The impossible dream: is technology set to revolutionise the mortgage market?
Published: 5 October 2016 | Author: Tony Moroney, Berkeley Research Group (UK) ltd
Tony Moroney spoke at a recent CML conference on digital innovation in the mortgage market. His presentation attracted a lot of interest from delegates, so we asked him to share his thoughts with a wider audience.
Tony is a managing director of international financial services at Berkeley Research Group (UK) Ltd, which is a CML associate. He looks at how lenders in different parts of the world are adopting new technology, and how it might be applied to the UK mortgage market. The views expressed are his own and not necessarily shared by the CML or Berkeley Research Group.
I started working in the mortgage industry in 1986. A lot has changed in that time, particularly in terms of technology. I can’t help but feel, however, that the UK has tended to look at technology through the lens of process efficiency (cost) and compliance (rules and audit trails).
Across the globe, new and innovative mortgage providers are using technology to improve the borrower’s experience, digitise and shorten the process, eliminate paperwork and – through customer portals – bring the borrower inside the mortgage process.
The changing paradigm
These new lenders have adopted an Amazon-style approach to creating a customer experience that is faster, mobile, self-guided and, if required, expert-assisted, in order to create a truly digital end-to-end mortgage process. Critically, they are not bound by the thinking associated with traditional systems and practice – that is, they are not limited to seeing the world in a particular way, such as a series of specific tasks.
Instead, their focus is on the customer’s journey to home-ownership, supporting customers, making home-buying easier, expanding the value chain and connecting borrowers with the services they need to buy, move into and ultimately enjoy their homes. In other words, they focus on the much-fabled customer journey!
All too often, incumbent lenders ignore the reality that customers actually want a home and have no inherent desire to be an actor in achieving compliance with a lender-driven process, particularly one which is not well understood.
Going forward, traditional mortgage lenders and brokers will need to develop the breadth and depth of their digital footprints. This is easier said than done for some, against a backdrop of outdated legacy systems which inhibit the adoption of mobile, cloud, analytics and other digital capabilities.
The UK mortgage market
Can we say that the UK mortgage market is truly customer-centric? And, in terms of technology, is the UK at the forefront of digital mortgage capability? Or is the model of lenders and distribution primarily through brokers driven by capacity constraints, compliance and, in particular, a desire to outsource advice?
The statistics suggest that not much has changed in terms of market share, with the usual suspects, using the usual technology, still dominating. And, while we have seen investment in technology and innovation by mortgage lenders and brokers alike, are these market changes transformational?
The new mortgage providers
In the US, a growing number of non-banks and specialists have entered the market and are winning the battle for mortgage origination and servicing.
Firms such as Quicken, Sofi, Loan Depot and Lenda strip away layers of pain that are inherent in legacy systems by using automated loan-decision algorithms, electronic document gathering and secure online communications.
Quicken Loans has moved the entire mortgage process online, minimising personal contact, and is now estimated to be the second-largest residential mortgage lender and servicer in the US. Not satisfied, Quicken recently launched its “Rocket Mortgage” service, promising full approval in eight minutes via the customer’s smartphone. It has won the J.D.Power customer satisfaction awards for primary mortgage origination for the past six years and has also taken the mortgage servicing awards for the last two years.
Another major US non-bank, Nationstar Mortgage, has launched a platform called Xome, which, it claims, is “the world’s first integrated, end-to-end digital platform for real estate, connecting every major touch point in the transaction process, from finding a home to closing the deal.” It offers a large selection of properties for sale, which customers can buy pre-auction using its exclusive online “own it now” facility, coupled with its “express close”option. Xome covers the full home-buying value chain.
Re-defining mortgage mediation
In the US and elsewhere, the traditional role of the mortgage middleman is changing and now includes marketplaces and online brokers
Marketplaces like LendingTree, Mortgage Hippo, Zillow and eLoan generate leads using mortgage rate algorithms to present borrowers with offers from potential lenders. Once the borrower chooses a deal, the referring marketplace site receives a fee for the lead and the borrower then completes the process with the lender.
