SECTOR SPOTLIGHT: FinTech Levels Up Home Lending
SECTOR SPOTLIGHT is a monthly series on FinTechtris that explores a specific sector within the expansive FinTech space by defining its history, frameworks, business model, leading companies, and outlook.
Its been over a year since we had a discussion about home ownership and how new FinTech companies have made the process simple and easy. Since our February 2019 article, mortgage rates have dropped, home equity values have increased, and housing demand has been influx. In light of COVID-19, buyers and sellers have scaled back overall activity, especially with searches, listings, and bidding. The residential real estate industry as a whole is making an adjustment to the pandemic and actively exploring new business models for purchasers and property owners to buy, sell, and manage property. We’ll explore how FinTech helps pave the way now for dynamic industry change in home lending.
SUMMARY:
Market opportunity and potential in home lending;
The 5 phases in the home lending process: prebuying, buying/selling, mortgage search, mortgage lending (closing), post purchase;
Key benefits that fintechs offer buyers, sellers, investors, and real estate agents;
Top companies in this FinTech sector (both established leaders and emerging startups);
What’s next for FinTech home lending?
THE HOME LENDING MARKET
Mortgage lending is a trillion dollar market — over 80M mortgages were closed back in the 1st Quarter of 2016, despite the time for closing (from application to signing) taking about 45 days.
For new entrants transforming the industry, there are other driving forces (data from the Urban Institute):
Over 6M homes were estimated to sell by the end of 2020;
2/3 of potential homebuyers are interested in working with an online lender;
Over 25% of borrowers were driven by the speed to close in deciding the lender to work with;
Less than 10% of banks can fully digitize their mortgage loan process;
Fewer than 15% of homes are sold via online channels;
The industry is clearly ripe and ready for digital transformation and innovation away from traditional banks and financial institutions. The home lending process (and its 5 phases) have already shown movement towards online/digital only channels.
What’s involved in the HOME lending process?
Buying a home is a complex mix of activities with various players (e.g. buyer, seller, broker, mortgage officer, lender, escrow agent, insurance provider, appraiser, etc.). The start of the process is based on an individual’s financial standing (e.g. income, debt, credit worthiness, and savings) and its step-by-step flow is heavily regulated on multiple federal, state, and local levels.
The home lending process can be broken down into five general phases:
Prebuying: Usually the most challenging phase, future homeowner lack the financial resources to attain and sustain homeownership — building a strong credit profile, monthly income, and savings for a down payment can take years. Two of these components can work against each other as paying down debt increases credit worthiness, but lowers savings balances. Outside of financial institutions and government programs, there are very few alternative structures in the US such as lease-purchase agreements (e.g. rent-to-own), that offer homeownership for those unqualified for a mortgage;
Buying and selling: Once individuals are pre-approved, the process goes online in search of a real estate agent. These agents can help buyers and sellers check off their list of needs, wants, and find the right property or purchaser. In the last 15 years, this search process has started earlier (in prebuying) as buyers explore sites (such as Zillow and RedFin) to set expectations on location and cost. For sellers, they can also gauge comparable pricing through online listings to help set an opening sales bid;
Mortgage searching: Mortgage loan officers in banks were the first stop for homebuyers exploring how much home they could afford. Bankers collected personal information, credit history, pay stubs, and tax returns, which was then used to calculate key ratios such as DTI (debt-to-income) in a bank’s mortgage scoring model. This process has also shifted digitally with online counseling and education platforms that now prep homebuyers on affordability and all other parts of homeownership. Many applicants lack knowledge on all the options that can lower closing costs and interest payments;
Mortgage lending: The actual mortgage lending steps of application, underwriting, documentation, appraisal, and closing tend to move the fastest (as long as buyers have been properly preapproved). Instead of collecting and printing documents, online data collection and disclosures are being utilized to speed up the process. This reduces the time and costs associated with repetitive doc requests of borrowers via phone, email, or fax (yes its still in use!) — and it improves the accuracy of underwriting;
Post purchase: As soon as an individual does become a homeowner, there are multiple considerations to make after signing. This includes mortgage servicing of monthly payments (including taxes and escrow), home improvement, home equity lines of credit, and choosing insurance coverage. Maintenance and expensive repairs can also quickly burden new homeowners — warranty programs and tapping into available home equity can help.
