We’re All Fintech Mortgage Lenders Now
According to Popular Science, the big advances of 2016 included more virtual reality, better drones and smarter pet robots. For the real estate industry, however, the big news can be summed up in one word: fintech.
Fintech is not a thing; it’s a revolution which will change the way everyone does business, including everyone in real estate. If you want to know how the revolution works, consider the three most famous mantras in Silicon Valley: “Move fast and break things” (Facebook); Let’s make better mistakes tomorrow (Twitter); and the sagest of all: Don’t be evil (Google).
To understand fintech and real estate, it’s best to start with today’s mortgage application. To be polite, the application process has become a minefield for lenders and a nightmare for borrowers. Applications routinely include more than 500 pages of documentation and, between 2002 and 2015, the time to process such behemoths has gone from one hour to five. Of course, if there’s a mistake in the underwriting process lenders can face stiff fines as well as costly buy-back demands.
Fintech – in the best case – promises to end much of the misery now faced by lenders and borrowers. The basic idea is to replace roadblocks with electrons. For example, rather than send over your most recent bank statements, retirement information and investment fund balances, the lender will be able to directly access your accounts. Key pieces of information will be instantly and accurately available to lenders, plus the data will be untouched by the mortgage applicant, thus removing an opportunity for fraud. No less important, huge volumes of paperwork will no longer need to be delivered, faxed or attached, meaning there are fewer opportunities for error. There will be less paperwork to send and re-send, a huge irritation for many borrowers.
Another example goes like this: We’ll see fewer appraisals.
An October study by the National Association of Realtors found that appraisals were associated with 11 percent of all contract cancellations, a statistic that no doubt is hotly disputed by the appraisal community. What is not in dispute is that appraising takes time, relies on human observations, and requires the use of licensed professionals who more and more avoid what many consider low pay/high irritation real estate assignments.
In the fintech era, appraisals – and appraisers – are increasingly regarded as unnecessary. If you have a subdivision with 2,000 units and five basic models, just how much will prices differ? And by looking at past valuations can’t you tell if sale prices are in line or not? Can’t you account for basic differences such as lot size by looking at past sales?
Fintech and Moving Forward
The Office of the Comptroller of the Currency sees fintech in its future. It has put out a call to see if it should establish “special purpose national bank charters for fintech companies.”
And Fannie Mae, for one, is already moving toward digitization, more mortgages and fewer appraisals. It has begun “offering income, assets, and employment validation services to lenders” and now provides “freedom from representations and warranties on appraised values through Collateral Underwriter and enhanced waivers of property inspection requirements on refinances. Together, these innovations deliver greater speed, simplicity, and certainty to lenders and borrowers. They also bring stronger risk management and promote greater digitization of data and processes to the mortgage industry.”
“Fintech is part of the digital revolution about to overtake the housing market and the mortgage industry,” said Rick Sharga, executive vice president at Ten-X. “The next generation of homebuyers and sellers will expect – perhaps demand – that transactions can be executed entirely online, anywhere, anytime, and on any device. That applies equally to mortgage applications and to online home sales on platforms like Ten-X.”
No doubt lenders, GSEs and investors will move quickly to implement fintech programs. If all works according to plan fintech should be great, cutting costs and saving time. But lurking beneath the surface are potent problems which could bring chaos to the financial world.
Fintech is not just limited to mortgage borrowing. The same systems and programs can be used to establish credit and lending profiles for car buyers, student loan applicants and appliance purchasers.
Fintech can thus speed financing and lower costs along a broad span of transactions but not without a number of potential worries.
First, errors in the system can devalue the best credit ratings. A 2013 study by the Federal Trade Commission found that five percent of all credit reports had errors which could result in significantly lower credit scores. There is no doubt that some borrowers will be hurt by fintech errors simply because mistakes always infest large systems with multiple information sources.
Second, back in 1999, when the Internet was barely formed, Scott McNealy, then the chief executive officer of Sun Microsystems, said privacy was dead.
“You have zero privacy anyway,” he said. “Get over it.”
While McNealy may not have been right then, in a fintech universe he is an absolute seer. A central premise of fintech is that it knows all, including perhaps things you would rather it didn’t. For example, while a credit report does not include your income or a long-ago run-in with the law, a broader system might.
Third, fintech by its nature is nothing but ones and zeros arranged for the convenience of humankind. Unfortunately there are some humans – and some governments – which are dedicated to breaking the system, stealing data, draining bank accounts and demolishing credit. A core problem with any financial hub is that there is always someone looking for a back-door – and too often finding one.
Fourth, fintech might be great for lenders but at the same time lousy for those employed by lenders. The industry today employs some 300,000 loan officers at a cost of more than $19 billion. With fintech and virtual mortgage applications we’ll need a lot fewer loan officers, a potent source of savings that lenders will obviously pursue.
Fifth, appraisals are really a consumer protection, valuations that stop buyers from paying too much. While electronic valuations may be good for lenders, they may not be so great for borrowers. If a lender has one errant valuation out of 10,000 properties, it’s not a big deal. If you’re the buyer of that one property you might feel very differently if you pay an additional $20,000.
Fintech is an equal-opportunity technology. It doesn’t matter if the lender is a bank with roots dating back to colonial times or a nonbank formed last Thursday; everyone has access to the same data and systems and every lender will be a fintech financier in the same way that every lender today uses computers and websites. There will be no fintech monopoly any more so than a calculator cartel.
In a sense, fintech is a source of both disruption and opportunity. If you’re a new player in the lender space, fintech is a way to skip decades of ossified business practices. If you’re an established player, you will either lose your abacus and get with the new system or you will lose revenues, profits and market share.
Established lenders understand the new reality. As a 2014 report from Accenture pointed out, “global investment in fintech ventures tripled to $12.21 billion in 2014, clearly signifying that the digital revolution has arrived in the financial services sector. It is still unclear whether this presents more of a challenge or an opportunity for the incumbents in the industry. But established financial services players are starting to take bold steps to engage with emerging innovations.”
Peter Miller is a contributing writer for Ten-X and Auction.com as well as a nationally syndicated newspaper columnist. He is the author of the 2016 edition of The Common-Sense Mortgage.