Part Three: Mortgage Technology – Streamlining Affordability
Author: Jeff Agyemang
Dated: Wednesday, January 2, 2019
I spent a good portion of my last blog post talking about the innovation in America’s real estate industry. This is not to say that Canadians are doing nothing in the space. The US has just created an environment that better supports the creative real estate entrepreneur. With the advent of the internet comes the expectation for transparency and faster processes. Real estate, traditionally, has been a slow-moving industry. A prospective home buyer will go from the mortgage pre-approval stage, to interviewing a realtor, to seeing potential homes, to making and negotiating an offer, to (hopefully) offer acceptance and a “sold conditionally” status, to the removal of conditions (usually home inspection and mortgage approval) and a “sold firm” status, and finally to the new home owner’s move-in (typically around 45 to 60 days from the sold firm date) *wipes forehead*. The entire process can be draining for anyone, especially a first-time buyer, with most frustration coming from the mortgage approval stage.
Modern technologies give us the opportunity to make the process easier for anyone looking to get into the market. But how do you streamline mortgages? Realtors typically make offers conditional for five business days after acceptance to ensure their client can get a mortgage and close the deal. This is because originating, processing and underwriting a home loan with a traditional lender (usually a bank) is long and complicated, requiring paperwork to touch multiple hands before it is approved. That’s five days where both the seller and hopeful buyer are both in limbo. That’s a lot of wasted time and unnecessary stress for all the parties involved. Large lenders need to focus on creating digital products to streamline the process, like our friends down south have done.
Let’s look at one large US lender for a second. Quicken Loans is the largest retail lender in the US, and the largest online mortgage lender. In 2015, the company launched Rocket Mortgage, a desktop and mobile loan application process that streamlines financial document and information sharing, speeds up approval to minutes, and lets customers lock in interest rates. Rocket Mortgage funded $7 Billion in loans in 2016, with 80% of those customers being first time buyers. Quicken Loans has clearly figured something out in the new economy: digital loan products are the future of the mortgage industry!
But digital lending requires A LOT of trust between customer and lender. Big banks have been suffering from a lack of trust for a while now. This distrust has nothing to do with their ability to lend but more so revolves around undisclosed fees to the customer. Many of these fees can be mitigated by automating the process to save costs. For example, customers can authorize their lender to retrieve their financial data and aggregate it, then run the data against its underwriting models to verify the data. This significantly reduces the friction of understanding the customer’s financial picture, and paves the way for a more speedy, low cost approval system. A perfect system for millennials; who are the generation that have grown up in the internet age and expect a faster process.
Millennials are burdened by student debt and high rental rates, causing many to struggle in managing their finances to qualify for a mortgage. This generation is failing to build up the capital for a down payment, adding to the struggle to get a mortgage by traditional means. And like many of us know, the longer it takes to build up a down payment the more homes appreciate and, in turn, the larger the down payment needs to be. Companies like Better Mortgage, SoFi, Loan Depot (yes, they are all US companies) are helping to tackle this problem by offering digital mortgage lending and marketplace lending. These innovators see the change in consumer behaviour shifting around technology and consumer debt profiles.
The home buying process is changing with the new generation of high debt burdened consumers entering the market, and they expect streamlined digital processes. Bank lenders that are slow to improve their technology will lose out to these new mortgage companies offering smoother and faster results at lower costs. And a few years from now the loan process will look very different than it does today. This excites realtors like myself because it gives us an opportunity to serve the new generation of buyers in a unique environment. The experience is getting to know the customer and their goals as quickly as possible. Faster loan processes will continue to change the game. Let’s see if we can keep up…