Editor's note: This feature originally appeared in the March issue of MReport.
The mortgage industry is in the midst of disruption that’s being caused by changing consumer behavior and demand. Today, borrowers are getting more tech-savvy and have become more open to a complete digital experience. Take millennials for example. A recent survey by Clever Real Estate revealed that 63 percent of this generation use their smartphone as a primary research tool while searching for a home, preferring to go to popular real estate search portals to find the right property. And it is this group of borrowers that are really driving the innovation in the digital mortgage space.
“Seventy-nine million potential millennial customers are entering the housing market for the first time and disrupting the industry with a new set of demands for the mortgage lending process,” said Joe Tyrell, EVP, Ellie Mae. “This new generation of homebuyers is more diverse and better educated than ever before, so they expect both high-performance technology and automation, along with increased personalized contact with their lenders.” It is perhaps these numbers that are encouraging lenders to enhance their customer service through apps with new features such as person-to-person payments, personal financing managing tools, and virtual assistants, according to a global consumer survey on digital banking by Deloitte.
The survey revealed that 23 percent of consumers in the U.S. said they used online banking to apply for home equity or mortgage top-up loans and another 23 percent used it for mortgage and mortgage refinance. Around 45 percent of those surveyed said that they would use online banking more if it allowed them to submit e-signatures and complete applications online entirely.
The Growth of Digital-Only
Lenders have taken note of these changing consumer behaviors as they look to offer end-to-end mortgage lending processes. Here’s some perspective from a study on fintech lenders—those who provide a completely automated mortgage experience—by the Federal Reserve Bank of New York:
- The market share of fintech lenders has grown from 2 percent in 2010 to 8 percent by 2016 • Mortgages offered by fintech lenders close about 20 percent faster than others
- Default rates for fintech loans are 38 percent lower for purchase loans and 29 percent lower for refinances
- These lenders also appear to alleviate capacity constraints during periods of high mortgage demand
Today, with the entry of retail giants such as Amazon in the mortgage space, digital-only mortgage banks are getting even more popular. “In 2019, we’re seeing a growth of digital mortgage banks especially through the entry of tech giants such as Amazon,” said Pete LeFebvre, General Manager of Operations and Client Services, Wipro Gallagher Solutions. “To manage competition from these new entrants, lenders must formulate an integrated digital strategy to improve the borrower experience. If they’re able to do that, then they can start actually meeting the expectation that consumers already have, that they’re used to in their digital lives.”
According to Tedd Smith, CEO, FirstClose, the emergence of digital-only banks are also likely to pose a threat to brick and mortar entities in the near future, not only because of the lower costs associated with running digital-only operations but also because they are able to attract new customers with higher interest savings accounts due to lower overhead costs. “Some of the digital-only banks out there are able to offer savings accounts at 2.25 percent or more where the larger banks are offering a fraction of that,” Smith said. “Maybe some of the larger banks will start opening up additional digital-only divisions that can compete, but they still have their brick and mortar operations, with a lot more overhead and cost.” But even brick and mortar banks are fast catching up on the digital revolution through a variety of channels.“More than ever before, lenders are utilizing a variety of channels to grow their business and are competing to give homebuyers a faster and more personalized, transparent and engaging digital mortgage experience,” Tyrell explained making a case for why lenders must adopt end-to-end mortgage processing technology and do so quickly.
Making Ends Meet
According to Shelley Leonard, Chief Product Officer at Black Knight Inc., digital lending has changed borrowers’ expectations of how long processes should take, how easy correspondence should be, and how transparent the lending process. can become. Digital lending, Leonard said, “is a dynamic that has fundamentally changed the consumer-lender relationship, and brought with it new challenges– but more importantly, new opportunities to build and capitalize on that relationship. Lenders that have the technology to address these expectations will be the most successful in benefiting from these new opportunities.”
The rise of digital initiatives is especially critical for lenders already tackling a market with diminishing refinance volumes and a predominant purchase market. As a result, according to Michael Kuentz, former President and CEO, Lenders One, lenders must bring technology that “can be mixed with creating lead generation while allowing loan officers to partner with realtors and consumers.” “Digital lending is no doubt shaping the industry,” Kuentz said. “It’s about finding the points of breakdown in technology and how we can leverage it as an enabler to correct that breakdown, shave-off time and make it cost-effective.”
