The Role of Technology in Mortgage Lending

This is not my paper, the full paper can be found here: https://academic.oup.com/rfs/article/32/5/1854/5427780

Technology-based (“FinTech”) lenders increased their market share of U.S. mortgage lending from 2 percent to 8 percent from 2010 to 2016. Using market-wide, loan-level data on U.S. mortgage applications and originations, we show that FinTech lenders process mortgage applications about 20 percent faster than other lenders, even when controlling for detailed loan, borrower, and geographic observables. Faster processing does not come at the cost of higher defaults. FinTech lenders adjust supply more elastically than other lenders in response to exogenous mortgage demand shocks, thereby alleviating capacity constraints associated with traditional mortgage lending. In areas with more FinTech lending, borrowers refinance more, especially when it is in their interest to do so. We find no evidence that FinTech lenders target marginal borrowers. Our results suggest that technological innovation has improved the efficiency of financial intermediation in the U.S. mortgage market.


The U.S. residential mortgage industry is experiencing a wave of technological innovation as both start-ups and existing lenders seek ways to automate, simplify and speed up each step of the mortgage origination process. At the forefront of this development are FinTech lenders, which have a complete end-to-end online mortgage application and approval process that is supported by centralized underwriting operations, rather than the traditional network of local brokers or “bricks and mortar” branches. For example, Rocket Mortgage from Quicken Loans, introduced in 2015, provides a tool to electronically collect documentation about borrower’s income, assets and credit history, allowing the lender to make approval decisions based on an online application in as little as eight minutes.

In the aftermath of the 2008 financial crisis, FinTech lenders have become an increasingly important source of mortgage credit to U.S. households. We measure “FinTech lenders” as lenders that offer an application process that can be completed entirely online. As of December 2016, all FinTech lenders are stand-alone mortgage originators that primarily securitize mortgages and operate without deposit financing or a branch network. Their lending has grown annually by 30% from $34bn of total originations in 2010 (2% of market) to $161bn in 2016 (8% of market). The growth has been particularly pronounced for refinances and for mortgages insured by the Federal Housing Administration (FHA), a segment of the market which primarily serves lower income borrowers.

In this paper, we study the effects of FinTech lending on the U.S. mortgage market. Our
main hypothesis is that the FinTech lending model represents a technological innovation that reduces frictions in mortgage lending, such as lengthy loan processing, capacity constraints, inefficient refinancing, and limited access to finance by some borrowers. The alternative hypothesis is that FinTech lending is not special on these dimensions, and that FinTech lenders offer services that are similar to traditional lenders in terms of processing times and scalability. Under this explanation, there are economic forces unrelated to technology that explain the growth in FinTech lending (e.g., regulatory arbitrage or marketing). It is important to distinguish between these explanations to evaluate the impact of technological innovation on the mortgage market. If FinTech lenders do indeed offer a substantially 1 different product from traditional lenders, they may increase consumer surplus or expand
credit supply, at least for individuals who are comfortable obtaining a mortgage online. If, however, FinTech lending is driven primarily by other economic forces, there might be little benefit to consumers. FinTech lending may even increase the overall risk of the U.S. mortgage market (e.g., due to lax screening). In addition, the results are important for evaluating the broader impact of recent technological innovation in loan markets.

Our research contributes to several strands of the literature. Although a large body of
research has studied residential mortgage lending (see Campbell, 2013 and Badarinza et al., 2016 for surveys), much of the recent work focuses on securitization and the lending boom prior to the U.S. financial crisis.4 Our paper instead focuses on how technology affects the structure of residential mortgage lending after the crisis. Most closely related to this paper, Buchak et al. (2017) study the recent growth in the share of nonbank mortgage lenders, including FinTech lenders. While there is some overlap between the descriptive parts of our analyses, and we use similar approaches to classify FinTech lenders, the two papers are otherwise strongly complementary. Buchak et al. focus on explaining the growth of nonbank lending, using reduced-form analysis and a calibrated structural model. Our paper focuses on how technology impacts frictions in the mortgage origination process, such as slow processing times, capacity constraints and slow or suboptimal refinancing.


Our findings also inform research on the role of mortgage markets in the transmission
of monetary policy (e.g., Beraja et al., 2017; Di Maggio et al., 2017). If lenders constrain
the pass-through of interest rates (Agarwal et al., 2017; Drechsler et al., 2017; Fuster et al., 2017b; Scharfstein and Sunderam, 2016), or borrowers are slow to refinance (Andersen et al., 2015; Agarwal et al., 2015), changes in interest rates will not be fully reflected in mortgage rates and originations. Our findings suggest that technology may be easing these frictions, potentially improving monetary policy pass-through in mortgage markets.

Finally, our paper contributes to a growing literature on the role of technology in finance (see Philippon, 2016, for an overview), and a broader literature on how new technology can lead to productivity growth (see e.g. Syverson, 2011 and Collard-Wexler and De Loecker, 2015). In our case, the “productivity” or “efficiency” measures we consider are processing times, supply elasticity, default and refinancing propensities, and we are the first to document that FinTech lending appears to lead to improvements along these dimensions.

Leave a Comment