Straddling the line between present and future is never easy. Fintech's role in the future of mortgage lending requires our attention to stay on firm footing.
Financial technology, or "fintech," companies have caused a digital disruption in the market, and mortgage lenders aren't necessarily traditional banks anymore. Residential and commercial real estate projects might be funded by alternative lenders — either directly by fintech companies or through firms acting as intermediaries.
By 2016, modern fintech lenders represented 8% of the total origination market — a 30% increase in market share between 2010 and 2016, according to the Federal Research Bank of New York's 2018 report, The Role of Technology in Mortgage Lending.
Wells Fargo and Quicken Loans (Rocket Mortgage) led the pack for home mortgage originators in 2018, HousingWire reported. The former is a traditional bank, but the latter is a mortgage fintech company. LoanDepot was another fintech business in the top 10 that year. Other major fintech players include SoFi, Reali Loans, and better.com.
Fintech companies have slowly been moving into commercial real estate (CRE) lending. CRE transactions tend to be more involved, creating a challenge for the automated processes fintech firms prefer. Though there are difficulties, some fintech organizations, like Money360 or Commercial Direct, offer direct lending, and other firms use peer-to-peer and crowd-sourcing models.
If you’re a lender that handles real property recordation, it’s smart to keep a close eye on fintech firms to learn what these startups are doing right and where there's room for improvement. But keeping up with such a quickly evolving market is challenging. To help you navigate this evolving part of the lending industry, here are some things to watch for if you’re planning on participating in the fintech space.
Alternative lending: The advantages and disadvantages of fintechThe future of mortgage lending is digital and streamlined, whether borrowers get residential and commercial mortgages through banks or alternative lenders. The fintech landscape has expanded quickly due to big data, data analytics, complex algorithms, and machine learning — which enable alternative lenders to better assess borrower's creditworthiness and reach historically under-served populations. Essentially, they offer products and services to a wider audience.
Fintech companies change the way borrowers interact with the lending process; a fundamental aspect of this is an online mortgage application process. Individuals and businesses fill out their information online or through an app, upload documents electronically and have one point of contact with the lender.
Fintech firms' advanced technological processes give customers an easier, faster and more transparent experience. They've automated many processes, which allows them to offer quicker preapprovals, underwriting, and closing times than traditional lenders. These companies often permit electronic signatures, remote online notarization, and e-closings.
Fintech also is starting to utilize blockchain technology and smart contracts, which remove third-party verification while providing greater transparency and trust. All parties involved can follow the transaction through a secure network and respond quickly, speeding up closing times.
But the traditional bank vs. fintech competition isn't over. Alternative lenders aren't the right choice for all residential or commercial borrowers. Customers shop for the best interest rates and terms, which can still come from banks.
Lenders tend to have more problems with fintech lending institutions than borrowers. Although fintech companies are known for their technological advances, information security remains a top concern. Additionally, the federal government doesn't regulate non-bank financial institutions as tightly as banks. Traditional lenders should look closely at a fintech organization's compliance program and willingness to implement controls before forming a partnership.
The relative youth of these companies is another concern. Entrepreneurs formed many of these startups after the 2008 Great Recession, and many of these companies haven't survived an economic downturn. Now, following the COVID-19 pandemic, they'll have to.
Technology and recordation in real estate
Fintech teaches traditional mortgage lenders a lesson: digital features, speed, and convenience are essential to modern borrowers. For lenders handling recordation — defined as the recording of deeds and other instruments in local register offices — electronic recording (eRecording) gives borrowers those benefits. It's the natural accompaniment to electronic signatures, notarizations, and closings.
Not all jurisdictions allow eRecording, yet, but it's close. In 2018, the U.S. Treasury recommended that jurisdictions that don't accept electronic records implement the necessary laws and technology to do so. The Property Records Industry Association reported, as of August 2019, more than 85% of local U.S. jurisdictions allow eRecording.
Lien Solutions helps lenders navigate potential fintech partnerships and move forward with technological advancements that attract borrowers. We offer decades of insight into commercial lending, lending best practices and perfecting secured assets. We also provide all delivery and recordation methods jurisdictions accept, including eRecording.