In 2019 though, speed and integration will define lending activities according to Mark Revard, Eastern Division EVP and Head of Gateway Mortgage Group Innovation Council. “The real differentiators in the mortgage industry in 2019 will be the lenders who can build a “one-touch” mortgage experience and offer upfront mobile engagement designed to quickly remove the client from the shopping pool,” he said. “These truly advanced companies will offer consumers a sophisticated, easy-to-use experience through a one-touch technology platform that helps reduce overall costs.” Tyrell agreed saying that more and more lenders would consider integrating their systems on a single platform for a seamless mortgage experience. “Most lending platforms on the market today only service a specific part of the mortgage process from their native application.
While many lending platforms do offer third party integrations, most lenders still outsource additional vendor licenses to fit their needs–opening them up to the risk of data integrity issues, which can substantially increase costs,” he said. “In 2019, lenders will be looking for a digital mortgage platform that offers configurable technology built to meet the unique needs of all business channels and customer types from a single system of record.” This is where application programming interfaces (APIs) will play an important role.“Digital platforms that enable lenders to consume and deploy APIs are critical to the entire loan lifecycle, and enable customized workflows, process efficiencies, cost reduction, and enhanced risk mitigation,” said Jeff Moyer, Division Business Director of Data and Analytics at First American Mortgage Solutions. “APIs enable flexible access to data and services without the limitations of static and pre-packaged solutions.” Additionally, Moyer said that APIs allow rapid access to big data, sophisticated analytics, and technologies enabling lenders to save time and money on loan processing while increasing data integrity and compliance.” However, the one technology that is more than likely to define the mortgage market in 2019 will be artificial intelligence (AI).
The Latest and Greatest
According to a Fannie Mae survey, some of the major areas of AI or machine learning (ML) application to the mortgage industry include identifying anomalies, assessing risk, exploring non-credit bureau data to enhance prediction of loan performance, and answering customer questions (e.g., search tools and chatbots). The survey revealed that while 63 percent of lenders said that they were familiar with the technology, only 27 percent said they used or had tried AI tools for their mortgage business. “We’re just starting to see the ways in which AI is positively impacting the mortgage industry, but the sky is truly the limit,” Leonard said.
“First up, effective integration of AI across the loan lifecycle will allow lenders to deliver improved customer service, respond to customers faster and decrease the opportunities for errors. These capabilities will help lenders streamline complex processes, reduce friction in borrower interactions and better anticipate client needs to deliver more proactive service across the loan lifecycle.”
But though the industry is seeing a lot of excitement around AI and other technology like blockchain, Smith said that using that using more practical and cutting edge technology like iBots and auto-decisioning logic optimally so that they can create the right experience for borrowers will be important. “It has to be applicable, it has to be in real-time to the consumer, and it has to work seamlessly with the lender’s underwriting guidelines,” Smith said. “It’s tough to get there with all the regulations, but as we continue to progress and technologies evolve that enable us to create a balance between regulation and user experience, then using technologies to help lenders get there is a very real possibility.”
While technology such as eClosing has grabbed the attention of lenders, Kuentz said that the industry was really excited about AI and robotic process automation not only because of all the possibilities posed by these technologies but also because of the partnership opportunities they presented. However, they also presented certain challenges. “When we can solve what’s more of an ecosystem challenge, like eClosing is, or, how can you begin to adapt AI and robotic process automation so that your employees don’t feel as if they’re being replaced, those are some of the big challenges that the industry will have to face,” Kuentz said.
According to Revard, all paradigms are being challenged by point of sale, loan creation, and operations and servicing platforms that automate using AI and ML technology. “In the next three to five years, the way in which the public will consume banking and mortgage products will be drastically different, using technology to drive a more customizable consumer experience,” he said. While AI is being rapidly adopted by the industry, it will still take a couple of years for blockchain to make its mark according to Kuentz, who doesn’t see the technology making its mark at least in the next 24 months. “In the long-term [the adoption of blockchain] is a no-brainer but before that, we need to get other areas of the process fine-tuned,” he said. “It’s still early for blockchain as we’re still trying to gain adoption of technologies like Day One Certainty from the GSEs.
