Fintech Advantages Not Limited to Fintech Lenders
By Alok Datta
April 22, 2019
Alok Datta is president of SLK Global Solutions America, Dallas, a business process management provider for the financial services industry. A former vice president of Genpact, he has more than 20 years of mortgage industry experience. He can be reached at email@example.com.
Fintech mortgage lenders are frequently making headlines these days with their announcements of 10-day closings and 20-minute approvals--sometimes even three-minute approvals. Indeed, the technologies they employ are game-changers for our industry. No borrower wants to wait any longer than necessary to find out if they've been approved.
These fintech lenders are making their mark on our industry, too. According to the Federal Reserve Bank of New York 2018 report, Role of Technology in Mortgage Lending, fintech lenders have grown their market share by 30 percent between 2010 and 2016, to $161 billion, and now represent 8 percent of the total origination market.
As more fintech lenders enter the market and expand geographies and products, their share of the market will continue to grow. That will come at the cost to more traditional mortgage lenders, especially since overall origination volumes are also lower. But what exactly is a fintech lender--and do fintech lenders truly represent the future of mortgage lending?
Fintech's Growing Footprint
According to the Fed report, fintech lenders are defined as having "an end-to-end online mortgage application platform and centralized mortgage underwriting and processing augmented by automation." Most of them are "stand-alone mortgage originators that primarily securitize mortgages and operate without deposit financing or a branch network," although the lines between fintech and traditional lenders are quickly blurring.
If we scan Mortgage Daily's Top 20 mortgage originators list of 2017, we see only seven traditional brick-and-mortar banks. Ten were non-bank home lenders, while, interestingly, the other three--Quicken Loans, loanDepot and Guaranteed Rate--were fintech companies. All three of these fintechs started or adopted the fintech business models after 2010.
So, what is making borrowers move from traditional mortgage lenders to fintech lenders?
How Fintechs are Changing Customer Expectations
Consider Better Mortgage, which extensively uses technology so a borrower can obtain a basic pre-approval letter in about three minutes, without the need to talk to any loan officer or processor. Borrowers can also get a verified pre-approval letter by uploading the relevant documents--W2s, pay stubs, tax returns, bank statements--in about 20 minutes. After acquiring Avex Funding, a Silicon Valley-based mortgage lender, Better Mortgage expanded into more traditional channels by integrating an experienced mortgage business into its cutting-edge technology platform.
Others are encroaching on the mortgage lending turf from other directions. Zillow, the dominant online real estate listing company, acquired Mortgage Lenders of America in August 2018 to "streamline and shorten the home-buying process for consumers who purchase homes through Zillow Offers." Note that, in 2017, there were 23 million loan information requests submitted by consumers through Zillow Group's consumer brands. So, there is a large opportunity and incentive behind Zillow's new mortgage origination business.
A digital mortgage lender from California, Eave, claims to bypass "flimsy pre-approvals" entirely and promises that a borrower can apply to purchase a property in 30 minutes and have a full financially underwritten approval within 24 hours, with a 21-day close guarantee. Interestingly, they believe they are better than even traditional digital mortgage lenders that average 37 days for closing.
San Francisco-based marketplace lender SoFi started lending to students using alumni funds, but has moved on to mortgage lending and personal loans. It focuses on "financially responsible individuals" and uses "non-traditional underwriting" that includes evaluating an individual's free cash flow, education level, professional progress and bill payment history.
Digital mortgage broker Morty, a fintech based out of New York, has a completely online process and works with 12 lenders to get the best terms and product for their borrowers. It quotes an email from a customer of theirs who could not believe that he had completed a refinance with Morty in only nine minutes, and was sure he had done something wrong.
Then, of course, there's the constant threat of companies like Amazon entering the financial industry space. Amazon has already established itself in the world of credit cards and payments with offerings like Amazon Cash and Amazon Pay, as well as Amazon Lending, which provides loans to merchants selling on their platform.
How Fintech Compete...
What, then, allows fintechs to compete with and outdo established mortgage players? Based on data for all U.S. mortgages between 2010 to 2016, the Fed report found that fintech lenders can move an application from submission to closing faster than traditional lenders, and that fintech lenders reduced average processing time by 10 days--a reduction of 20 percent off the average processing time.
"Elasticity," or the effect of volume fluctuations, was better handled by fintechs, too. When applications doubled, as they did during the refinance boom that took place from 2010 to 2016, loan processing times increased by 13.5 days for traditional lenders, compared to only 7.5 days for fintech lenders. This held true for all types of loans and borrowers, and for nonbanks.
Sceptics would say all this is because fintech lenders focus only on qualified borrowers. And yet, when volumes doubled, fintechs actually reduced their denial rates compared to other lenders, which suggests that the faster processing achieved by fintechs was not because they choose only easily qualifiable borrowers during peak periods.
...And How Mortgage Lenders Can Fight Back
So, what should mortgage lenders do? To compete with fintechs, most traditional mortgage lenders rush to get the loan submission process online, believing that this is the key differentiator behind fintech lenders. But this is a poor assumption. In order to increase loan approval speeds, the same speed and efficiency is needed in a lender's back-office operations. Fintech lenders have achieved this by reducing or eliminating the many follow-up requests to borrowers for more information that are typical with traditional lenders, which requires processors and underwriters to rework loans. They have also enhanced parallel processing, tracking and analytics to identify improvements in the loan approval process.
At this point, one might think traditional lenders who hope to compete with fintech lenders must make major changes to their technology platforms and origination systems. While that may be so in the long term, when the lender is ready to make the investments of time and money to redesign and rethink their customized processing and operations, it's not necessarily true.
In fact, some service providers have quick-to-implement solutions that use a mix of automation, data analysis and very efficiently designed manual processes to achieve similar or better results than the fintechs, with a lower cost structure. Developed by technologists with a deep knowledge of mortgage processing, these solutions can be loosely coupled with a lender's loan origination system instead of having to be fully integrated with it.
By combining automation, manual intervention and parallel processing, and by closely monitoring turn times and quality, they are capable of achieving super-fast turn times, better quality, lower costs and real-time status information, which enable processors, loan officers and underwriters to attain guaranteed approval and closing times. In fact, one top lender that has tried this strategy was able to achieve a 38 percent faster closing rate while reducing operating costs by 61 percent.
In the final analysis, fintech lenders have demonstrated that it is possible to manufacture and sell loans far more quickly than most of us realized. But they don't have a monopoly on these achievements, which is evident by the many different ways in which they are approaching and satisfying today's mortgage consumer. It's certainly no time for traditional lenders to throw in the towel, in other words. By reimagining the mortgage approval process, by applying new technologies in smarter ways and by choosing the right partners to work with, traditional lenders have the opportunity to achieve the same results or even better ones.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)