Lending Briefing: How fintechs are digitizing the mortgage process
- Shifting consumer preferences are incentivizing mortgage banks to digitize other outdated, paper-based or manual parts of the business. But most of the innovation is happening outside the legacy system with fintechs taking the lead.
- Given the current macroeconomic environment, uncertainty and dwindling margins in the mortgage sector, digital processes can help weather the storm by reducing costs.
Digital Mortgages: The Final Frontier
As consumer preferences shift towards the digital, everything happens online nowadays. Well, almost everything – it’s not yet time to say goodbye to paper – there are still some processes that haven’t been converted into code. And software engineers are scratching their heads over how to tackle the last remnants of an era before the internet.
One of these head-scratching areas is mortgage. While the pandemic forced the mortgage industry to digitize core functions almost overnight just to keep pace with demand, this segment of the market is often described as the last mile - the daunting task of making a mortgage transaction happen in a few minutes on your phone will be the last piece of the financial puzzle.
The industry adopted digital solutions to perform tasks that were typically completed face-to-face, including e-verification of income and assets, drive-by and automated appraisals, and hybrid closings, according to a Deloitte report.
But now mortgage banks are looking to digitize other outdated, paper-based or manual parts of the business – a huge weight on the lending process, rendering it more inefficient, expensive, and time-consuming, the study argued.
One big player in the digital mortgage arena is Blend, whose cloud-based platform is used by many top US financial institutions, including big banks like Wells Fargo and US Bank. And demand is rising - the fintech’s white label technology processed $1.4 trillion of mortgage and consumer loans in 2020, up threefold year-on-year, according to Forbes.
The traditional process can take weeks just to get a loan financed. All of those time delays cost money and create volatility especially now as house prices and interest rates are moving dramatically.
Therefore, it’s important to note that a fully digital mortgage isn’t just about serving an impatient Millennial who can’t be bothered to sift through hundreds of pieces of paper – it actually lowers operational costs, mitigates risks, and delivers superior financial performance in the long run.
Mortgages exist today in a digital format, called an e-note – these represent about 70% of overall mortgage production. Currently in the US, there's only one database that keeps track of these – called MERS (Mortgage Electronic Registry System), a public utility company that has been privatized.
But having MERS as the sole option creates a single point of failure, according to Daniel Wallace, GM of Figure Lending. The company is part of Figure Technologies, co-founded and headed by Mike Cagney, a member of the founding team of Provenance Blockchain and the co-founder and former CEO of SoFi.
“This public utility is now owned by a private company, and they've doubled prices in the last six months. Therefore we think that the industry would be better served to have an alternative registry,” Wallace said.
To solve this, Figure Lending is using blockchain technology as a parallel system of record, and also allows digital mortgages to be bought and sold instantaneously as pure digital instruments that don’t require human intervention. MERS currently doesn't have an infrastructure to facilitate instantaneous and bilateral transactions between two parties.
Getting it all to work together was very difficult, but what was even more challenging was getting all of the participants in the mortgage space to come along, according to Wallace. It’s really a matter of getting all the dominoes to fall into place.
“The mortgage industry operates on this feast and famine basis – when rates are low and everyone's making a ton of money, no one wants to do anything but make more loans. When the market switches, like what we're going through now, it’s all about minimizing losses. The industry never sees a perfect time to be investing in technology and updating its systems,” Wallace said.
And indeed, mortgage profitability continued to drop in 2021, and 65% of banking leaders expect further declines this year, according to Finastra. But one could argue that turbulent times like what the market’s currently experiencing can be better weathered by adopting better technology solutions.
“Technology is the single biggest area that lenders turn to when it comes to improving margins,” said David Lykken, president and founder of Transformational Mortgage Solutions.
Digitizing end-to-end processes with cloud-based solutions and APIs, streamlining operations with bolt-on capabilities and applying data analytics to identify new opportunities can drive down costs and widen margins.
Some folks are developing such APIs, but outside the legacy system. After ten years at Freddie Mac, Charles McKinney co-founded embedded investment mortgage platform Vontive, creating software that automates the underwriting process using a data platform that would integrate all the different variables. McKinney calls it ‘opinionated software’.
“Having an opinion about the correct way to structure a process, bringing everything together with a data foundation, and then automating as much as possible allows us to remove friction and reduce closing timelines from weeks to a matter of days,” he said.
In the mortgage business, multiple parties need to talk to each other and it’s not always straightforward what all the requirements are, and software can bring forward a very clear checklist and transform all the manual work of underwriting into code.
So while innovation in the mortgage space is happening here and there at the moment, there are people and companies looking to build a foundation. But whether the current macro environment is going to be a catalyst for change remains to be seen. It’s probably still going to be a while until we see full scale adoption…
Chart of the week
Looking at product investment priorities for 2022, the largest single focus for the global retail banking industry is digital lending, with 56% of banks investing in this according to a Celent report.
Meanwhile, 35% of banks are tackling some of the newer trends, like banking-as-a-service or embedded finance.
Other key findings included:
- 75% of banks believe that fintech and challenger banks’ threat is higher than it was a year ago
- 49% are making open banking investments as a technology priority for 2022
- 48% are focused on migrating workloads to public cloud infrastructure
- 73% have a clear strategy to engage with the open ecosystem
What we’re reading
Coinbase is on other side of Goldman’s first bitcoin-backed loan (Bloomberg)
Possible Finance bags $20m alongside pair of new lending products (Fintech Global)
How neobank digital lending will disrupt financial services (Investment Monitor)
Enova doubles small business loan originations YOY (deBanked)
Robinhood unveils stock lending feature (Finovate)
Square Loans launches in Canada (Finextra)
Higher borrowing could stoke lender, fintech merger interest (M&A)
BNPL is sending Gen Z into debt (SFGate)
Compound treasury receives S&P credit rating (Medium)
What we’re writing
- Q1 fintech earnings: stocks in the red, but growth prospects abound
- Data Snack: US fintech lenders down 30% on average in Q1 2022
- As Feds increase fintech scrutiny, experts outline a BNPL regulatory framework
- The revenue potential of banking-as-a-service, in 4 charts
- The evolution of lending towards a digital ecosystem, in 4 charts
- ‘Peloton and pizza balance out in my mind’: A day in the life of Lindsay Davis, head of markets at Atomic