How Fintech Can Disrupt the $14T Mortgage Market
Fintech, which has already disrupted the payments, banking and financial advisory markets, is beginning to enter the $14 trillion mortgage market. Given the growing popularity of digital financial solutions, there appears to be a demand for electronic mortgage solutions among home buyers and sellers alike.
The U.S. mortgage market has been dominated by several major players with Wells Fargo at the top and JP Morgan Chase, Bank of America and US Bank not far behind, according to Daily Fintech. But since the 2008 mortgage meltdown, the industry has been upended. Non-bank mortgage lending is expanding as commercial banking declines. In fact, mortgage lending by type of institution shifted dramatically between 2007 and 2014. Recently, commercial banks provided 52% of mortgage lending, down from 74% in 2007. In 2014, mortgage lending by non-banks almost doubled to 43% from 23% in 2007. (For more, see: 7 Things That Will Shape the Future of Fintech.)
Where is that growth coming from? Here's how fintech is gradually entering the mortgage lending market.
Fintech Players in the Mortgage Market
Radius Financial Group cracked the fully paperless mortgage code in 2016. The firm, along with help from DocMagic, the MERS loan registry, Fannie Mae and Santander Bank closed six loans without paper documents. Radius used DocMagic and the MERS loan registry to handle distinct parts of the process, showing the potential for automation in document preparation and loan tracking.
Electronic closings and e-notes aren’t new, as Fannie Mae and Freddie Mac have bought e-mortgages since the turn of this century. Yet, the problem with these types of transactions is that few warehouse lenders can purchase electronic mortgages, according to a recent National Mortgage News article. This drawback is likely to change as more companies enter the electronic mortgage market. (For more, see: Fintechs' Expansion Will Shatter the Status Quo.)
Clara, a California startup, aims to solve some of the mortgage problems that plague consumers seeking to buy a home. Founded by engineer Lukasz Strozek and Jeff Foster, a former policy advisor at the U.S. Treasury Department, Clara strives to smooth out the inefficiencies that accompany the mortgage lending industry. Clara differentiates itself by educating borrowers and offering an online portal for completing paperwork. The firm also maintains that its rates are lower than competitors.
Lenda, a home-loan provider, also offers a digital mortgage solution. Other digital mortgage lending services include Quicken Loans' Rocket Mortgage. Then there’s SoFi, the fintech firm known for student and personal loan services, which is also gaining ground in the digital mortgage lending sphere. (For more, see: How Tech Startup SoFi Plans to Disrupt the Banking Industry.)
A recent JD Power survey found that 62% of respondents under 35 who bought a home this year stated that they’d use a mobile app to complete a mortgage application, if available from their lender. And 20% of buyers of all ages weren’t happy with their lender, providing further support that there is demand for a new type of mortgage service.
The Bottom Line
It is likely that there will be more automation within the mortgage lending industry going forward – either full service start to finish solutions or companies expediting a part of the process through automation.
Mortgages are composed of many moving parts, from the loan application and approval process, to appraisals, completing and verifying borrowers' credit and loan application, as well as completing and signing the final paperwork. In the end, like so many other aspects of finance that fintech has taken on, there’s room for automation. Reducing time, fees and face-to-face contact are an allure for the fintech mortgage market. Ultimately, this new frontier seems to be gaining traction with innovators and disrupters. (For related reading, see: What Does Trump Mean for the Fintech Market?)