When Efficiency Just Isn't Enough?
By Mark P. Dangelo
July 1, 2019
(Mark P. Dangelo is president of MPD Organizations LLC, featuring books, industry reports and articles. He is a strategic management consultant, outsourcing advisor and analytics specialist with extensive process, technology and financial results and is a frequent contributor to MBA Insights. He can be reached at email@example.com or at 440/725-9402.)
It seems we cannot catch our breath when it comes to the unrelenting pace and outright acceleration of innovation in our personal lives, and those of current and prospective homeowners. We have become anesthetized to the innovation singularity created by their incorporation into our behaviors, our families, and most recently, within our dwellings. Innovations are enthusiastically embraced, but with their unquestioning acceptance, the economic and social ramifications are yet to be quantified.
For lenders, the contagion of innovation has surfaced across the buying experience--prospecting, financial preparedness, discovery and due diligence, real estate, appraisals, underwriting, risk attribution, credit assessments, digital documents, electronic certifications and closings--all have been significantly impacted by hundreds of innovations during the past five years. Yet, while the supply chain of industries, all part of the homeownership experience, has undergone innovations consumers have eagerly embraced radical innovations that impact their healthcare, family dynamics, interpersonal communications, work assignments, transportation, energy, entertainment and leisure, financial instruments and so much more. The flux and fatigue of innovations have never been greater as the era of the internet gives way to the dawn of synthetic intelligences.
The next generation of homeowners cannot remember a time when they were not immersed or merged with their innovations. To them, BTI (before the internet) was a time of stone wheels, stogie smoking bankers, centrist news reporting and faxing paper. These new generations of homeowners are snowflakes--unique, non-wilting, powerful, transformative, educated; and when "they melt", they bond together to become floods washing away those mocking their demands and lifestyle. So, how will these up-and-comers, view traditional lenders who are efficient versus those who recognize their idea of "home?"
The Dawn of a New Industry?
As mortgage bankers await the surge of the Millennial home buyers, especially as the Baby Boomer generation heads into their downsized fortresses of solitude, the incorporation of innovations are business axioms driven by consumer behaviors and technological advancements. Why such a myopic focus on Millennials and Gen Z? While Gen X and Y are homeowners, they are stretched by massive levels of student debt (both their own and their childrens'), balancing incomes to expenses, parents who were unprepared for retirement and a job market that while robust, has made them stagnant. These new and varied demographics represent unbridled opportunities for leadership in lending with the embrace of all things digital in a world of declining origination margins and overall profit per loan.
However, while bankers pine for the long-awaited buying deluge from Millennials and soon Gen Z prospects, is the concentration on efficiency alone (i.e., automation, process streamlining, digitalization) the key to success? Or, does success also include ensuring that the product, that is the real estate itself, is in demand by these demographics representing an estimated 160 million individuals in the coming decades? Or, should the focus be on just closing, money and collections? Or, will those potential buyers who demand amenities be incorporated into future transactions represent the "new normal" for non-commoditization of lending currently served by atypical capital sources? We can already see that the demand for homes meeting the lifestyles of innovative homeowners no longer is concentrated in "progressive "cities such as Austin, Los Angeles, Miami, New York, Seattle and San Francisco.
Drilling down and focusing on the non-stop innovations that these new generational buyers are constantly demanding and fully integrated with their emerging behaviors, will the products that bankers offer to lend money against be linked to the future habits of their inhabitants? Are these products (e.g., homes) encompassing the demands for consumerism that include Internet of Things? Do they include augmented reality and artificial intelligence to manage mundane homeowner functions? Are the internal "capabilities" such as plumbing, electrical, connectivity, modularity, and structural integrity ready for the inclusion of devices, innovations and data that are already integrated into emerging generational social dynamics and subculture interactions?
Bottom line, will mortgage efficiency be enough to be competitively sustainable, or will the successful lender of the future understand that mortgages will continue to be commoditized? Differentiation and hence improved margins will reside in arranging loans for not only those who are merely creditworthy, but allocating relationships built on the understanding that money lent against innovative homes will be the tip-of-the-spear moment.
Is It ‘Live,' Is It AI or Is It an Amalgamation?
