FinTech Is Fundamentally Changing Mortgage Lending Right Now

March 8, 2018 at 9:50 am 1 comment

The digitalization of mortgage lending is not a gimmick to attract millennials but a fundamental shift in the way mortgage lending is done. If you don’t have plans in the works for a fully automated mortgage production process, you should. And if you already do have such plans in the works, you should speed up your timetable for deployment. That is my takeaway from this fascinating bit of research released in February by the Federal Reserve Bank of New York. It’s actually worth reading on your own.

The researchers examined the impact of FinTech lenders. For purposes of their research they defined these companies as lenders employing a beginning-to-end online mortgage application platform with centralized mortgage underwriting and processing augmented by automation. In other words, while aspects of the mortgage origination process have been automated for more than two decades now, what they were interested in examining was the efficacy of Rocket Mortgages of the world. The research looked at some of the most fundamental questions involving FinTech mortgage Lending and concluded that beginning-to-end automation of the mortgage process has so far proven to be not only faster but beneficial to consumers across socioeconomic groups.

The efficiencies speak for themselves. According to the researchers, FinTech lenders process loans 7.9 days faster than non-FinTech lenders. This is true even when FinTech’s are compared to non-deposit taking mortgage lenders suggesting that these results aren’t simply a reflection of fewer regulations.

Critics have suggested that FinTech’s are quicker because they are less careful about who they lend to. Not so the researchers concluded. Loans originated by FinTech lenders are 35% less likely to default than comparable loans originated by non-FinTech lenders.

Does this mean that FinTech lenders are simply picking off the best potential applicants? The researchers found “that the lower default rates associated with FinTech lending is not simply due to positive selection of low risk borrowers.” This is speculation on my part but maybe automation makes it easier for lenders to quickly adjust underwriting standards in response to changing market conditions.

For example, it appears that because the FinTech model is so automated it can more quickly adjust to changes in the interest rate environment. This typically benefits borrowers whose interest rates average 2.3 basis points lower than those offered by brick and mortar lenders.

To sum it all up, if you are a traditional lender, you are competing against a business model which provides cheaper mortgages to a large cross-section of the mortgage marketplace more quickly and efficiently than was conceivable even five years ago. It’s no wonder the market share of FinTech lenders is growing at a rate of 30% annually from a mere 34 billion in originations in 2010 to 916 billion in 2016.

For those of you hoping to be more actively involved in mortgage lending, the writing is on the wall. You better move quickly before your existing approach to lending ends up as an exhibit in the Smithsonian.

Entry filed under: Mortgage Lending, technology. Tags: , , .

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1 Comment Add your own

  • 1. Thom Powers  |  March 8, 2018 at 9:53 am

    Agreed. We went 100% FinTech on Mortgages years ago with a CUSO in New Jersey. It’s the only way to do Mortgages.

    Reply

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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