In the years before 2000, mortgage lending in the U.S. was a conservative industry that featured strict underwriting and little innovation. However, with the emergence of the Internet and the economic boom it fostered, along with the repeal of a nearly 70-year limitation on the business activities of banks and other financial institutions, the stage was set for disaster.
Thankfully, that era of mortgage lending is now history. Fast forward to 2016, and it’s obvious this is not your father’s mortgage lending industry anymore.
If the industry in the days before the crisis was characterized as stuffy, stagnant and guided by the 4Cs of lending (capacity, credit, collateral, and capital), the current landscape abides by a different set of 4Cs: capable, connected, competitive and customer-oriented.
Similar to the capacity evaluation a lender has always performed as part of the underwriting process, today’s mortgage lenders must be capable of doing many things well and all of them at once. In the past, lenders used to differentiate themselves based on low rates or great service. Those essentials, along with maintaining compliance with very precise regulations and preserving a strong financial position, are a requirement in today’s industry; not an option or mere differentiator. In order to meet these capabilities, today’s lenders require sophisticated management that effectively leverages technology and efficiently manages capital.
Technology is the key to maintaining compliance with today’s regulatory requirements while preserving the ability to offer competitive pricing. In today’s lending environment, borrowers and their loans are reduced to data points that, when connected, form the structure of an approvable, sellable loan. At the same time, consumers expect access to information in real-time – and want decisions made and processes completed in ever-shorter windows. Clunky legacy infrastructure has been replaced with responsive, predictive data management systems on the back-end and responsive, predictive customer interfaces on the front-end.
Perhaps the most significant change in the mortgage industry in the post-crisis era is the nature of the competitive environment. The industry has always been extremely competitive, with brokers, correspondents and bankers (both retail and independent) battling for market share. The specific economic conditions at a given time largely determined which type of lending was ascendant. Sure leadership, culture, marketing, operations, systems, regulatory compliance and fiscal management made a difference at the margins, yet many firms with poor performance in one or more of these areas still managed to succeed in stable economic conditions.
Today, competition has been defined as much by the new regulatory structure as it has by economic conditions. As a result, big retail banks have largely curtailed or eliminated their mortgage operations – particularly those beyond the reach of their retail banking customers. Brokers are far fewer in the current competitive mix, given the regulatory and financial burdens inherent in today’s mortgage marketplace.
In the current environment, independent mortgage bankers have risen to the top of the competitive landscape mostly due to the two imperatives they can deliver: compliance and speed. But, even the place of independent, retail branch-oriented mortgage bankers is being challenged today by a new set of competitors – large online originators and new hybrid consumer lenders known as marketplace lenders.
Thus, lenders must achieve scale before they achieve the goals of speed and compliance. To achieve scale, a lender must have access to a steady supply of capital. But if that capital increases costs, the ability to deliver competitive rates can suffer.
While lenders have claimed that they were customer oriented since at least the 1980s – when the growth of the housing market ramped up competition – the fact is that lenders largely imposed whatever requirements they needed to in order to get loans originated profitably. Often, that meant mounds of paperwork or processing and approval timelines that were, at best, “fluid.” The same technology that has become pervasive throughout our lives and allows us to expeditiously shop, pay, play and essentially run our lives from our mobile device has conditioned the mortgage customer to expect the same, despite the complexity of a mortgage transaction.
Today, a customer-oriented operation requires technological innovation to simplify and expedite the application, approval and closing processes; but it also requires access to products that meet the needs of actual customers. The regulatory process and its qualified mortgage box does not meet the needs of many customers who represent sound underwriting risks for mortgage loans. Moreover, mortgage loans represent only one type of loan a customer may need. The days of being able to find success as a plain vanilla mortgage loan originator without a streamlined process are over. Product access and innovation are essential components of a customer oriented operation.
Success in the modern mortgage industry starts with the inherited requirements of low rates and great service. That means complex capabilities, state-of-the art technology at all points of the process, nimble response to competitive threats, and delivery of real-time information and options customized to the individual consumer.
In other words, this is not your father’s mortgage industry!