It might be stating the obvious to say that retail banks are one of the largest providers of mortgages in the United States. However, many still might be surprised at the total value of those mortgages. Business Insider reports that retail banks accounted for $236 billion of mortgage originations in Q4 2016. It stands to reason, then, that mortgages are one of retail banks’ most profitable products.
So when alternative lenders, or “fintechs” become involved in mortgages and promise both disruption and possibility, there are bound to be repercussions.
Mortgages are extremely complex financial animals. Whether it’s the sheer length of the loan — 30 years in most cases — the variability is endless. As a side effect, the process is often slow and bogged down with paperwork and language that leaves most borrowers confused and in need of help. And perhaps that’s exactly why there is such an opening for a different way of doing business through fintechs.
Quicken Loans, with their “Rocket Mortgage” might be one of the most visible examples of the new guard of lenders that are changing the visible mortgage lending landscape. Interestingly, they are also an example of an established financial institution using technology to (seemingly) improve the lending experience. Other lenders such as SoFi, Clara, and Lenda are true “fintechs”, and all of them offer tremendous innovation to the industry — in particular, innovations that address the speed at which a mortgage can be approved. However, these startups are often only able to do it through collaboration with established lenders, including traditional banks.
And there’s your paradox. Traditional mortgage lenders aren’t always doing a satisfactory job, which leads to an opportunity for fintechs. However, the fintechs can’t connect the agencies, brokers, and consumers all on their own, so they need to get help from the traditional lenders. It seems like a catch-22, but the reality is a bit more optimistic.
The rise of fintechs has been able to shed light on the deficiencies of the mortgage industry and has been able to get companies thinking about how to better meet the needs of the customers. They tend to have plenty of capital to back their investments, so they are healthy. And they are more than tech-savvy, making them more likely to embrace eRecording, which can increase the speed of recording by 90%. According to the Property Records Industry Association, there are now 1,739 U.S. counties that allow electronic recording of documents. eRecording is one of several innovative mortgage-related services offered by Wolters Kluwer Lien Solutions.
The early years of incorporation require partnerships with institutions that know the industry best, but that’s not a permanent affliction. It is, however, an opportunity to learn more about what makes a borrower tick and to build a product offering that offers the best opportunity for future success.
On the other hand, the traditional lenders, while no doubt spooked by the sudden competition fintechs are giving them, are able to better understand what’s expected of them to retain customers. They can also work to build out more tech-savvy areas of their business in order to eventually go toe-to-toe with the startups.
What then, does that mean for the customer?
For one, it’s imperative for a borrower, whether on the commercial or residential side, to be educated about the mortgage process and be willing to shop around and ask questions of potential lenders. It cannot be acceptable to default to only one, or the same lender, because the process seems too complex. A smart borrower will do their due diligence to make sure they are getting the best a lender has to offer.
Additionally, don’t assume a fintech is the best option. While there are tangible benefits to working with a lender like SoFi, they might not offer the best customer service or interest rate. In most cases, traditional banks are still controlling the general borrowing for mortgages, so in certain cases they will still be a better option. Just don’t sleep on the startups!
The next few years are bound to be eventful ones for mortgage lending and the overall financial lending sector. Traditional banks are evolving and more and more fintechs are coming online to disrupt the space. The hope is that the experience continues to improve for the borrower, because that means repeat business. If the early returns hold, we’re in for a truly revolutionary period in American finance.
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