Jason van den Brand can’t promise that your mortgage won’t end up with Wells Fargo. As chief executive of Lenda, a home-loan provider, he’s in the business of selling mortgages into a huge secondary market in which Wells is a significant player.
But he says that a wave of revulsion against the “too big to fail” bank, in the wake of the sham-account scandal, is prompting more people to look at alternatives. He says he’s had “multiple” people come to Lenda, a mostly digital service based a few hundred yards away from Wells’ HQ in San Francisco’s financial district, because they’re upset at the way the bank did business.
Younger people in particular, he says, are “tired of being nickel-and-dimed at every turn”.
Getting a toehold in the US mortgage market — easily the biggest in the world, with $8.4tn of loans pumped out by more than 7,000 originators — is not easy. Lenda is among a small group of fintech start-ups including Sindeo, Clara and Better Mortgage, which account for less than $1bn of total originations between them.
But market share is there to be taken, as the big brick-and-mortar banks such as Wells, JPMorgan Chase and Bank of America continue to be squeezed by tougher post-crisis regulation and higher capital and liquidity standards. The third quarter marked the first time that non-banks grabbed more than half of originations, according to Inside Mortgage Finance.
And fintech groups have made a big impression in other classes of assets. In the $80bn market for unsecured consumer loans, for example, the likes of Lending Club, Prosper and Avant have come to dominate, by coming up with user-friendly ways of crunching data to match borrowers and investors over the web.
There’s no reason why the upstarts cannot do the same in mortgages, says Jesse Beyroutey, a New York-based partner at IA Ventures, which joined Goldman Sachs, KCK Group and Pine Brook in a $30m funding round for Better over the summer. Better is now producing about $65m of loans a month through its online platform, flipping the loans on to about 20 investors including Fannie Mae, the government-backed mortgage company.
“The decisions banks tend to make about who to underwrite, and why, are actually rather simple but our regulatory system makes it overcomplicated,” says Mr Beyroutey.
“Giving a customer certainty that his or her loan will close at the best rate of ‘X’ per cent in ‘Y’ days, by abstracting away all the rules imposed by each bank — that’s exactly the sort of magic that’s been applied by tech start-ups in other areas.”
Things won’t always go smoothly. Eugene Berson, who works in business operations at Slack, the messaging software company, is hoping to close his Lenda loan soon; right now he is being held up by the discovery of an (old) piece of litigation against his homeowners’ association in the Potrero Hill district of San Francisco. If Lenda had “been a bit more high-touch” and called him to check if the case was still current, he says, the problem could have been averted.
Meanwhile, the banks won’t surrender more share to the upstarts without a fight. Two of the big five, for example, are now customers of Blend, a San Francisco-based company which supplies mortgage-origination software, according to Pranay Kapadia, vice-president of product management.
But whether banks go it alone or partner with a white-label provider like Blend, say analysts, they’ll need to improve their offerings. A JD Power survey this month found that 62 per cent of people under 35 who bought a home this year said they would use a mobile app for a mortgage application, if their lender provided it. More than one in five buyers of all ages regretted their choice of lender.
Getting a mortgage has “really been a very painful process” since the crisis, says Mike Fratantoni, chief economist at the Mortgage Bankers Association in Washington, DC, as litigation-wary lenders have agonised over “checking, double-checking and reverifying every aspect”.
According to the MBA, it costs independent mortgage banks over $7,000 to process a mortgage loan — up from about $4,500 in 2008. Servicing costs have more than tripled over that period.
If fintechs can find a way of making the process more pleasant for the borrower, says Mr Fratantoni, “that’d be a huge step forward”.
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