The Online Mortage Lending Report
11 de julio, 2019
Tiempo estimado de lectura: 20 minutos
In late 2015, Quicken Loans disrupted the mortgage industry with the launch of Rocket Mortgage, a completely online end-to-end mortgage experience. While many lenders offered online mortgage application capabilities at the time, the process often involved filling in an online form with basic personal data and then talking to a loan officer who would probably request additional documentation before moving to send the file to an underwriter — and approval would take days. But with Rocket Mortgage, the applicant essentially submits information directly into the underwriting system, and information on income, assets, and property can be verified online without providing pay stubs or bank statements. Rocket Mortgage also allows the potential borrower to see live interest rates, view monthly payment and fees info, and secure a loan approval within minutes.
Given Quicken Loans’ brand recognition, Rocket Mortgage helped bring other, smaller online lenders to the fore by legitimizing the digital lending process. Lenda (now Reali loans) launched in October 2013 with a platform that allowed customers to complete mortgage refinancing entirely online and moved into mortgage purchases at the end of 2015, while better.com launched in early 2016 with a 100% digital loan process, for instance. These players also leveraged tech to offer lower costs and rates compared with traditional lenders.
- The US’ 75 million digital-native and cost-conscious millennials account for the biggest segment of the population and 37% of recent home buyers, the largest share among generations. And this cohort favors digital mortgages: Millennials were found to make initial outreach to their lender online (43%) far more frequently than boomers (24%), per a 2018 Ellie Mae survey, while they were also twice as likely to initiate the mortgage process online.
- Further, around half of consumers (47%) would be comfortable applying online for a primary mortgage, pera recent Fiserv survey.
Staggering mortgage debt figures also reveal a significant opportunity for home loan lenders. US mortgage debt stood at $9.2 trillion in Q1 2019 — the highest mortgage debt level since Q4 2008, when it stood at $9.3 trillion — accounting for 68% of the total household debt and trumping all other types, with student loans a distant second at $1.5 trillion.
Big banks have seen their share of the market shrink since the 2008 financial crisis, but they can now unlock the potential of advanced mortgage tech to act against the threat of nonbanks and alt lenders. In Q3 2018, mortgage originations of the top five US banks — Wells Fargo, JPMorgan, Bank of America (BofA), US Bancorp, and Citigroup — accounted for 21% of the total, a sharp decline to their combined market share of 50% in 2011, per Trefis. This was partly due to suffering significant losses as a consequence of the recession, which weighed on loan growth, as well as the introduction of stricter underwriting standards that have made mortgages more expensive for those lenders. But financial institutions (FIs) can today leverage the power of advanced technologies to shave down costs — by cutting labor expenses or reducing the possibility of fraud, for example — and drive a more significant opportunity in residential mortgages.
And because large FIs are finally reacting and unveiling their own digital mortgage lending platforms, we could see them claw back some of that lost market share. Since the beginning of 2018, banks such as Wells Fargo, JPMorgan Chase, BofA, SunTrust, and TD Bank have all launched their own propositions, for instance.
In this report, Business Insider Intelligence will examine the current state of the mortgage lending landscape and how technology has enabled alt lenders to transform the home loan process from application to closing. We will then explore how legacy banks are responding to the threat of digitally advanced competitors by unveiling their own online mortgage solutions and offer recommendations for FIs looking to enhance their mortgage offerings.
How Digitally Advanced Nonbanks And Alt Lenders Have Transformed Mortgage Lending
The Federal Reserve Bank of New York defines fintech mortgage lenders as lenders that offer a «complete end-to-end online mortgage application and approval process that is supported by centralized underwriting operations, rather than the traditional network of local brokers or ‘bricks and mortar’ branches.» We split those fintech home loan lenders into established nonbanks — FIs that are not full-scale banks because they don’t offer depositing services — and alternative online mortgage lending startups.
- Established nonbanks include QuickenLoans and loanDepot, which unveiled a digital mortgage experience in March 2017 and rolled out its end-to-end digital mortgage, mello smartloan, in February 2019.
- Alternative online mortgage lending startups include SoFi, which launched its mobile mortgage experience back in March 2015, Reali Loans, which formed following the acquisition of online lender Lenda by estate startup Reali in April, and better.com, which launched its online mortgage offering early in 2016.
