The era of self-service online mortgages has arrived. The challenges these new mortgage lenders faced in creating a functional compliance and reporting infrastructure were great, but have been largely overcome (at least regionally). Multipoint, data-driven lending is clearly superior to lending decisions based solely on a credit score or a couple of meetings between banker and client. It boils down to the fact that humans may be more biased than algorithms.
The financial crisis of 2007-2008 badly hurt nonbank mortgage lenders that once profited handsomely from originating loans and then securitizing them. Many firms small and large closed their doors or reorganized from 2008 to 2011.
However, the nonbank mortgage lending sector has bounced back over the last couple of years, and now represents close to 70% of Federal Housing Administration loans. That said, nearly all of these loans meet the FHA's new stricter rules for qualification.
The relatively high costs of relationship lending encourage bankers today to seek large customers instead of smaller ones. This has resulted in a situation where new businesses and borrowers on the periphery of the banking system are left without many options.
Peer-to-peer lenders and crowd-sourcing firms have developed new ways of assessing risk. Kabbage and OnDeck use information on everything from social-media reviews to usage of logistics firms to assess the current state of small businesses. Avant has developed a unique machine learning system to underwrite consumers whose credit scores were hurt during the financial crisis.
The peer-to-peer segment continues to evolve beyond marketplace lenders. Successful firms like SoFi have morphed into hybrid online banks that raise capital and run hedge funds. Despite an established track record of success in the personal loan and commercial lending sectors by the still-evolving P2P segment, penetration into the mortgage lending sector has been limited, largely due to the regulatory complexities and expenses.
Marketplace lenders are also finding innovative methods for dealing with regulatory compliance in their sectors. For starters, a fully online loan application process literally eliminates paperwork and notably simplifies proof of regulatory compliance.
Note that as of this past summer, nonbank lender Quicken (with their online lender Rocket Mortgage) has moved up to the No. 3 U.S. home lender after Wells Fargo and Chase, originating just under $80 billion in mortgages in 2015.
The online lending and fintech space is maturing from a markets and regulatory standpoint. The Consumer Financial Protection Bureau has taken steps towards additional regulation of the online loan sector, including online mortgage lenders. Of interest, some executives in the expanding segment are actually calling for more regulation to set the stage for the next wave of growth in the industry.
One of the more well-known online lenders, SoFi began in the student loan segment in 2011, allowing recent graduates a chance to consolidate and refinance their loans at better rates. The firm began moving into personal loans and mortgages a couple of years ago. SoFi will sign off on home loans up to $3 million with down payments ranging from 10% to 50%.
SoFi uses a fully online application process where you apply and upload documents online. As of October 2016, the firm is licensed to originate mortgages in 28 states and Washington, D.C.
Better Mortgage has streamlined the mortgage experience into a seamless online process using data science, artificial intelligence, and user experience design. The firm is based in New York, and originates mortgages that they then sell to investors. The entire process from an initial quote through to the ultimate house purchase occurs 100% online. Better Mortgage has originated more than 11,200 mortgages to date.
Fintech is here to stay. Mainstream financial institutions, including Wells Fargo and JPMorgan, have been investing in and acquiring small marketplace lenders and other fintech firms over the last few years. Not surprisingly, some analysts are suggesting that mortgage industry-focused fintech firms are likely to be involved in the next wave of fintech-related investment and M&A activity.
The interest in acquiring these new mortgage industry innovators is not just about new business models and access to relatively untapped markets, it's also about acquiring regulatory expertise in a highly regulated sector. Acquiring a firm like Better Mortgage includes a core team of knowledgeable mortgage professionals with demonstrated regulatory competence. These professionals understand how to leverage technology to improve the customer experience and simplify regulatory compliance, and larger firms will pay to bring this talent in-house.
Brad Walker is the CEO of Income&, a fintech firm focused on fixed-income investment strategy.