For years, companies in the mortgage space, including banks, lagged woefully behind other industries in embracing technology. But surveying the landscape in 2017, it’s obvious that the $14 trillion mortgage market is quickly making up ground as it sprints to keep up with consumer demand for a smarter, easier mortgage process.
Ironically, the monkey on the mortgage industry’s back for the past 10 years — increasing regulation — is the very thing that forced companies to find efficiencies in every part of the process, which serves them well as they look to engage tech-savvy consumers. Even as the enforcement of some of those regulations is now in question, the long-lasting benefits of investing in automation will stand.
The mortgage sector is particularly primed for transformation, having hit the critical turning point described by a Wall Street Journal article on digital disruption from April 2016:
“First comes the use of IT to improve the productivity and quality of production-oriented, back-end processes. Distribution comes next, leveraging the universal reach and connectivity of the Internet over the past 20 years. The transformation then reaches a tipping point when technology radically changes the user experience – as has happened with the rise of smartphones over the past decade – leading to a fundamental disruption of the industry and its business models.”
Deployed within the complex individual processes that make up lending, servicing, investing and real estate, mortgage innovation comes in many forms.
In the first nine months of 2016, $18.9 billion poured into fintech startups worldwide, according to Forbes, up from $17.6 billion in the first nine months of 2015. These startups included companies in banking, payments, investing, insurance, currency, lending and financing.
Venture capital firms made big investments in online lending in the first half of 2016, but cooled off after Lending Club and Prosper ran into some mid-year trouble. This year, fintechranking.com predicts that companies delivering innovations in online real estate transactions and those that find ways to lend to the underbanked will be the biggest winners of VC money in the mortgage space.
Fintech startups have already sliced and diced everything from income verification to valuation to REO management to warehouse lending in their bid to remake the mortgage process.
Here are just a few examples, taken from the 2017 HW Tech100 list:
• FormFree’s Accountcheck solution consolidates, analyzes and verifies assets directly from their source, then applies thousands of proprietary algorithms to generate asset reports on demand.
• Investability allows users to sort and analyze more than 1 million MLS-listed and exclusive properties by cash flow, net yield and gross yield, matching investors with properties that meet their criteria.
• Land Gorilla is a cloud-based construction loan software empowering lenders to manage their construction loan pipeline to track draw requests, change order and inspection reports.
Fintech companies are distinguished by their origins — they are first and foremost technology companies that apply their expertise to the mortgage space. Finding correlations between markets, their vision lets them leverage lessons learned in one industry to improve a totally different vertical. Alight, Inc., for instance, is a provider of enterprise-class applications for real-time, dynamic scenario comparison and analysis that cut its teeth in the mining industry and has since become equally visible in the mortgage space and built a client base of some 30 top customers.
“In the mining industry, they do long-range strategic planning, 10, 20 and 30 years out, then build out operating plans monthly,” said Alight CEO Michele McGovern. “They have to invest a lot of capital in equipment and all of this equipment has sensors that generate stats to help them figure out when to bring them in for maintenance, etc. As a result, mining is heavy into big data — they have millions of records every day from every part of the value chain.
“Just last year, we had an 'aha' moment when we were able to enhance our mortgage industry application with technology developed by our mining team. The waterfall charts that we initially developed to help mining companies the impact of the capital expenditures that are inherent in mining were equally valuable to the mortgage firms, which face similar levels of volatility and uncertainty.
"For us, it represented a huge savings of resources and allowed us to bring something new and effective to our customers more quickly than we ever could have done otherwise,” McGovern said.
Startups are tackling a variety of thorny problems, ranging from nuts and bolts production issues to expanding homeownership through new loan products, credit models and financing options. Sometimes, their most significant contribution is thinking outside the box.
Unison, for example, pioneered a program that brings investment capital to consumers. The Unison Homebuyer program partners with consumers to invest in their home, providing up to 50% of the down payment in return for a share of the appreciation in the home’s value at the time it is sold. The program is not a low down payment assistance program where the consumer assumes more debt — it is an investment that pays when the home is sold.
“Our founder, Thomas Sponholtz, used to manage portfolios for Barclays, and there was a need from certain institutional investors to diversify their portfolios, and fulfill future obligations. With pension funds, two of the biggest constraints are housing and healthcare, and the need to fund their respective liabilities,” said Michael Micheletti, director of communications at Unison. “That’s why our programs are long term — 30 years — to align with both the consumer need and the investors’ long-term strategies.”
Unison recently expanded the program, which had been available only in combination with jumbo loans, to conventional loans, and now operates in 13 states.
The velocity of change in the mortgage industry toward efficiency and automation is only going to gain momentum, propelled by the newest and largest generation of potential homebuyers, the Millennials. And this is where fintech has a distinct advantage over traditional companies.
In their Global Fintech Report from March 2016, PricewaterhouseCoopers states:
“Millennials seem to be bringing a higher degree of customer centricity to the entire financial system, a shift that is being crystallized in the DNA of fintech companies. While 53% of financial institutions believe that they are fully customer-centric, this share exceeds 80% for fintech respondents. In this respect, 75% of our respondents confirmed that the most important impact fintech will have on their businesses is an increased focus on the customer.”