Industry personnel and their advocates fill the headlines with topics related to mortgage accessibility, private versus public funding (e.g., a decade of waiting for the U.S. Government transubstantiation of the GSE's), defaults and foreclosures, regulatory compliance, political positioning, consumer advocacy and legal consequences. And, those are just the ones from the last week.
Innovations are increasingly being linked to our lives, the lives of potential borrowers. They are altering cultural behaviors and how we live, our sleep and even our interpersonal relations. If I can marry my "robot" (e.g., Japan) and it has standing as a citizen (e.g., Saudi Arabia), why would my intelligent, autonomous home not be afforded similar standings at some point soon? Let us examine a few of the macro trends already well underway and rapidly cycling with new, more powerful functionality.
A. With fashion and wearable devices (transmitting biometrics and performance goals) now communicating with homes, appliances, healthcare monitoring, visual stimulates (i.e., integrated into home photos, paintings, displays to help improve mood) and food choices (tied to the home and kitchen stock), will homes represent extensions of our possessions and therefore designed (and leveraged) to our "individual quotients"?
B. As the next generation of companion holograms become available to ease loneliness, provide care, and create "bodies of affection" (i.e., human renderings), how will these human-generated replicas be valued against say a traditional home-theatre, swimming pool or tennis court, sustainable construction, or traditional home automation?
C. As AI grows in cognition, capability, and deployment, what impact will these evolving, semi-autonomous "beings" have on how homes are utilized, constructed and priced? Will these AI-integrated homes deliver improved lending margins or reduce the risks making their "owners" the new gold standard for borrowers? If the "in-house" AI generates "bodies of people that don't exist" or deep-fake projections that are outside the home "offensive," will this materially decrease home valuation?
D. As Internet of Things are projected to reach more than 50 billion devices by 2026, what will all this data represent to the home and to the creditworthiness of a borrower (i.e., will this data now become part of standard credit checks since it is generated by the house, like a utility bill)? Will this, along with AI "reports," become deciding factors for lenders to "weed out" borrowers?
All this discussion surrounding innovation dwelling loans begs a question: will lenders be liable for privacy and ethical breaches if their capital is used to violate the rights and personal protections granted to a home's inhabitants?
As homes become "living entities" a web of AI, VR (virtual realities) and robotics, what lending realities will change? How will be able to "appraise" a "living home" when it comes to the valuation of its tightly coupled software, networks, support structures, data repositories and privacy and ethical conduct? And, if we think about it, can you truly get a title to a future autonomous "being" residing in a home or does that "being" have rights, and legal recourse in the event of a sale (or default)?
I Jest, Really?
The pace of innovation ingrained in our personal lives has said to be the equivalent of coming home to a new companion every three to six months. You just get comfortable with the "person" (i.e., innovation) and it changes. Futurists have asked the question: if a home is autonomous, thinking, intelligent and has cognition with all its devices contained within the structure, what happens when I want to sell it and move? Does that mean my home agrees to a "divorce" and would it be entitled to a share of my assets and post-sale earnings income? And, if I sell my house, would that be a form of bondage in a structure inhabited by intelligent beings unable to voice their "free will?"
Yes, this article has been a bit cheeky. It has been a bit over the top, exaggerated if you will. Yet, the points implicit in the examples and questions are very real. The dogmatic belief that efficiencies will collectively define how mortgages are created in the future for an emerging homeowner fully vested in singularity with their innovations is, well, just a small part of the likely future realities. It would appear, using a deductive projection of the innovative future, that the most profitable lenders will be those who recognize the shift in what a home will become, how future borrowers view value and the risks of participating in cultural trends that will diverge from decades of history.
Our acceptance of efficiencies will continue to deliver positive benefits to consumers of lending products. The question is, in a world conducted against hyper-accelerated intelligent innovations and automation, will these traditional products be a wanted commodity? Or, will new industries be launched to deliver emerging, high-margin loans against an asset that may be a traditional structure (i.e., home) in name only?
As traditional lenders exit the mortgage markets, perhaps they have glimpsed the future of lending and recognize that to compete in it, it will be about price--not value. Perhaps the value resides with real-world solutions that "embrace the cheeky?"
(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.)