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If consumers aren’t holding lenders back, then who or what is?

Here's why direct-source data is a necessity in assessing borrowers’ ability to pay

Think back on all the major financial decisions you’ve made since entering adulthood. Perhaps your list starts with renting your first apartment or buying your first car. Later, you may have taken out a personal or small business loan. Eventually, you purchased your first house, maybe got a home equity line of credit. There’s a common denominator in all of these transactions: It’s you.

Chances are, you don’t work for the same company that employed you when you got your first apartment. Your annual income has likely grown, and your assets and debts have almost certainly changed, whether for the better or worse. Your credit score has ebbed and flowed. Your name might have changed due to marriage or divorce. In fact, your fingerprints might be about the only thing that’s the same today as when you started your financial journey.

Making a loan is all about understanding who a person is and what risk they represent. For too long, we’ve made prospective borrowers submit forms and documents for review in an antiquated process that’s subject to fraud, bias and human error and frustrating for everyone involved. We need to empower consumers with the ability to carry their financial DNA with them at all times — just like their fingerprints — and the authority to share it with others on demand. 

Consumers are ready — and they’re waiting on mortgage to catch up

While mortgages make up the lion’s share of consumer debt — nearly 72% of it, according to the Fed — they’re among the rarest financial transactions in a consumer’s life. Median homeowner tenure, now 13 years, has been on the rise for more than a decade according to the National Association of Realtors. And while there is no legal limit on how many times a mortgage may be refinanced, closing costs and interest rate cycles effectively limit the number of times any given homeowner will pursue this option. All told, it’s estimated the average American will take out four or five mortgages, including refis, in their lifetime.

There’s no doubt that mortgage data is among the most valuable in the world. Nobody collects a fuller picture of your financial situation than your mortgage lender — not your financial advisor, not your stockbroker and not even the IRS. But once you consider the infrequency of the mortgage transaction and the fact that the median age of U.S. home buyers is now 47 years, you’ll begin to recognize the futility of attempting to extract meaningful information about consumer behavior and preferences from mortgage data. 

Mortgage data is aged data. At best, it offers a trailing indicator of what consumers expect from the homebuying experience, including their comfort level with technology and their expectations around transaction speed and data privacy. 

To truly understand how today’s consumer engages with financial transactions, the mortgage industry needs to look at what they’re doing every day, not once every six years. For example, earlier this month, digital payments network Zelle surpassed one billion transactions. Many of those transactions required consumers to authenticate their identity using facial or fingerprint recognition.

Zelle is owned by Early Warning Services, a fintech that is in turn owned by seven of the country’s largest banks, but most consumers don’t know that. Whether they download Zelle as a standalone app or access the service through their online banking, what matters to consumers is that the technology is easy to use and endorsed by their financial institutions. 

Consider, too, that the pandemic has given consumers a big push when it comes to expanding their technology comfort zones. Consumers say they feel safer conducting transactions digitally than dealing with financial institutions and merchants in person, and it shows. Banks have reported triple-digit increases in mobile banking registrations since the beginning of the year, and according to Salesforce 68% of consumers say COVID-19 has elevated their expectations of companies’ digital capabilities. 

The massive popularity of services like Zelle challenges many lenders’ entrenched belief that consumers aren’t “ready” for aggressive modernization of their financial transactions. Consumers are ready now, and by the time they apply for their next mortgage, a streamlined experience that includes features like biometric screening will be a baseline expectation. 

Direct-source data holds the key to limiting lenders’ and investors’ risk exposure

If consumers aren’t holding us back, then who or what is? The challenge for mortgage lenders and investors is understanding how to meet borrowers where they are without layering on risk or getting bogged down in third-party intermediation. It’s easy enough to enable a consumer to complete a 1003 loan application on their mobile device, but how do you ensure the information supplied is truthful and accurate? Uploading a photo of a bank statement is quick and easy, but how do you know the bank statement is unaltered and actually belongs to the loan applicant? 

Having invested handsomely in a modern front-end borrower experience, lenders are far too often still jumping through hoops behind the scenes to perform traditional verifications. From a cost perspective, that’s like shooting yourself in both feet. The ideal route to overcoming these lingering risks in the digital origination workflow is to rely directly on the source.

We built FormFree’s Passport to retrieve asset, employment, identity, income, credit and public records data straight from the source for this very reason. Lenders need direct-source data, not aged data, to assess borrowers’ ability to pay (ATP) and willingness to pay with the highest degree of confidence, least consumer friction and lowest cost. With Passport, a consumer’s ATP score is always up to date, allowing prospective borrowers to understand their financial situation before they ever approach a lender. Further, consumers maintain control over their Passport at all times, choosing when and how to share financial data with lenders and other trusted sources. 

The call for change has never been more urgent

Minimizing third-party intermediation on borrower ATP will allow lenders of every stripe, but especially mortgage lenders, to streamline and strengthen their credit decision-making. The faster lenders move away from traditional credit scoring and toward ATP scores fueled by direct-source data, the sooner we can help the 50 million Americans without credit scores and the tens of millions of people whose income and employment have been affected by the pandemic. That’s because applications like Passport consider cash flow from both traditional and non-traditional income (i.e., the gig economy) and use sophisticated algorithms to evaluate credit risk, credit resiliency and other factors that aren’t discernable from traditional FICO scores. Armed with this information, lenders can truly understand the risk borrowers represent and confidently extend loans they might decline based on FICO scores alone.

We believe any borrower who carefully manages cash flow and has a solid ATP should be eligible for a loan of some amount, regardless of their FICO score. This financially inclusive view offers tremendous upsides for consumers and lenders alike.

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