Online mortgage brokers like Sindeo provide more of a concierge service, with advisers guiding customers through the home loan selection process, working closely with both the borrower and the lender. In the UK, Trussle has recently entered this space, claiming to marry human and robo-advice. It has been quickly followed by Habito, which claims its algorithms can search the whole market to find the best deal for a customer in 10 minutes.
But this opportunity is also available to banks. Interhyp, owned by ING, is one of the most successful mortgage brokers in Europe using financial technology. It has consistently outperformed the market and has been named Germany’s best mortgage provider by €uro magazine for the past 10 years. It offers advice through its website, which is supported by mortgage advisers in call centres and around 90 regional hubs. Interhyp utilises a combination of technology and service to helps borrowers find the best mortgage offer from some 400 banks, building societies, savings banks and insurers.
Bridging the gap
#ashChing in Australia is an online marketplace for borrowers and mortgage brokers. Through its platform, borrowers can access exclusive “broker-only rates” available from lenders. Once a borrower has chosen a deal, #ashChing – in true Uber style – provides the customer with full details including the broker’s profile picture, phone number, email address and reviews from previous users, together with a calendar invitation. The borrower can upload documents via the #ashChing portal and will receive a call from the mortgage broker within 24 hours.
LoanDolphin, again in Australia, operates an online platform where customers can confidentially enter their details and priorities on an auction platform for banks and mortgage brokers to fight for their business. Only when the customer chooses a deal does the bank or broker receive the borrower’s personal details. By “reverse engineering” the process, LoanDolphin is intent on addressing information asymmetry (i.e., where the lender and/or broker has more information than the borrower). In parallel, it significantly reduces the search time and effort required for the customer.
Attracting new entrants
Increasingly, new mortgages are being financed by equity from external counterparties.
In a record low interest rate environment, investors are seeking higher returns from mortgage assets with a perceived acceptable risk. This is good news for marketplaces and online mortgage brokers.
In the US, new entities such as Better Mortgage have created a three-way online matching engine linking consumers, properties and the investors who want to finance them. The mortgage portfolios are packaged for investors, who provide ongoing servicing and customer contact post-acquisition.
In Holland, funds known as regiepartijen have enabled institutional investors to originate mortgages through funds that offer a higher yield than Dutch government bonds. Investors include pension funds and insurance companies.
Others have sought to change the whole concept of home-ownership. US-based Opendoor has created a home exchange to buy, sell and trade homes directly from and to private individuals.
A seller, subject to their home being inspected, can select a closing date of between three and 60 days. A purchaser is able to return their new home within 30 days, minus the closing costs. All homes sold come with a two-year warranty covering a range of repairs and maintenance services.
As the platform expands, it potentially makes home trading fast and efficient. And, of course, the mortgage is an integrated part of the home exchange platform.
The rise of robo-advisers
With the development of analytics, many have conceded that “plain vanilla” mortgages are susceptible to computerisation, while some are assuming that the need to hand-hold customers and/or deal with non-standard applications offers a safe haven.
Leading banks in Japan, China, India and, of late, ING in Europe are deploying “humanoids” to deal with routine customer inquiries and assist with account opening. Mizuho in Japan, for example, is trialing a humanoid robot caller Pepper, which takes its surroundings into consideration, reacts using proprietary algorithms and synchronises with cloud-based databases using the internet to gather necessary information.
Humanoids now have the ability to evolve their skills over time, recognise customers, and understand and speak multiple languages, offering significant commercial and compliance advantages. The technology is such that humanoids can also detect human emotions (based on the customer’s voice, expression, body movements and use of words) to choose the optimal way to engage with customers.
It’s not inconceivable therefore that every mortgage in the future could be dealt by robo-advisers or indeed locally based humanoids!
Where to from here?
The time to act is now, so let’s not hide behind regulation. Innovation that improves the customer experience, provides greater choice and competition and demonstrably puts the customer at the heart of a mortgage provider’s business has nothing to fear.
The alternative is the very real risk of losing significant market share, future revenue and perhaps a long-established franchise to the new and emerging breed of mortgage providers.
After all, the UK, as Europe’s biggest mortgage market, represents a significant opportunity: 11 million mortgages with a value of £1.3 trillion, with new mortgage origination perhaps on course to exceed last year’s total of £220 billion.