Fintech was already transforming mortgage lending prior to the Covid-19 crisis. The pandemic is actually accelerating the adoption of fintech because it offers socially-distanced interaction and better service
by Dave McKenna, Editor – CREB on April 22, 2020
We’re all remote consumers today. The necessity of social distancing and state-wide lock-down mandates have expanded our use of virtual services of all kinds — from business meetings to grocery shopping. Prior to Covid-19, the mortgage industry had been rapidly evolving on several fronts. The dramatic increase in non-bank mortgage providers and fintech lenders had already significantly altered the mortgage landscape.
By 2019, 45% of all mortgages were originated online, either through a traditional bank or with an on-line only provider, and over two thirds of all mortgages were underwritten by a non-bank financial institution specializing in consumer credit.
A recent paper by the Federal Reserve Bank of Philadelphia found that fintech mortgage products had expanded credit access in non-metropolitan areas. On-line applications, automation, and streamlined processing had given fintech mortgage providers like Rocket Mortgage from Quicken, Loan Depot, and Better.com a growing share of the mortgage market in areas where bank branches are fewer and farther between.
In the short term, the financial catastrophe of Covid-19 will challenge the entire mortgage industry. With potential unemployment reaching as high as 32% in Q2 of 2020, a recent Federal Reserve Bank analysis suggests as many as 19% of all mortgage holder may fall behind in their payments. The holders of these loans are still required to make interest and principal payments to their investors, even when the mortgage holders fail to pay. This will pose significant liquidity challenges for the system and especially for many non-bank lenders who have a disproportionately large share of the lower credit-worthy borrowers.
The CARES Act provides mandates for mortgage forbearance of up to a year for Governmental Sponsored Enterprises (GSEs) like Freddie Mac and Fannie Mae. Additional work is being done to help facilitate the solvency of the loan servicers as well.
In the meantime, technology is filling the vacuum left by social distancing. On-line rental payments platform Zego is having the best year in its twenty-year history. “We are seeing a really sizable adoption of technology. All of the people that said digital payments are a passing fad have now found that they need another way to collect their money,” Dirk Wakeham, CEO at Zego.
The Fed paper points out that the growth of fintech has produced a superior product by applying current technology to a very old, paper-bound, and manual process. The fintech automation of mortgage lending has lead to some surprising benefits.
The modern tools cut weeks off the process time. But they also have been proven to be measurably less biased by racial factors than in-person lending. Also, the fintech mortgages are able to command higher interest rates on their loans for equivalent risk due to the convenience factor offered by the on-line processing and speed-to-close.
The on-line only products like Rocket Mortgage from Quicken have also proven able to reach under-serviced populations outside of the major metro MSAs. While most non-metro loans are originated by traditional banks with a physical presence, lenders like Better.com and SoFi have successfully employed targeted digital and print media direct marketing campaigns to identify and bring in consumers. Now one in ten of these loans are through fintech mortgage platforms.
This technology has proven so successful that a number of the traditional banks have begun to white label the fintech solutions from the non-banks in order to leverage the benefits of on-line access and streamlined processing.
It is likely that the Covid crisis will result in consolidation in the mortgage finance industry. There had been concern among regulators and academics prior to the pandemic that non-bank institutions were not prepared to weather an economic downturn. However, many thought the concerns were overstated because the nature of the relationship between the non-bank lenders and their investors amounted to virtually real-time oversight by a highly interested third-party.
Of course, no capitalization requirement could anticipate a 19% delinquency rate. We are facing greater mortgage lag than the Great Depression. The more recent lessons of 2008 have motivated policy makers to take steps to help provide adequate liquidity in the system to prevent a full collapse of the industry and to ensure that millions of Americans don’t lose their homes in the fallout.
The question is — what kind of industry will emerge from this present crisis. No one can know for certain, but here are a few good bets: First, the non-bank mortgage sector will receive additional regulation that will make it more resemble the traditional banks. Second, consumers will demand convenience and speed via on-line systems more than ever. And finally, high-quality fintech mortgage platforms will accelerate their growing share of the trillion-dollar mortgage finance industry.