These fintechs reduce loan processing times, cut interest rates, and face lower default rates compared with traditional lenders, per a 2018 Federal Reserve Bank of New York report:
- Fintech mortgage lenders are about 20% quicker at processing mortgage originations than traditional lenders.
- Interest rates offered by fintech mortgage lenders are 2.3 basis points lower overall and 7.5 basis points lower for purchase mortgages.
- And default rates of mortgages originated by fintechs are approximately 25% lower than other lenders’.
One explanation for lower default rates in particular could be that automated underwriting processes reduce fraud incidences. Further, alternative online mortgage lenders tend to «get a natural selection of savvier, slightly price-conscious shoppers who tend to manage their financial lives better,» Dr. Sean Hundtofte, chief economist of better.com, told Business Insider Intelligence in an interview. Of note, alternative online mortgage lenders haven’t faced trying economic conditions in the US that would stress test those findings.
And some alternative online mortgage lending startups lower or eliminate fees. Online mortgage lenders can significantly cut costs, such as through commission-free loan officers, for instance. Better.com CEO Vishal Garg told Business Insider Intelligence that its commission-free business model allows customers to save an average of $3,500 in fees. Of note, established nonbanks, such as Quicken and loanDepot, have commissioned loan officers.
The traditional customer mortgage application journey is bogged down by manual processes, wait times, and frequent branch visits. This journey requires customers to either come into the branch or talk to a loan officer on the phone, and then manually gather documentation and provide it to the lender piecemeal. Underwriting is hampered by manual processes, as the application information is matched with data in the supporting documents and other facts are confirmed with third parties such as employers and banks. And waiting for an appraisal to be scheduled and processed only further increases the cycle time. When it comes time to close, signing involves scheduling a meeting with all involved parties, including the attorney, closing agent, and lender.
Below, we break down how technology has enabled fintechs to transform the various stages of the home loan process.
Digital mortgage lenders allow customers to start and complete their application completely online. This compares with some traditional lenders that either don’t offer an online application solution or allow customers to initiate their loan application online by filling out some basic information digitally, but require them to complete the rest of the application process offline. Online mortgage lenders offer customers constant access to a home loan portal that details all documentation requirements and offers real-time updates on the status of the application. Additionally, potential borrowers can customize their mortgage based on real-time pricing.
Online mortgage lenders enable completion of home loan applications within minutes:
- If the borrower is already a client of the lender, demographic information can be auto-populated rather than input manually.
- Records and accounts can be pulled to verify additional information: Data on income and taxes, for instance, can be gathered from verified third parties, such as the applicant’s online bank account, significantly enhancing the customer experience and data quality.
- Additional supporting documents can be securely uploaded and processed digitally, including through mobile image capture.
In the digital mortgage lending process, applicant information is input into the largely automated underwriting process. This compares with the traditional process, where a loan officer compiles the application file before sending it to the underwriter, who manually checks that the information matches the applicant’s documents and reaches out to third parties, such as banks and employers, to confirm information.
In the largely automated underwriting process:
- Efficient data extraction allows underwriters to easily verify information, while software processes documents and flags any inconsistencies or omissions.
- Borrower information can be compared against employment databases and a variety of records, such as marriage and property.
- Algorithms can check the consistency between recent bank deposits and pay stubs.
- Automated valuation models generate property valuations without the need for official appraisals.
And findings from the Federal Reserve Bank of New York suggest that fintech lenders process home loan applications 20% faster than their competition.
Online mortgage lenders significantly cut closing times, often to around two weeks compared with months in the traditional process, eliminating the need for multiperson physical meetings. Quicken and loanDepot have closed in as little as eight days, for example, with Quicken’s Rocket Mortgage closing two weeks earlier than the average and fintech Lenda (now Reali Loans) saying it can close loans in 17 days, with a record close of 13 days. However, the closer the process gets to the closing stage, the harder it is to fully automate — and there’s increased need for creating bridges that connect the online with the offline world, per Hundtofte.
This often hybrid process could include the following:
- E-closing, or the digital execution of some or all required closing documents. Some home loan closing documents can be paper-based, such as the promissory note, while others can be electronic, per Fannie Mae. Of note, it’s not yet possible across the entire US to perform e-closings, Rajesh Bhat, CEO and cofounder of Roostify, told Business Insider Intelligence.
