Digital Mortgage: Threat or Opportunity?
Ron de FratesBackground and History:
Technology has shaped and improved the financial industry since the invention of the first computer. Upon development of the first scalable operating system (MSDOS), software for mortgage originators and processors was developed to replace the manual processes of pen, paper, and physical files. This was the beginning of the digital mortgage.
In 1984, Fannie Mae[1] announced the pilot of their new “Desktop Underwriter”. This [installed] program was the first of its kind to “standardize how underwriting guidelines are interpreted, reduced discrimination by removing subjective reasoning from the decision process and reduced the cost of manual underwriting for both lenders and Fannie Mae.” Fannie Mae’s goal in creating this technology was to “reduce the cost of making a mortgage by $1,000 and reduce the processing time from eight weeks to five days”. This was followed quickly by the development of loan origination systems that replaced the internal processing of handwritten loan applications and documents (see exhibit 1 – History of significant mortgage technology). The vision for the “digital mortgage” had been set. Mortgage and technology professionals could imagine the future, but, due to the complexity of the loan process and the fragmentation of the mortgage ecosystem (see exhibit 2), implementation would be a long and arduous process.
Like other industries, the use of the PC created immediate improvements in operational efficiency and access to standardized best practices that allow smaller companies to compete with the larger players. By these two measures alone, the cost and time to deliver a mortgage (close) should improve as added competition typically drives consumer costs down. However, companies deploying these new technologies would recognize the financial benefits on their P&L, not passing savings to their customers.
Throughout the 80’s and 90’s, technologies primarily focused on business to business efficiencies creating value in the simplification of delivering information to and from critical niche vendors such as credit repositories and document drafting companies. These essential elements of the mortgage process were improved and in some cases, turn times for their function went from days to seconds. But the customer still had to provide handwritten application (fnma 1003) forms, and financial documents. It was not until the utilization of the internet in 1998, did companies start thinking about how to engage with the consumer to improve the origination[2] of the mortgage.
Incremental Development and Standardization:
A mortgage transaction is complex and has many stages. To fully automate the process is a difficult task as many keystone and niche companies touch every transaction, each with their own (sometimes proprietary) way of performing their work. In such a widely distributed ecosystem, the logical step for a company of developers (whether externally or internally developed) was to select “high-value targets ” (segments) and automate the process piece by piece. It became clear that a technical standard would improve the sharing of data between systems, and the MISMO[3] effort was founded in January 2000 by the Mortgage Bankers Association. This new standard streamlined application, credit, underwriting, and other electronic forms of data to be easily and accurately shared. By this time, Ellie Mae’s[4] “Encompass” (LOS) platform was aggregating the market with its connectivity to all of the top vendors. Ellie Mae’s business model was to create an indirect network effect by making it easy for vendors to participate on their platform which created demand amongst mortgage originators who want the convenience of the connections; a semi-automated process.
Benefits Realized?
With all of the effort to reduce cost and time for delivering a mortgage, many improvements were made but both costs and time were not highly impacted (see tables 1 – 4). Data would suggest that productivity is going down (output per FTE), and costs are going up, with the only significant changes in Underwriter views (quality of packages) and “days to close” (Time). With all of the improvements, we see an 18% improvement in delivery times. This is valuable to both consumers and professionals as they consider the length of a typical transaction to be stressful. Further, the reduced “views” by underwriting staff imply the quality of the loan packages coming into the business is improving as a result of pre-qual and pre-underwrite (automated) systems.
To realize technology’s true potential, a company would have to create a fully automated experience: Case in point Quicken Loans.
Quicken Loans – Control the Ecosystem
Quicken Loans (“QL”), originally Rock Financial, was founded in 1985 intent on creating a better way to produce mortgage loans. Their vision, like Fannie Mae’s, was to use technology to provide a better customer experience as well as a better manufacturing solution. Given the fragmented ecosystem, and challenges it presents in trying to maintain quality and control, QL began to delve into all aspects of loan delivery including the title. This allowed them to guarantee better turn times for their customers. The company started to change course in the late 1990s, shifting from a traditional mortgage provider to an online-focused lender.
This near fully automated mortgage was extremely successful as more borrowers flocked to the convenience of transacting on their terms, online (see tables 5-6). However, unlike refinance, purchase loans proved more difficult to originate from an online process. To capture this business, the approvals had to be quick and with few conditions. QL’s success in the refi space gave rise to their new platform Rocket Mortgage. A fully automated (end to end) mortgage loan experience.
Rocket Loans – Digital Mortgage = instant approval
In 2015, QL developed the Rocket Loans platform, an end-to-end digital mortgage experience. Rocket Loans is an asset-light, online-based personal loans business that focuses on high quality, prime borrowers. Clients can apply for a loan online, be approved in minutes, and receive same day funding. This is enabled through a proprietary technology stack that includes underwriting loans in accordance with credit criteria that are agreed upon with third-party investors who are funding and acquiring these loans.
Historically, real estate agents do NOT like online mortgage companies as they do not feel as connected to the loan officer and status of the transaction. As a result, real estate agents often encouraged buyers to seek other local sources of financing. However, with instant approval and closing, borrowers are demanding this type of service QL is starting to see the results. Of the clients that applied using the Rocket Loan platform or app, “75% are first-time homeowners and/or Millennials”[5].