The home lending sector has slowly embraced online and mobile channels in each of the 5 phases over the last 15 years. This early transformation has centered on enhancing efficiency: taking manual, paper-based business functions and automating them to increase accuracy, minimize costs, and open access to information for consumers. FinTech is also meeting the industry demand for automation, better user experience, and data analytics.
RISING demand for innovation in mortgage lending
Over the last decade, the FinTech industry has built a reputation of improving business models and operations across multiple areas such banking, insurance, and wealth management. Within home lending, many of the same improvements are being utilized:
Deeper digitalization and automation. Without an expensive legacy infrastructure, fintechs reduce operating costs and put cash towards improvements in product, functionality, and user experience. FinTechs are able to quickly move in decision-making and iterate best practices that can be automated — this improves processing speed but also reduces human error rate. Personnel can truly focus on relationship building and guiding applicants from start to finish.
Omnichannel user experience. Homebuyers are using their smartphone to research properties, applying for mortgages through a desktop, and scheduling calls through email. Being able to provide a top user experience across all channels seamlessly, keeps consumers engaged throughout the lending process.
Data analysis and insights. FinTechs leverage data to iterate on decisions that increase user experience and customer success. Through proper analysis, insights that target user experience and faster processing can be generated — this can lead to more loans closings and deepen customer loyalty. Tools that utilize artificial intelligence (AI) quickly analyze volumes of data towards these insights.
These general improvements in efficiency from FinTech solutions can be further broken down into the following benefits:
Access: Being exclusively digital means instant availability — no need to wait for business hours to consult with a banker about a preapproval letter to look at open houses this weekend. Customer traffic into branches has been declining over the last 10 years due to digital transformation and FinTech;
Convenience: Digital providers have streamlined their application processes to the minimum amount of information and screens to scroll through, optimizing the user experience and making it as convenient as possible;
Timing: As consumers prioritize speed of process, being able to view their application status, next steps, and time to close become critical. FinTech solutions provide updated information in minutes instead of days;
Better rates: Reducing the overall cost is a significant decision factor for consumers. For FinTech’s alternative lenders that operate outside of banks in the independent broker space, interest rates are more flexible and overhead is lower — these savings are then passed down to the buyer.
Up to this point, our discussion has focused on general enhancements of efficiency that come from the impact of FinTech 1.0. For deeper levels of growth, the home lending sector is now focusing on FinTech 2.0, in which new business models are replacing legacy processes. In particular, FinTech has focused on minimizing barriers by creating products and services that address deep issues in home ownership such as poor credit, housing affordability, low savings balances, and expensive home equity financing.
top fintechs in home lending
With an overview of the home lending process, current market opportunity, and benefits — we now examine top FinTech companies within the home lending sector and their industry impact:
Lenda (acquired by Reali in Apr. 2019 )- Launched in 2014, Lenda offered a streamlined refinancing program for homeowners — without the need to meet in person. Through its application process, homeowners save time & money — Lenda passes back reduced overhead costs in the form of lower fees and rates.
Opendoor - this Fintech is considered an “iBuyer” and helps both existing and prospective homeowners in saving time on the sale or purchase of their home. For homeowners, OpenDoor acquires the property themselves (with a cash offer) in as little as a few days, saving time in listing or waiting for buyers with standard financing. For prospective buyers, OpenDoor has properties it owns that have “all-day open house” access through their app (6a - 9p daily). Buyers are able to return their new home within 30 days if they aren’t happy with the purchase, minus the closing costs
Sindeo (acquired by Renren; now Freedom Debt Relief) - Founded in 2013, this broker advises on mortgage loans and refinancing, and complete loan fulfillment. For customers in the prebuying phase, a calculator is available that breaks down amount qualified, closing costs, and cash required. The client portal keeps all borrower info and gives access to more than 40 lenders and 1K loan programs. Once an applicant is in contract on a property, a mortgage advisor is assigned as point of contact for the customer and real estate agent.
Reali - Since 2015, this fintech focused on digitizing the real estate agent experience through expert staff that handle all steps in buying and selling on behalf of clients. Their goal is to simplify and make the process as affordable as possible. Reali has also developed a a quick home loan approval process that is same day, as opposed to days or weeks with most banks. They purchased Lenda in 2019.
Rocket Mortgage - When it comes to hyper-focused loan processes, Rocket is at the top of the list (only behind Wells Fargo and Chase in terms of loan volume). Founded in 2015, it’s omni-channel user experience, speed to close, and access to a variety of loan programs (from FHA to jumbo) keeps customers coming back looking for the best rate. Their app is one of the most widely used in the digital home lending space.