- E-notarization, or remote online notarization. This occurs via a physical meeting between the borrower and the closing agent, where most of the documents are signed electronically. Meanwhile, in the case of remote online notarization, there’s no need for a physical meeting and all documents are executed digitally.
- E-notes, or electronic promissory notes. These are essentially an electronic version of the record of the borrower’s obligation to repay the home loan. When e-notes can be signed, managed, and stored digitally, the need to schedule an appointment with the relevant parties to physically sign the promissory note is eliminated.
How Legacy Players Are Responding To The Threat Of Digitally Advanced Nonbanks And Alt Lenders
To strike back against online mortgage lenders, many US banks have unveiled their own digital mortgage offerings since the beginning of 2018, including: Wells Fargo, Chase, BofA, SunTrust, TD Bank, Ally Bank, and US Bank.
Most often, banks partner with mortgage service and software providers to help them digitize. For instance, Roostify works with TD Bank and Chase, Blend works with Wells Fargo and US Bank, and better.com ventured into the B2B space via a similar partnership with Ally Bank. And while the industry average for closing a purchase mortgage stood at 43 days in April 2019, some incumbents have managed to significantly cut their closing times: Chase promises a three-week close and BofA said its average closing is now 20 days, for instance.
Apart from enabling a digital mortgage application, mortgage software providers can also help banks digitize parts of the remaining process. Roostify, for example, can provide the ability to integrate computer e-closing providers that facilitate electronic closings in specific states so their bank customers can digitize closing as well, per Bhat. However, he added that for the most part, banks are not yet ready to enable the digital workflow for underwriting.
Below, we look at how the top three incumbent banks according to mortgage originations are pushing toward a digitized future.
As of Q3 2018, Wells Fargo held a 10.1% market share of total mortgage originations in the US when including both new mortgages and mortgage refinances, making it the largest mortgage originator among banks.
During its 2017 Investor Day, Wells Fargo revealed it would deploy a digital mortgage application that was already in production. The application was in pilot with team members, with plans to take the pilot to nonteam members later in 2017 and fully roll it out in 2018, per the Investor Day call cited by HousingWire. And later in 2017, Wells Fargo and mortgage tech provider Blend announced a partnership, per HousingWire.
The bank said that, among other capabilities, its new digital mortgage experience would allow customers to apply via its website or on mobile, increase speed and transparency, and streamline the approval process. For example, using existing log-in credentials, Wells Fargo customers can have their information prefilled and can easily select which Wells Fargo accounts to use in their application. And the lender can verify income and employment for some customers and avoid asking for pay stubs and W-2 forms. Further, in October 2018, Wells Fargo announced it would work with digital solution provider eOriginal to launch e-note capabilities.
Initial results demonstrate that going digital holds promise. In a 2018 press release, Wells Fargo said that as of September 2018, 28% of its home loan applications were completed online. The latest data revealed that the online mortgage application reduced approval-to-funding time by about 18%, on average, and that there’s been a steady increase in the number of customers using its online mortgage application.
JPMorgan Chase As of Q3 2018, JPMorgan Chase held a 4.9% market share of total mortgage originations when including both new mortgages and mortgage refinances, making it the second largest mortgage originator among banks in the US.
In February 2017, Chase revealed plans to launch an end-to-end digital mortgage platform that would offer a more transparent, simpler, and speedier home loan experience from application to closing. The banking giant started with a pilot, while the complete rollout came in 2018.
Chase collaborated with mortgage tech provider Roostify to launch a self-serve platform, which offers the bank’s more than 43 million digital users the following features:
- Application and fulfillment of the mortgage loan digitally
- Document upload and tracking tools
- E-sign capabilities
- The option to communicate with loan officers and processors in real time to address any questions
On top of digitizing its front-end home loan process, Chase announced in April 2018 it would partner with loan servicing solutions provider Black Knight to streamline originations. Black Knight’s LoanSphere Empower system leverages integration with third-party service providers and automation to boost efficiency, and enables the banking giant to originate mortgages on a single platform and reduce cycle times throughout the home loan production process.
