4 Mortgage Mega Trends

Borrower expectations for digital engagement have risen dramatically over the past 3 years and even before the onset of covid, expectations were being driven by the rapid digitisation of the experiences in other industries. Remember ordering a meal from a waitron? Or buying a movie ticket? The majority of these interactions have now gone online where it makes sense to do so with some dramatic P&L results. With the rapid digitisation of many experiences our collective understanding of the consumer life cycle has been altered and we are never going back to analogue.

So where are we in the credit space and more specifically on the biggest purchase any consumer can make? Their mortgage. As someone who likes to keep one foot, personally, in the tech and the other, professionally in banking I have noticed 4 Mortgage Mega Trends.

Tech/data partners and providers are dominating more parts of the process

Ecosystems and partnerships are in. In the past 5 years I have seen the vast offerings available to lenders from third party providers, these offerings include: Front-end platform modernisation for both brokers and customers, Underwriter and broker workflow management, document extraction through the use of OCIR, digital income and expense verification through open banking, digital platform asset valuations, employment verifi­cation, title verification, e-completion, automated compliance through reg-tech, and rapid rules based decisioning. These software solutions are designed to speed up the mortgage-application process, lower costs, and improve the overall customer and broker experience. Crucially should all these items lower costs to the lender there may be scope to lower costs for borrowers as well. The reward for having your ‘house-in-order’ before applying? Excuse the pun.

The state of play here is that there are still vast numbers of lenders still engage in labor-intensive and repetitive originations and completions tasks, even though there is potential to automate far more than half of the tasks across the credit life cycle – even in an in-life servicing context. This all has a knock on effect on time to cash and costs that must be born by someone. Costs can also be paid in time to cash or missed opportunities.

Most of the technology innovation and investment in mortgage lending so far has been channeled toward the front end of the value chain. These are in the form of aggregators and comparison sites/tools and this makes sense given the barriers to entry for new lenders in the mortgage space. It’s a far quicker time to market if you facilitate the lending instead of provide the lending. You also dont have consider the in life servicing either nor bear the costs of bad debt.

Non-bank lenders continue to grow market share with speed and agility

A topic that fits neatly into the cost equation above. We are not able to ignore non-bank lenders anymore. In the United States five years ago, nonbank lenders accounted for roughly half of total mortgage originations; two years ago, that figure was nearly 60 percent. In 2020, the share of originations by nonbank lenders leapt to nearly 70 percent. This growth has been driven by digital first, super agile, non-bank businesses that provide a differentiated value proposition. Some additional insight from UK Finance from the SME sector.

The benefits of Non-bank lenders come from significant investments in front end technology from document submission to communication with the borrower. These interactions have been streamlined that has resulted in real benefits for the consumer. Some tech-enabled lenders are also introducing some risky and innovative products like offering home buyers in competitive real-estate markets cash up front so that these potential home buyers can make cash offers. Pre-approval within certain parameters. Asset certainty is obtained by simply running the target property through a valuation model on the fly, on the ground. This may prove game changing in the UK, famous for its gazumping practise.

Analytics from these non bank lenders suggests that they are operating at a 30% quicker to the same bank in the same lending space and at a 25% discount on loaded costs per mortgage. Compound this advantage through a few credit cycles and you have a winner in my book.

Next-generation servicers are introducing more-efficient digital first platforms

The focus of the industry in more recent years has been within the originations space. However the less sexy space of mortgage servicing has also seen a rapid digitisation. In the US this space is seeing double digit annual growth which is attributed to two trends:

New lenders and owners of the yield on the mortgage who are entering the industry certainly lack internal servicing capabilities and will consider or need to outsource to retain the fixed income stream.

The market is experiencing a greater shift from in-house servicing to outsourcing, propelled by higher regulatory scrutiny and the perennial challenge of bad debt servicing, which can cost 5 times as more as servicing a performing loan. This engagement with the customer also requires niche expertise and close provable adherence to regulatory rules. Moreover, the capital-intensive nature of the mortgage servicing business often acts as a deterrent particularly for traditional servicers and smaller players to invest in modernisation and digitisation. It’s very difficult to run a business and change a business at the same time. Especially while the activity to perform this business is based on monthly cycles.

As a result, newly minted digital-first servicers have gained traction over the past two to three years for their ability to use technology and behavioural science to increase efficiency, improve the client and end-borrower experience, boost retention, and strengthen compliance. A well-built digital interface helps mortgage borrowers access information about their loans, make payments accurately, upload or receive documentation, and communicate seamlessly with the servicers. I am sure the market share for digital-first servicers will continue to grow.

The bundling of home-buying services

This one is a little out there right now, but, there is a possibility of bundling the whole home buying experience into a one-stop shop:

• Asset search,
• mortgage,
• Warranty and inspection,
• Title and escrow services,
• Movers and homeowner’s insurance.

There is serious scope here with the development of ecosystems and links to service providers. API’s anyone?

The buyer won’t have to search for properties because algorithms will know what kind of properties would suit their needs and means, and recommend them because their social media demographic data feeds the algo.

The buyer will view the property virtually, or make an appointment online to view it in person. The current costs for sellers will be reduced due to efficiencies that the estate agent will achieve and new business models for estate agents, such as earning referral fees from other stakeholders in the ecosystem, rather than commissions from sellers. This may help drive healthier sales practises.

The vision may include:

Customers in the US have spoken and want bundled home-buying solutions: research from the National Association of Realtors in the US indicates that more than 90% of home buyers would consider a one-stop-shop model for their home-buying journey, and 79 percent of home buyers believe bundled services make the buying or selling process more efficient and manageable. For the buyer, this will be an engaging and frictionless experience; for the seller it will be quicker and cheaper; and for the providers it will be more efficient.

There is more to this story... given the amount of investment that has gone into the development of the stand alone solutions the next wave of real innovation would be to weave all of the tech together so that it appears to the consumer as a single experience. This is where I see the real wave of disruption taking place. If you would like to reach out to me on this point specifically please do so here.