Drivers of Change:
Until 2015, technology in the mortgage industry was fragmented mostly being used as a tool or tools to improve efficiency and reduce the time from start to close. One major driver of change is the millennial first-time homebuyers (see table 7). This cohort, 67 mil between the ages of 20 and 34, represent a large potential demand over the next few years. With their homeownership rate at 32%, this could have a significant impact on the demand for online mortgage services. How will this impact mortgage and real estate professionals?
Many don’t want to call a real estate professional, preferring to perform their searches online (82% of millennial homebuyers found their home online), and only engage with a professional if they have questions. This is true for both home and mortgage searches.
Conclusion:
Technology has improved all aspects of the mortgage transaction from seeking information, origination (pre-qualifying and applying for a loan) to signing a digital set of closing docs. Productivity has been impacted positively, but costs have not improved. The most important value sought by both borrowers and lenders is time compression. 36 years after Fannie Mae’s published vision, the digital mortgage has arrived. With 24/7 access to information and instant approvals and closings, will these technologies displace the real estate professionals who use them? Trends in millennial attitudes suggest that the shift is on. These new buyers and borrowers want to do more themselves accessing domain experts only when needed. Further, many digital efforts and budgets have shifted expenses from traditional sales efforts (loan and R/E agents) to online and multi-media spends, which may explain why overall costs have not been reduced. Likely, the roles of professionals in the industry will dramatically change as business models evolve towards a highly digital mortgage experience.
Research Citations:
1. Desktop Underwriter: Fannie Mae’s automated Mortgage Underwriting, 1997 https://www.aaai.org/Papers/IAAI/1997/IAAI97-184.pdf
2. MISMO (wiki) https://en.wikipedia.org/wiki/MISMO
3. Ellie Mae Sale: https://www.elliemae.com/about/news-reports/press-releases/ellie-mae-acquired-by-thoma-bravo
4. NY Fed – processing turn time improvement: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr836.pdf
5. MBA Performance Reports: www.mba.org
6. Rocket Company (RKT) S-1: https://www.sec.gov/Archives/edgar/data/1805284/000104746920004008/a2241988zs-1.htm#eg15201_principal_stockholders
7. Quicken Loans Press Room: “Fast Facts” https://www.quickenloans.com/press-room/fast-facts/
8. Quicken Loans Press Room: “America’s Largest Lender Continues to Thrive — Quicken Loans Has Best Quarter in Company’s 34-Year History” - https://www.quickenloans.com/press-room/2019/07/16/americas-largest-lender-continues-to-thrive-quicken-loans-has-best-quarter-in-companys-34-year-history/
9. Forbes: “ The Rise Of Online Mortgage Lending” https://www.forbes.com/sites/robertfarrington/2019/02/19/the-rise-of-online-mortgage-lending/#356861835f19
10. Quicken Loans: https://en.wikipedia.org/wiki/Quicken_Loans
11. Home Lite Blog: Millennial Home Buying Trends: https://www.homelight.com/blog/millennial-home-buying-trends/
12. NLMS: https://mortgage.nationwidelicensingsystem.org/about/Reports/2019%20Q4%20Mortgage%20Report.pdf
13. CNMC: “Millennials are projected to buy the most houses this year—this is how they can prepare for it” - https://www.cnbc.com/2020/02/04/millennials-to-buy-the-most-houses-this-year-how-they-can-prepare.html
14. STEM Lending: How Millennials Have Changed Mortgage Shopping https://www.stemlending.com/millennials-technology-mortgage-shopping/
15. Washington Post: Millennials now represent the largest cohort of home buyers. Here’s what they are looking for. https://www.washingtonpost.com/realestate/millennials-now-represent-the-largest-cohort-of-home-buyers-heres-what-they-are-looking-for/2019/12/11/99e0e386-eeb9-11e9-89eb-ec56cd414732_story.html
[1] Federal National Mortgage Association “FNMA” aka Fannie Mae”, is the nation’s largest source of conventional
mortgage funds have made a commitment to use technology to improve the efficiency of processing a loan by reducing the time, paperwork and cost associated with loan origination.
[2] Mortgage Origination: this is the front-end efforts of taking an application, prequalifying, disclosing terms, and collecting consumer paperwork (prior to submission to processing).
[3] MISMO: MISMO® is the standards development body for the mortgage industry. MISMO developed a common language for exchanging information for the mortgage finance industry. Today, MISMO standards are accepted and deployed by every type of entity involved in creating mortgages, and they are required by most regulators, housing agencies and the GSEs that participate in the industry. Use of MISMO's standards has been found to lower per loan costs, improve margins, reduce errors and speed up the loan process by reducing manual, paper-based processes while creating cost savings for the consumer. MISMO is a wholly owned subsidiary of the Mortgage Bankers Association. MISMO stands for Mortgage Industry Standards Maintenance Organization.
[4] Ellie Mae Value: Thomo Bravo purchased the Ellie Mae in 2019 for 3.7 billion dollars.
[5] Millennials are the highest cohort of applicants on the Rocket Loans platform – Rocket Company S-1 Filing
