FinTech Disrupting The Mortgage Industry

photo by www.cafecredit.com

photo by www.cafecredit.com

Researchers at the NY Fed have posted The Role of Technology in Mortgage Lending. There is no doubt that tech can disrupt the mortgage lending business much as it has done with others. The abstract reads,

Technology-based (“FinTech”) lenders increased their market share of U.S. mortgage lending from 2 percent to 8 percent from 2010 to 2016. Using market-wide, loan-level data on U.S. mortgage applications and originations, we show that FinTech lenders process mortgage applications about 20 percent faster than other lenders, even when controlling for detailed loan, borrower, and geographic observables. Faster processing does not come at the cost of higher defaults. FinTech lenders adjust supply more elastically than other lenders in response to exogenous mortgage demand shocks, thereby alleviating capacity constraints associated with traditional mortgage lending. In areas with more FinTech lending, borrowers refinance more, especially when it is in their interest to do so. We find no evidence that FinTech lenders target marginal borrowers. Our results suggest that technological innovation has improved the efficiency of financial intermediation in the U.S. mortgage market.

The report documents the significant extent to which FinTech firms have already disrupted the primary mortgage market. They also predict a whole lot more disruption coming down the pike:

Going forward, we expect that other lenders will seek to replicate the “FinTech model” characterized by electronic application processes with centralized, semi-automated underwriting operations. However, it is unclear whether traditional lenders or small institutions will all be able to adopt these practices as these innovations require significant reorganization and sizable investments. The end result could be a more concentrated mortgage market dominated by those firms that can afford to innovate. From a consumer perspective, we believe our results shed light on how mortgage credit supply is likely to evolve in the future. Specifically, technology will allow the origination process to be faster and to more easily accommodate changes in interest rates, leading to greater transmission of monetary policy to households via the mortgage market. Our findings also imply that technological diffusion may reduce inefficiencies in refinancing decisions, with significant benefits to U.S. households.

Our results have to be considered in the prevailing institutional context of the U.S. mortgage market. Specifically, at the time of our study FinTech lenders are non-banks that securitize their mortgages and do not take deposits. It remains to be seen whether we find the same benefits of FinTech lending as the model spreads to deposit-taking banks and their borrowers. Changes in banking regulation or the housing finance system may affect FinTech lenders going forward. Also, the benefits we document stem from innovations that rely on hard information; as these innovations spread, they may affect access to credit for those borrowers with applications that require soft information or borrowers that require direct communication with a loan officer. (37-38)

I think that the author’s predictions are right on target.

 

Mortgages from the Shadows

dollar-sign-silhouette

 

 

Realtor.com quoted me in ‘Shadow Banks’ Are on the Rise for Home Loans: Should We Be Afraid? It opens,

Where do home buyers go for a mortgage? To a bank, of course—or at least that’s what many might think. Yet a new force has taken over home financing, called “shadow banks.” So what are these non-banks exactly, and should we run for the hills?

In a nutshell, these are the less conventional places that don’t provide savings accounts, only loans to buy homes. They include companies like Quicken Loans, which is one of the nation’s largest mortgage providers, Caliber, and loanDepot.com.

But they can also be companies run by wealthy individuals using their personal fortunes to finance loans and then pocketing monthly interest payments, according to the Wall Street Journal. Or they could be funded by private equity, which is financed by pooled investor cash.

And, as a group, they’re no longer operating on the fringes of the housing industry. Instead, shadow banks “have overtaken U.S. commercial banks, to grab a record slice” of the market,” according to a recent housing report by ATTOM Data Solutions.

This group of nontraditional lenders now accounts for 48.3% of mortgages in 2016—compared to just 23.4% in 2008, according to the ATTOM report.

“The big banks got burned by the financial crisis, so they’ve become much more hesitant to make loans that are even close to being risky,” says Daren Blomquist, senior vice president at ATTOM.

These mortgage makers are very appealing to buyers without a 20%—or even 10%—down payment and therefore have trouble getting a loan from a regular old bank, says Blomquist. This might make sense for first-time buyers, or folks who have gone through a foreclosure.

But are they right for everyone? And, more to the point: Are they harbingers of the risky loaning behavior that help bring on the U.S. housing collapse?

Could shadow banks lead to another housing crisis?

As a group, these lenders are not subject to the same level of governmental scrutiny, regulations, and fees that drove many traditional financial institutions, like banks, out of the space after the housing bust. But they still come under a significant amount of federal oversight.

In short, regular banks retreated, so shadow banks moved in. What’s wrong with that?

As market media site Seeking Alpha has pointed out, shadow banks are “some of the same characters that played leading roles [in the last housing crisis].”

Not all experts believe we should be overly worried.

“While it’s true that so-called shadow banks played roles in the last housing crisis … the market itself is very different,” says David Reiss, a professor of Law at Brooklyn Law School and editor of REFinBlog.com.

For one, the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010 in response to the housing meltdown of 2008, changed how all lenders—banks, shadow banks, and otherwise—make loans, to better ensure there isn’t another housing bust.

Another big difference: Lenders are now documenting the income of borrowers to make sure these new homeowners can afford to make their monthly payments.

“There’s no evidence out there that non-banks are lending in any sort of imprudent way and/or hurting consumers,” Guy Cecala, publisher and CEO of Inside Mortgage Finance, tells realtor.com®. “In fact, most non-banks are more competitive than banks when it comes to mortgage interest rates and fees.”

“But they don’t have the same level of capital [such as cash], assets, or liquidity as banks do,” he says.

What to consider before getting a shadow bank loan

Borrowers should just take care to tread carefully and examine the terms and conditions of the financing before signing on the dotted line, says Mark Greene, a longtime mortgage lender based in Hackensack, NJ.

He recommends looking for red flags like adjustable rate change terms, prepayment penalties, and other hidden fees.

Good ol’ common sense will come in handy too.

“If your loan is coming from a fishy-sounding company like Two Brothers Fly-by-Night Hard Money-Lenders, Inc., you may want to dig a bit deeper, to figure out what kind of lender it really is,” says law professor Reiss.

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