

It’s true. That’s how I experienced you when I first met you at that conference and at that reception. There’s this huge guy, yet you are so welcoming and genuinely humble about how you approach things. I felt warmly invited into the Candor family. One of the things I want to talk about is there’s been a lot of skepticism. Can technology do the job for me?

There’s been a lot of disappointments in our journey and further into technology as it’s matured. One of the things that Candor has done to back up their technology is they put in an insurance policy. If it’s being used at the front end of underwriting a loan, you will get an insurance policy that there will be no defects in that loan, provided the information that went into Candor is fact or accurate. You will insure against a repurchase. Am I correct on that?

 

We do two things. First of all, we talked a little bit about we capture the data and helping a lender portray what has happened in the underwriting of that loan. It is capturing the thought life of the underwriter through that process. If there is something that Candor doesn’t clear because Candor does clear conditions or we don’t provide a condition that would make sure the loan was processed according to the guidelines, we have a policy where we will support the lender in managing the funding of that particular activity. Probably the best way to think about this is that we have a policy that covers in effect the gap in price that could be created by a mistake. That’s what it is.

It’s gap insurance on the market price.

The real risk in repurchase is that you sell it at one price, maybe par, and you have to sell back at some discount. We cover the gap between par and the discount.

That’s a great way to look at it. Thank you for putting that in the proper context. When I talked to Tom Showalter about this, he says, “What’s so unique is we’ve never had to ever once all on our insurance policy.” That is quite a testimony, which goes to the confidence you can have in this system. It’s pretty impressive. I want to go back and talk to you about all the repurchases that are going on now that are starting to happen.

There’s a crescendo of those happening in the development world. They’re increasing. I’m a Music major, so some people may not understand what a crescendo is, but anyway, they’re grown. The fact is that people are experiencing more of them. Obviously, we want everyone to get a license and start using Candor on the front side, but there is that event where you start experiencing repurchases. You’d certainly be wise to bring it in. Talk about that.

Candor is an underwriting tool. If you think about it from the perspective of being able to both underwrite a loan as well as analyze a loan, which has been underwritten to conforming conventional standards, we can do the credit analysis after the fact. It’s as detailed and as precise as if you were underwriting the loan. You could use the product as a loan review tool for quality control.

Think about it this way. One of the ways you could use it is if you want to look at the production from the past, you could run Candor against that production and get an idea of where there are problems in your portfolio and have some sense. By the way, if there’s anything you can do to remedy, you could address those remedies, but at least you’d have a better understanding of what your exposure would be. I would suggest the best way to avoid that exposure is to underwrite with the platform.

 

 

It is to underwrite at the beginning with the platform. One of the things is when you’re looking at the repurchases. We’ve cut down a reduction in the workforce. There’s been a significant reduction. The underwriter that underwrote the file may not be there anymore. To have a system that can recreate the underwriter’s thoughts based on the paper trail that you do have is significant. Marc, I’ll let you jump in here with a question.

One of the questions that I would have is a little add-on thing. Since it’s an underwriting-based system, would this system also be applicable in a loan servicing operation for underwriting FHA and VA assumptions?

You could use a system like this for any type of underwriting, especially if you’re in servicing. Let’s say you had a loan in forbearance. You wanted to make sure that you’ve got a borrower who, through the pandemic, may not have been able to make payments for a period of a year or two years. A lot of people are in that circumstance.

They say, “I’d like to modify that loan. I need some help with a different set of terms. I can’t write you a check for two years’ worth of monthly mortgage payments.” You could use a platform like this to re-underwrite that borrower given their current circumstance and figure out what the right loan would be for that borrower. Where they would compare is if they wanted to look at going into the marketplace to be able to get a loan. Understanding that and being able to do that in servicing can happen with recapture, forbearance, and loan modifications, all the circumstances where you’d like to have an accurate way to estimate a borrower’s capability.

One of the things I like about what you just said in doing a workout on a conventional loan where you can take the delinquent amount or a portion of it and balloon it to the end for certain investors would be good because you can run the model for what you think they can afford to pay on the day. That would be great.

When you have situations like the pandemic, a flood, or a tornado, there are lots of circumstances where people lose their source of income and have to regain it. You need to be able to figure out how to organize their financial lives and extend them credit on some basis. Tools like automated underwriting engines, especially like ours at Candor, do step in a situation where it’s difficult. It can perform very quickly and very uniformly.

Let’s say you have 100 people that experience the same challenge. You can have the same tool underwrite what they have for income in a consistent fashion, so you have a high degree of confidence. For those folks who have suffered that disaster, you have a uniform way of looking at the credit and making sure that they can get back on their feet.

The more I learn about Candor and the power of the technology, the artificial intelligence in this, it’s a must-have. There are certain products that you go, “I’d like to have.” This seems to be a must-have product as you look at this. I want to talk a little bit about artificial intelligence. There are a lot of talks, especially with the launch on November 30, 2022, of ChatGPT.

Everyone’s starting to get a new sense of what AI or Artificial Intelligence can in fact do. What is reasonable for us to expect in the future? Where are we going to see artificial intelligence? You could speak about it from a Candor perspective. Generally, what can we expect to see coming into our industry?