Although published results related to its digitization push are limited, some data suggests there’s potential in its efforts. Chase Chairman and CEO Jamie Dimon discussed the initial results of its new digitally enabled mortgage fulfillment process that prefills applications for its existing customers in the bank’s 2018 letter to shareholders. He said that the process is 20% faster than its paper-based equivalent, allowing the bank to close a mortgage within 21 days.
Bank Of America
As of Q3 2018, BofA held a 3.1% market share of total mortgage originations when including both new mortgages and mortgage refinances, making it the third largest originator among banks in the US.
Unlike the majority of incumbents that have partnered to digitize their mortgage processes, BofA launched an in-house digital mortgage solution, dubbed Digital Mortgage Experience, in April 2018.
The mobile and online banking platform’s functionalities include:
- Enhanced speed with a prefill capability that auto-populates significant parts of the home loan application
- Constant access to lending specialists
- The ability to lock interest rates and select flexible monthly payments and closing costs
- The option to track the loan and view action items on a mobile phone
- The ability to upload documents online
BofA‘s solution sees same-day conditional approvals and faster closing times amid expectations of significant customer demand. The bank added that conditional approval will, in many instances, be received on the day of the application completion. This compares with mere minutes at most alternative online lenders. Closing of the transaction will, however, still be done in person. The bank’s average closing time for digital mortgages is around 20 days, cut from between 35 and 40 days traditionally, per BofA Managing Director of Consumer Lending Steve Boland, cited by American Banker. And demand for this solution is expected to be high: The banking giant said at the end of 2018 that it expects half of its mortgage applications will be done online by 2019, per HousingWire.
What Banks Should Do To Enhance Their Mortgage Offerings
With mounting competition from digitally advanced nonbanks, alternative mortgage lenders, and leading banks, FIs that have yet to digitize their mortgage application offerings should take action or risk ceding market share.
FIs should aim to transform more than just the application submission process. Legacy players that allow customers to start the application online, but then take them offline for a significant part of the process toward closing, are still offering customers a subpar experience that tests customer loyalty. To enhance the home loan experience, banks should strive to automate underwriting and digitize closing to the fullest extent possible.
- Working with mortgage software providers, such as Blend and Roostify, to use their scalable technology, industry collaborations, and expertise could be the most efficient way forward when compared with the cost- and time-intensive process of building in-house. Such partnerships can help banks improve customer satisfaction, conversion rates, and operational efficiencies.
- Alternative online mortgage lenders could become interested in offering B2B services to banks and would also make good partners for FIs. As big banks increasingly offer front-end digital mortgage services, alt lenders could look for additional sources of revenue by shifting their business models to add B2B services. One recent example is better.com’s work with Ally Bank. This partnership represents the first deployment of «Better as a Service,» a new business line focused on bringing better.com’s services to other partners in the financial services sector, according to better.com.
Incumbents should also focus on providing more transparent offerings. One example would be ensuring there are no hidden fees. While banks might get more customers into their funnel by hiding fees, and increase the likelihood of conversion, the lack of transparency could negatively impact customer satisfaction and retention rates.
Forward-looking banks should also consider rewarding customers to compete with online mortgage lending upstarts on price. New players continue to undercut banks on price with lower fees, for instance, but banks could respond by offering rewards to ward off competition. For example, JPMorgan Chase gives Sapphire Reserve cardholders 75,000 points, which translates to an average of $945, if they close a mortgage with the bank.
Banks should figure out the right mix of customer interaction channels. Some customers still prefer in-person or call center customer service, for example. And since consumers might continue to demand a variety of channels for interacting with their bank, those lenders that succeed in offering the right mix of such channels stand to benefit the most, Ahmet Hacikura, Partner at Oliver Wyman, told Business Insider Intelligence in an interview.
After developing a digital mortgage application solution, industry players should also look for new revenue growth opportunities in the mortgage space. The process of buying a home starts long before the application: Consumers first consider what they can afford, how to build a good credit score, and what options are available in terms of financing and support for the down payment, as examples. Banks could fill this gap by becoming customers’ trusted advisors long before they apply for a mortgage. We expect significant consumer demand for services that reduce the uncertainty and anxiety surrounding home buying: 40% of US consumers say purchasing a home is the most stressful event in modern life, for example.
Fuente: Business Insider
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