A Digital Future for North American Mortgages
Mortgage providers in the United States and Canada face challenges from every direction, including increasing regulation, low interest rates, growing customer expectations, and new digital native competitors. In addition, these companies now have to manage the disruption caused by the COVID-19 pandemic, which is pushing the global economy toward another recession.
Even before the current crisis, growth in much of the North American mortgage market was already low or non-existent. Profitability was under pressure, due to falling mortgage rates, escalating cost of loan origination, and the high prices of homes. In 2018, Forbes, Zillow, and others cited the housing slowdown, among other factors, in their predictions of an economic recession in 2020.
In the U.S., outstanding residential mortgages fell from $11.3 trillion in 2007, just prior to the Great Recession, to $10.9 trillion at the end of 2018. That decline of 19% doesn’t even consider inflation.
Recessions have a particularly complex effect on the mortgage business. Unemployment leads to decreased lending and spending, which slows the economy further. Banks are less willing to lend money, resulting in higher interest rates. But those are often offset by governmental stimulus policies to lower the rates. Sometimes this encourages existing homeowners to refinance their loans. Cash buyers might switch to the more attractive financing options, while others may choose to save their money for emergencies, such as job loss.
Although the mortgage market hasn’t boomed since the last recession, it also hasn’t stood still. Nonbank mortgage originators accounted for just 25% of the U.S. market in 2008, according to the Bank for International Settlements. By 2018, their share increased to more than 60%. These nonbank lenders are popular options for customers rejected by banks because of low credit scores.
Additionally, online peer-to-peer (P2P) lending has increased in popularity. Those platforms easily link borrowers to investors with lower rates, digital innovation, and faster processes, a good fit for tech-savvy millennials. The worldwide P2P lending market was valued at over $67 billion in 2019, according to Allied Market Research. However, not all nonbank originators are new fintech companies. Quicken Loans, which was founded in 1985, introduced its highly successful Rocket Mortgage division in 2015.
Faster loan approvals, flexible rates, shorter processing times, and looser regulatory norms have helped digital-first mortgage providers race ahead. Interestingly, this may be the first recession experienced by these companies. Since many nonbanking mortgage lenders rely on short-term credit for their operations, they are particularly vulnerable to greater losses and risks during economic downturns. A Forbes article explained that while traditional banks have deep data and extensive experience to deal with recessions, fintechs come with the advantage of being highly adaptable.
Clearly, whether incumbent or startup, keeping up with digital developments — or even pulling ahead — requires significant investment and effort. For example, Quicken Loans reported that a team of more than 500 was needed to develop and launch its Rocket Mortgage offering.
To match these new competitors, traditional mortgage providers need to build capabilities in a range of new and developing technologies, such as blockchain for faster approvals, machine learning to consolidate borrower information, artificial intelligence (AI) for underwriting, automation for faster loan origination, and omnichannel lending capabilities for enhanced customer experience.
In a 2019 Infosys global survey, financial services executives said the most important technologies across the mortgage value chain were robotic process automation, advanced data analytics, and cybersecurity. Other important and emerging technologies were AI, machine learning, and open APIs, according to executives at these legacy companies.
The Infosys survey looked at critical investments made by mortgage providers and found there was some progress. However, there was much more to do. For example:
- AI and machine learning are required for many applications in the mortgage value chain, from powering customer service chatbots to supporting anomaly detection in fraud systems. However, many companies are not yet taking advantage of benefits these technologies offer. According to the Infosys survey, only 40% of C-suite executives reported their companies had already invested in and were achieving results with AI or machine learning.
- Open APIs are needed to connect with suppliers and partners in the growing ecosystems required to deliver a fully digital experience. But financial services firms overall have made limited progress, according to the Infosys survey. Just 29% of C-suite executives said their companies were already achieving results with open APIs.
Although many companies have begun exploring these and other digital technologies, the investment and range of skills needed are huge. To further develop capabilities in AI, machine learning, and open APIs, about half the companies surveyed said they would prioritize partnerships over internal investments.
Historically, the mortgage industry has been slow to digitally transform, but that has started to change. Nonbank lenders and neobanks forced traditional lenders to expand their digital capabilities to meet evolving customer demands. The pandemic seems likely to accelerate and intensify that change both with intermediaries and direct-to-consumer mortgages (acquisition, servicing, and retention).
Liquidity pressures, intensified by the new economic crisis, is also expected to accelerate nonbank consolidation. The nonbanks are asking for bailouts, but none of the U.S. federal relief packages have included them. Throughout this industry shake up, success will be measured by how lenders and servicers have helped their customers and employees through this crisis. If they succeed, the post-pandemic world will see a different and more resilient mortgage ecosystem.