Over time blockchain will become an absolute must-have but I don’t see that happening at least until 2020.” Yet, the industry must take heed of data security in an increasingly tech-heavy environment.
Loss and Recovery
Given the way information is shared in the digital space, a white paper by CertifiD, a real-time identity platform noted that mortgage payoffs were prime targets for fraudsters. The report found a steep rise in the use of spoofed mortgage payoffs by cybercriminals in the title and settlement industry while highlighting five areas of risk associated with these statements.
They included spoofed lender payoff portals, lender payoff statements, payoff received from current borrowers, land contract payoffs, seller-held mortgages, and other third-party payments, and payoff trolling. Robert Siciliano, CEO of Safr. Me, who led a panel discussion at the National Association of Realtors’ recent Realtor Conference and Expo 2018 said that every few seconds someone’s identity was stolen because of a data breach, computers were hacked or credit cards were compromised. “As a result, businesses and reputations are experiencing security risks many are not prepared for,” he said. “The system we function under, combined with the conveniences of technology can be easily flawed by simple scams.”
As mortgage banking increasingly relies on digital technology to support loan origination and servicing functions and often replacing traditional documentation with electronic data, there must be an unrelenting focus on data security and cybercrime, according to Regina Lowrie, President and CEO of RML Advisors. “While digital lending and technology may drive lower costs to originate and service, understanding and managing the risks attendant with digital transformation is paramount,” she said.
Additionally, Lowrie pointed out that while there’s lots of investment and focus on POS systems to improve pre-qualification pull through, the must-have technology for 2019 “is cybersecurity and combating wire and identity fraud.” “Regrettably, there’s a lot of misunderstanding about E&O insurance, CPLs and other coverages that are perceived to cover cyber-crime and privacy,” she explained. “Any lender who is at least not validating wire instructions certainly needs to be prepared to not only absorb the capital loss, but also cover the typical 100 hours of management time and legal costs to attempt possible recovery.”
Despite these challenges, technology has certainly made the job of processing a mortgage much easier. “Innovation that transformed the landscape in retail, medical, insurance, and travel landscapes has finally made its way to the mortgage industry, and the voice of the customer has never been louder, Revard said while making a case for the rise of technology in the mortgage industry.
Yet to succeed in this market, lenders must have technology that is capable enough to get homebuyers into their dream homes faster, customize engagement with their unique customers, stay in contact throughout the process and respond to homebuyers’ needs on their terms, according to Tyrell.“To make this possible, more mortgage lending companies are working with developers to create robust technologies that meet the specific needs of their consumers and investors. While the industry has made great strides in offering a digital mortgage experience, no one company has addressed the entire range of issues in today’s highly fragmented market,” he said. Kuentz agreed.
He said that the definition of digital lending had been sporadic, meaning different things to different lenders. However one constant remained that providers in the market wanted to be technology partners for the future rather than just solving minor problems. “What that means is that we must be willing, as a provider, to get outside our own comfort zone. For providers this means that they must be able to solve critical problems in order to be viewed as a true partner rather than offering a single solution to create win-win synergies.”
According to Revard, the prominence of lender competition online along with the notable compression of the home shopping cycle by companies like Zillow, Redfin, and Trulia, has heightened the complexity of acquiring tomorrow’s customer. “It is crucial for lenders to develop the resources, bandwidth and execution prowess to engage consumers much earlier in the home buying process while staying true to key fundamentals supported by data,” he said. A good place to start that process, Kuentz explained, was to really understand where the process breakdown occurred. “That may be through technology, but it may just be through better ways to streamline your process, perhaps even through outsourcing,” he said. “It doesn’t necessarily have to be a piece of technology, it can be how we leverage other ways to outsource components of the process, which help us to be able to take something from 35 days to close down to 10 days to close.” To do that, he said lenders needed quick adoption and training. “We need more clarity so that consumers and loan officers start to gain that level of confidence that this sort of adopting can really streamline the process of lending,” he said.