I’m going to take that as two questions. I’ll talk a little bit about what Candor has done. We use an expert system and some other tools to be able to do what we do. What’s important about that is, first of all, we can show you everything the system does. It’s a clear box. You can see through it. As a matter of fact, it would be very difficult to support a lender in a repurchase, a make-whole, or any kind of demand from an investor of any type if you didn’t have a system that could absolutely show you everything it did in the logic that was employed.

When you talk about ChatGPT and generative AI forms, which use machine learning and a number of other technologies to be able to mimic some set of activities, that’s what it is, mimicry. They must be taught. These are computers, at the end of the day, must be taught. The thing I’m amazed at is if you look at the adoption of things. If you go back and look at how long it took for 100 million people to get a PC or a cell phone, it wasn’t a month. A month after these technologies were made available, they had 100 million users.

It went vertical within months to have the rate there. I heard some statistics on that, and the rate is astounding. If you don’t have a business that is enabled by artificial intelligence such as what Candor provides, you’re going to find yourself at a competitive disadvantage, it would seem.

Let me tell you. There are two schools of thought here. I’d love this debate. There are some people who think that artificial intelligence replaces people. I’m going to tell you, that has not been true with any technologies. As a matter of fact, it creates different jobs. You have to have mental dexterity. You’ve got to be able to think differently. The other thing it does is it makes humans far more productive.

That’s part of this that we haven’t had a chance to talk about. One of the wonderful things artificial intelligence can do is it can begin to organize information for humans and to be able to help do problem-solving. We’re at a time where affordability is a big issue. We’re at a time where we’re trying to get more people into home ownership. We’re at a time where we want to look at all kinds of different income and asset types to be able to support their ability to qualify for a mortgage.

A lot of times, that’s going to be a function of how you interact with a person and what your ability is to be able to put together that person’s narrative in a way that allows them to understand what their capability is. That’s not what our systems do. That’s what smart people with smart tools can do much better. That’s one of the ways you’re going to expand markets and grow in this space. To me, that’s a big opportunity that’s still on the table.

Not only that, we actually can reduce cost efficiencies, shorten the cycle, and create an overall general experience. AI is enabling humans to focus on the most important part of the transaction. That’s a relationship. That’s what you were speaking about. Books, what a joy to have you here. I always enjoy my time with you. I mean that generally.

Smart people with smart tools can do much better. AI is really enabling the human to focus on the most important part of the transaction – the relationship. Share on X

I can say that about all the Candor folks, Tom, Sarah, and the whole team. It’s a brilliant gathering of people that love thinking about how they can make a difference for the consumer. That’s where you went when we first started this interview. That’s what you’re about. That’s what I’m about. Marc, any last questions?

Yes, a question and a comment. I agree 100% that technology is not going to replace people, but to me, the biggest value is it takes some of the more worrisome things and human error things hopefully out of the transaction. You get to double-check something very quickly. You get to run another analysis against it to make sure the right decision is being made.

In our environment where we are held to so many different compliance standards and investor standards, etc., having somebody check the checker is a very good thing. It adds a lot of value. I agree 100% with what you said, Books, about it creating other jobs. It can allow you to be much more aggressive in the front end, finding better solutions for people, and then building an adaptation of a system to deal with it. I salute you for what you do, and I too have been impressed with the whole team at Candor. I’m looking forward to getting a demo of that underwriting system one of these days.

Anytime you’re ready, Marc. Thank you so much for those kind words. We’re trying to earn it every day. It’s not an easy thing to do. This is a very tough business. It’s one of the oldest businesses out there. It’s getting more complex and more difficult every day.

Marc’s comment is a layup to ask you this question. How can people get ahold of you to get a demo of this product and talk to you more about the vision that Candor has and the difference it can make for their company?

You can visit our website at CandorTechnology.com. We have a form that you can fill out. You can ask for the demo, and we’ll get somebody to work with you and arrange a time. Not a challenge at all.

Books, thanks so much for taking the time to be here with Marc and I. We appreciate you so much. We wish Tom, Sarah, and the whole company well. We’re going through some interesting times, and people need to take the time to get to know what Candor can do for them. Thank you, Books. I appreciate it.

David, you’re a treasure. Thank you very much, Marc. it’s a pleasure.

Thank you, sir.

 

Important Links

• Earl Thomas Booker III
• CandorTechnology.com
• Candor Loan Engineering System

 

About Earl Thomas Booker III

Over 30 years ago, as a futures and options trader, Tom Booker began his career at the intersection of finance and technology; transitioning into executive leadership in the fintech industry as one of the original players.

Tom’s career spans time with powerhouses such as IBM and Fannie Mae, where he oversaw the launch of the DU in the early 2000s. Since then, Tom focuses his career on the investment of fintech providers, leading to his current role as the Chief Strategic Officer for Candor Technology.

As a technologist, Tom led the outsourcing of bank system operations and application development, mortgage loan origination sourcing, default servicing and led a business transforming severely indebted borrowers into viable creditors. His breadth and depth of knowledge as an industry leader affords him a true appreciation of what fintech is, how it works and what outcomes are critical to success.