The COVID-19 pandemic accelerated the shift to a modernized home mortgage experience, primarily driven by the consumer’s demand for a digital-focused, streamlined transaction. What has followed since coronavirus vaccines became widely available
All of this is happening at a time of relative economic uncertainty. While projections remain strong for the growth of U.S. gross domestic product, or the sum of all goods and services produced, questions linger about the future of interest rates and the outcome of the Federal Reserve eventually tapering off their purchases of mortgage-backed securities.
Despite these unknowns, the mortgage industry will look far different in the not-too-distant future. Mortgage lenders and the originators who work with them must adapt to these trends or otherwise risk becoming obsolete.
The seller always had more information about the marketplace. In the past decade, however, this premise has shifted. The advent of social media, consumer review sites, blogs and videos has meant that the buyer has access to information they otherwise would have been in the dark about.
In the past, buyers had to rely on real estate agents to get information about things like multiple listing services in order to find out what homes were for sale. They also relied on lenders to find the best rates. If you said you were the best loan officer in the country, there was no way to actually corroborate your claim by ascertaining your service level. This is known as information asymmetry — having more information as a service provider or seller than as a buyer.
Now, buyers can go to Zillow and Redfin and look at every home that is listed. They are no longer dependent on a real estate agent. Similarly, they can easily look up rates and are no longer dependent on mortgage originators for this information. Buyers also can easily figure out if you’re being genuine. If you tell them that you do an amazing job of servicing clients, they can jump on Yelp, Google or Facebook to see your consumer reviews and verify your claims.
How can originators counter this shift? They have to be more than just run-of-the-mill loan officers. Buyers armed with more information means that originators need to rethink their role. It can’t just be about providing the basics anymore. Originators must provide what can’t be found online and shift to more of a consultant’s role. This means understanding what the buyer’s goals are and customizing a solution based on this information.
The mortgage sector has entered a period of digital transformation. Let’s start with the basics of communication. All consumption of information from homebuyers (and even home sellers) now starts with online research. By the time they actually come to the originator, borrowers have done their homework and often know their stuff, or at least most of it.
From a technology perspective, there is a shift in terms of what a consumer wants and doesn’t want. It’s fairly certain that a buyer doesn’t want to mail documents to you. They don’t want to fax documents to you. In many cases, they probably don’t even want to email documents to you, given cybersecurity concerns.
What they do want are secure uploads. Buyers want a convenient point-of-sale system. They want automated verification of income, employment and assets. These are areas where consumer preferences are changing, and it’s important that mortgage originators and real estate agents cater their adaptations to new technologies that enable these preferences.
It’s important to understand two things. One, technology is an enabler for making it easier for the borrower. Two, technology is a means to help them consume information more quickly and efficiently.
Speed to set yourself apart from your competitors is a relatively new concept for the mortgage industry. Until the current era, there were few e-commerce activities in mortgages, and even when there were, reducing the time to closing was never a major consideration.
Nobody had thought of delivering things faster. They simply thought that because they could buy things online and have them delivered to their home, this convenience was good enough. That is, until Amazon Prime happened and everything changed.
Now, speed is becoming a major difference-maker in the mortgage industry. The first step was that you could order your item online. Therefore, it was convenient. The second step, which has truly catapulted entire industries, was speed. In essence, it’s the promise of speed — that you can get it done much faster than your competitors.
The mortgage industry witnessed this even before COVID-19. While the pandemic grossly altered the number of days required to close, it does not shoulder all the blame. The sheer demand for loans that ensued post-pandemic was something the industry was not ready for. Previously, the average closing time for a purchase mortgage was about 40 days. Today, across-the-board closing times are 45 to 50 days or more. This is becoming increasingly unacceptable.
Lengthier closings will likely soon be a relic of the past. In the near future, the majority of mortgages are likely to close in two weeks or less. The originators that embrace speed as a differentiator stand to benefit from a huge opportunity.
The past several months have heralded a rush of merger-and-acquisition activities in the mortgage industry. In addition to some of the largest names in mortgage lending going public, it’s the most activity that the industry has seen in some time.
Consider this: In the late 1970s, banks had nearly 75% of the market share in residential mortgage lending. By 2019, this had shrunk to less than 25%, according to the Federal Deposit Insurance Corp. This means that there is more fragmentation because there are no longer a handful of large entities powering the market. Instead, there are a number of smaller players competing for smaller shares of the market. Think of Rocket Mortgage, which has a market share of 8.4% but is the No. 1 lender in the country. Today, a lender could have a market share of less than 1% and still be one of the top 25 lenders in the country.
While this fragmentation of the market has opened up space for smaller lenders to exist and be successful, it’s not going to stay that way. It’s not feasible for hundreds of lenders to sit at shares of 0.1% to 0.2%. This is why the industry is seeing a lot of mergers and acquisitions.
At the same time, this creates an opportunity for smaller companies that understand consumer preferences for technology, communication and speed. Those that are able to automate much of the process could catapult themselves to a position as a top 50 lender over the next two to three years.
The need for automation is key to the transformation the industry must undergo. One of the biggest challenges, however, is that a lot of mortgage businesses are run by people who have been in the industry for a long time.
Many of these leaders are stuck in the old ways and are reluctant to shift their culture because it is ingrained in what they’ve done for decades. Conversely, the industry has seen an incredibly rapid automation of mortgage operations over the past 12 to 18 months — think robotic process automation, artificial intelligence, intelligent automation and optical character recognition technologies
So, while there’s a ton of technology out there that can automate the process, the industry’s problem is tied to people. There has to be a culture of wanting to adopt this new tech and automate. The benefit to the consumer should be your first consideration when you’re looking at tech. What can we do to help improve the consumer experience? The second consideration should be cost — will this change actually cut expenses?
After a year like 2020, businesses completely dependent on people had to scale up at a time when hiring happened at two or three times the typical market rate. Now, when business is declining, they are indefinitely stuck with these fixed costs. This cost consideration would go away if at least 50% of the entire operation, from application to funding, was automated. Your workforce is then able to do a much higher-quality level of work. Have bots do the work you hate and have your people do work they love. You can have the best of both worlds.
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This is the future of mortgage lending: Invest in training your people to do more complex work, adopt technology to automate clerical work, and improve culture and change management for your organization to be ready for both. This combination will completely change the way mortgage production works.
Unfortunately, only a handful of mortgage lenders are currently equipped for these changes. Few have the components in place to successfully transition from where they are to where they need to be. The rest will have to hurry before it’s too late. ●