And a ready ‘traditional’ solution to fight back with
FinTech mortgage lenders are frequently making headlines these days with their announcements of 10-day closing, and 20-minutes approvals – sometimes even 3-minute approvals. And they are steadily gaining market share. FinTech lenders have grown their market share by 30% between 2010 and 2016, to $161 Bn, to achieve an 8% market share, according to the Federal Reserve Bank of New York 2018 report on the “Role of Technology in Mortgage Lending”. As more FinTech lenders enter the market and expand geographies and products, their share is increasing, at the cost of mortgage lenders, since overall origination volumes are also lower.
FinTech mortgage lenders and their impact
According to the Fed report, FinTech lenders are defined as having “an end-to-end online mortgage application platform and centralized mortgage underwriting and processing augmented by automation”. Most of them are “stand-alone mortgage originators that primarily securitize mortgages and operate without deposit financing or a branch network”, although the lines between FinTech and ‘traditional’ lenders are quickly blurring.
If we scan the Top 10 Mortgage Lenders list of 2016, compiled using HMDA data, we see only 5 traditional brick and mortar Banks among the top 10. Three were non-bank mortgage lenders, but interestingly the other two (Quicken, LoanDepot) are FinTech companies. Another one – Guaranteed Mortgage – sits at number 12. And all three of these FinTechs started or adopted the FinTech model after 2010.
So what is making borrowers move from traditional mortgage lenders to FinTech lenders?
How FinTechs are changing customer expectations
Consider Better Mortgage which uses technology extensively so a borrower can obtain a basic pre-approval letter in about 3 minutes, without the need to talk to any Loan Officer or processor at Better Mortgage, and get a verified pre-approval letter, by uploading the relevant documents – W2s, paystubs, tax returns, bank statements – in about 20 minutes. Better Mortgage expanded into more traditional channels after its acquisition of Avex Funding, a Silicon Valley-based mortgage lender. This acquisition brought it an experienced mortgage business to apply its cutting-edge technology platform.
Another FinTech, Zillow, the dominant online real estate listing company, acquired Mortgage Lenders of America in Aug 2018, to “streamline and shorten the home-buying process for consumers who purchase homes through Zillow Offers”. Note that, in 2017, there were 23 million loan information requests submitted by consumers through Zillow Group’s consumer brands. So, there is a large opportunity for Zillow for its new mortgage business.
Others are encroaching on the mortgage lending turf from other directions.
A digital mortgage lender from California (Eave) claims to bypass “flimsy pre-approvals” entirely and promises that a borrower can apply to purchase a property in 30 minutes and have a full financially underwritten approval within 24-hours, with a 21-day close guarantee (with penalties up to $100,000). Interestingly, they believe they are better than even ‘traditional’ digital mortgage lenders who average 37 days for closing.
San Francisco based market place lender SoFi started lending to students using alumni funds but has moved on to mortgage lending and personal loans. It uses “non-traditional underwriting” – evaluating an individual’s free cash flow, education, professional progress, and bill payment history. For now, it focuses on “financially responsible individuals”.
Digital mortgage broker Morty, a Fintech based out of New York has a completely online process and works with 12 lenders to get the best terms and product for their borrowers. It quotes an email from a customer of theirs who could not believe that he had completed a refinance with Morty in only nine minutes and was sure he had done something wrong.
Then, of course, there’s the permanent threat of companies like Amazon entering the financial industry space having already established themselves in the world of credit cards and payments with offerings like Amazon Cash and Amazon Pay and Amazon Lending (for loans to merchants selling on their platform).
How FinTechs compete ….
What, then, allows FinTechs to compete with and outdo established mortgage players? The Fed report found that they can move an application from submission to closing faster than traditional lenders – FinTech lenders reduced processing time by 10 days (or 20% of the average processing time) based on data for all U.S. mortgages between 2010 to 2016. This reduction was expectedly larger for refinance (14.6 days) than purchase (9.2 days). Note that the numbers were similar for even non-banks, indicating this may not just be an effect of regulations.
And the ‘elasticity’ or effect of volume fluctuations was better handled by FinTechs. When applications doubled (the refinance booms during 2010 to 2016), loan processing time increased 13.5 days (or 26%) for traditional lenders, compared to only 7.5 days for FinTech lenders. This held true for all types of loans and borrowers, and for nonbanks.
Skeptics would say all this is because FinTechs focus only on qualified borrowers. But no, when volumes doubled, FinTechs actually reduced their denial rates relative to other lenders – suggesting that faster processing shown by FinTechs is not because they choose only easily qualifiable borrowers during peak periods.
… How mortgage lenders can fight back
So, what should mortgage lenders do? To compete with FinTechs, traditional mortgage lenders rush to get the loan submission process online and believe this is the differentiator that FinTechs offer. But that’s not true. The same speed and efficiency are needed in their back-office operations. To speed approvals, FinTechs have reduced or eliminated follow-ups, multiple requests to the borrowers and rework required by processors and underwriters. They have enhanced parallel processing, tracking and analytics to identify improvements.
Does this require a major change in technology platforms and origination systems? The answer may be ‘Yes’ – in the long term, and when the lender is ready to make the investments of time and money to redesign and rethink their customized processing and operations.
However, some service providers have quick-to-implement solutions, which are loosely coupled with Loan Origination systems (rather than having to be integrated with them to be effective) and which use a mix of automation, data analysis and very efficiently designed manual processes to achieve similar or better results, with a lower cost structure. The solutions rely on part automation, part manual intervention, part parallel processing, with close monitoring of turn times and quality, and deep knowledge of mortgage, to achieve almost the same results – superfast turn times, better quality, lowered cost, real-time status information for processors, LOs and underwriters to achieve guaranteed approval and closing time.
One such solution from SLK Global, who combines their technology-enabled solutions with their 18 years of financial services and mortgage experience, called LoanAccel, has delivered 38% faster closing with 61% reduction in operating cost for a top lender.