Flyhomes - As a digital real estate brokerage for the last 5 years, this fintech helps homeowners trade their house on their platform; after 90 days of being on the market, the home would be purchased by Flyhomes (if its not sold beforehand). For buyers, Flyhomes can purchase a property on their behalf with cash and facilitate a mortgage through lenders in its network. The company is also willing to guarantee offers from its prospective homeowners in order to help in winning high-demand properties.
Homeward - Similar to Flyhomes, Homeward allows existing homeowners to purchase a new property before selling their existing one. This is done with the fintech first purchasing the property and then giving the customer a 6-month lease; during the lease, the customer has enough time to sell their old home and close a loan on their new property.
Ribbon - The company (founded in 2017) works with both homebuyers, homeowners, and real estate agents. The fintech uses cash offers to buy a house on behalf of a future homeowner. For agents, Ribbon can expedite loan signings (by up to 2 weeks), which can increase their capacity of clients and closings per month.
Divvy - With a modified rent-to-own approach in which buyers put a 2% down payment and pick out the home they’d like to own, the company is tackling the challenge of home ownership and affordability. Divvy purchases the property and then rents it out to the future borrower. Each monthly rent payment includes a 20 - 25% portion that goes into a down payment reserve fund that grows over 3 years. The buyer benefits by paying market rent while seamlessly saving towards a down payment for the house they are already living in. Divvy focuses in on cities and areas in which home ownership makes sense relative to rental rates (currently operating in Atlanta, Cleveland, and Memphis).
Better Mortgage - Founded in 2014, the FInTech company has become a leading digital mortgage originator that can qualify a prospective borrower (through its app) in a few minutes with stated income figures and a credit inquiry; this pre-qualification can lead to a pre-approval letter (necessary for making offers on listed homes) after submitting required documents, within 24 hours. The ability to gain an offer letter within a day, without having to make an appointment to see a home loan officer and providing physical copies of lending requirements, is a huge convenience for today’s applicants. Better Mortgage matches underwritten loans to partner lenders (who include Fannie Mae and top banks in the US) with a pricing guarantee, and origination cost paid by the lender.
SoFi - Based in San Francisco, the student lender expanded into personal loans and mortgages up to $3M (with flex down payment options that start at 10%). The established fintech (founded in 2011) offers quick prequalification based on credit score and personal info — then informs applicants on the likelihood of lender preapproval. To proceed, a borrower would need to provide standard docs to verify income. SoFI doesn’t require private mortgage insurance (PMI) for mortgages with less than 20%. The company is currently licensed in 26 states.
Lending Tree - One of the online pioneers in the home lending sector, this fintech has been around since 1998. It’s known for its lender marketplace that allows customers to conveniently shop for the best rate and mortgage program. Beyond home loans, the company also offers business loans, personal loans, student loans, and credit cards.
THE NEXT DECADE in home lending for fintechs
Despite the the market size, demand for innovation, and new tools and products being launched, there are still challenges facing fintechs in home lending.
The low mortgage environment benefits consumers who are ready to buy, but minimizes revenue for non-bank lenders — it becomes a competitive race down to a 0% spread (in which digital lenders earn nothing on the loan, only on fees). The macroeconomic industry view anticipates rates to stay put through the end of the year.
Housing supply is dried up as demand for affordable new homes outpaces the number of properties being built. Existing homeowners are not to selling their house, but renting it out instead as an additional income source; for those that do keep their property as a primary residence, it takes up to 10 years before they move out.
A growing trend that may help the housing market to bounce back quickly is the population shift from expensive cities to smaller suburbs and towns. Due to COVID-19, individuals are ready to give up paying high rents / mortgages and take advantage of remote work opportunities in areas with a lower cost living. This creates a wave of homebuying in counties that are readily affordable — converting most renters to buyers.
Additionally, there are more FinTech startups focused on the prebuying phase and helping customers qualify faster for homeownership by improving credit and monthly budgeting.
Overall, the FinTech sector of home lending still has a buzz in terms of potential and impact towards reducing the gap in homeownership. As the US deals with the long-term effects of the pandemic, housing can help bring back the economy out of recession as it increases consumer spending, business revenue, and tax collection. Government programs offering home purchase incentives (similar to those after the Financial Crisis) may also kick in as an added stimulus. What is clear is the movement of increasing homeownership by emerging fintechs is gaining momentum in this new decade of 2020s.
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