When will the mortgage industry know it has reached the tipping point where innovation is no longer a competitive advantage but an existential need?
Maybe when it consistently fails to attract viable, aspirational customers (in part because it is cycling through last year’s leads and legacy customers instead of innovating new pathways to reach underserved, high-propensity homebuyer communities).
Maybe when its standard products no longer serve a broad contingent of qualifiable customers (in part due to a credit model yearning for the diversification needed to illuminate currently invisible homebuyer candidates).
Maybe when the escalating cost of doing business is a perpetual drag on sustainable profitability (in part because of appropriate compensation of business builders, but also in part because mortgage businesses continue to have a tough time scaling without overstaffing and overpaying for leads).
Maybe when foreseeable boom-bust cycles disproportionately impact our economically foundational industry and create ripples that influence U.S. housing and economic policy in ways that aren’t always beneficial.
Any one of these indicators points to a housing finance industry ripe for innovation. All four signals flashing red is nothing less than a cry for consensus among our industry’s most strategic echelons that it’s time to run some serious, realistic ideas up the flagpole.
Here’s what is possible now
I’ve been thinking about these and similar issues my entire career. Fifteen years ago, I launched a business on a mission to modernize and decrease friction in the real estate finance supply chain. Before that, I cut my teeth in bleeding-edge securities trading environments.
What we’ve learned from mortgage lenders of every stripe supports our original vision, although its execution has demanded patience, persistence and agility as Web5 — an AI native technology ideal for what we thought possible — was perfected.
Right now, there’s both a compelling need and the technological capacity to do mortgage lending differently.
Marketplace model
By differently, I mean delivering mortgage lending at scale to consumers so that the four flashing Maybes are solved. To our way of thinking, the model that suits modern mortgage lending to a ‘T’ is the marketplace model. A quick web search will deliver plenty of hits on the term, but it’s likely that anyone within the sound of my voice has already shopped or sold in a marketplace, whether that’s Amazon or CarMax or Etsy.
If so, you already know it isn’t rocket science. Aggregation of supply and demand plus transaction enablement and fulfillment is at the heart of the marketplace model.
There’s a logical case for how a mortgage marketplace could be constructed to enable broader consumer participation in available finance options while also creating a new and exciting business channel for mortgage lenders and the ecosystem of supporting services they require.
Why marketplace principles work for mortgage
Marketplaces are where human innovation has happened since forever. Marketplaces are hubs of intentionality. Some participants come to sell, some to buy, some for both. Everyone wants an outcome that meets their needs. Everyone works together.
A functioning mortgage marketplace would aggregate seller and buyer intentions along with those of lenders and the ancillary providers needed to complete the purchase transaction and finalize trailing documentation. Ultimately a mortgage marketplace could also encompass both temporary and long-term mortgage servicing.
Here’s how one might imagine the mortgage marketplace of the future serving homebuyers within a transparently competitive, end-to-end ecosystem that offers the consumer an array of options for as long as they opt in, allowing lenders to serve them both now and when their intentions intersect again.
— Attract and compete for viable customers
From aspirational homebuyers who wonder whether they are ready for a mortgage to experienced homeowners who prefer charting their own course and getting an assist only when needed, a mortgage marketplace gives consumers a place to start where they can self-evaluate their own readiness to obtain and maintain financing and let lenders know when they are ready. Lenders can review and select the customers they intend to serve based on their business objectives and requirements.
— Serve a broader swath of qualifiable customers
The beauty of a mortgage marketplace is in part how it performs as a laboratory where lenders can test innovations. One of the most promising arenas of innovation to benefit both consumers and lenders is the use of alternative methodologies for calculating default risk. It is widely understood that traditional credit scores are a useful instrument for assessing a person’s credit worthiness and risk.
However, changing market demographics and dynamics have created a need for new ways to serve people that just don’t fit the box that traditional credit scoring models create. Now it is possible to look more holistically at a consumer’s financial situation and build a risk profile — of which traditional credit scores are just one component alongside other vectors like cash-flow analytics and rent payment history. The marketplace is a rich environment for putting these alternatives into service to nurture a more inclusive homeownership path for Americans.
— Combat escalating costs of doing business
The pace at which costs are escalating for mortgage lending businesses is unsustainable and signals an outmoded business model. It is simply too costly and ineffective to find and follow up on leads the way it has always been done, period. Who knows whether a consumer needs or is interested in a mortgage? The consumer knows and their real estate agent knows. Who knows whether a consumer is financially prepared for financing? If a consumer can self-assess using marketplace tools and lenders can trust the tools they used, loan qualification gets much easier. A mortgage marketplace could eliminate or minimize costs by enabling:
- Self-identification of mortgage readiness and intent
- Consumer-driven collection and assessment of financial qualifications
- Reduced processing and underwriting effort
- Decreased dependence on purchased leads and lead-generating FTEs
- Streamlined transactions and performance analytics
In addition to stanching the hemorrhaging cost of doing business to improve profitability, a mortgage marketplace is inherently scalable, enabling lenders to manage to the current cycle and environment without wide swings in staff or backups on the production side.
— Modulate Boom-Bust Cycles
Every eight to 10 years, the mortgage industry finds itself buffeted by economic conditions it cannot adequately respond to because of the inherent weaknesses of its 20th-century business model. Among the worst of several inefficient legacy mortgage traditions is our industry’s impulse to staff up during boom cycles and to let folks go when demand cools. Anyone who has run a business knows that is a suboptimal way to do things. Further, it casts a shadow on mortgage industry careers. Personal accounts posted by recently laid-off mortgage personnel tell the story. Lenders don’t talk much about the reputational impact on an industry that cannot seem to break out of its obsolescent practices due to its glacial pace of change. They should.
A modern, streamlined, transparent, collaborative and more inclusive mortgage marketplace would eliminate a lot of headaches, nurture innovation, broaden opportunities for homeownership among the persistently underserved and strengthen our industry’s reputation. And it is unavoidably corny but true to say: “if you build it, they will come.”
Brent Chandler is founder and CEO of FormFree.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the editor responsible for this story:
Sarah Wheeler at sarah@hwmedia.com
To contact the author of this story:
Brent Chandler at brent.chandler@formfree.com
