This is Part I of a series looking into the Mortgage Market. The inspiration came from a great conversation that Kevin Simback , Director of Strategy at IBM Lending Solutions, started on the Fintech Genome, MortgageTech – the last frontier for Fintech? A starting list of companies focused on Mortgage.
The value of mortgage debt outstanding in the US is close to $14 trillion and around $1.5 trillion of new mortgages are originated annually. The market is complex in many ways. There are residential and commercial mortgages, and within each category there are primary or secondary residential, commercial or multifamily; there are FHA, VA, and all other sorts of Federal Home loan programs. There is the institutional lending part of the market and the private lending portion. The institutional continues to be dominated by a few large banks –Wells Fargo, Chase, JP Morgan Chase, Bank of America.
The process from approval, underwriting, closing, and then servicing, is complex and has a long life. Typical length for the closing of mortgage has been 25days. Typical lengths of the (debt-promissory) Note, is 10-30yrs. A variety of debt instruments are used; from floating rate, to fixed rate, step-up, amortizing with multiple types. Covenants related to the pledge, the property itself, vary and are covered in the second legal document that goes with a mortgage.
I can’t even scratch the surface of the history and the ancecdotes in the mortgage industry. I started my career at Salomon Brothers, 7 WTC in the ’90s and just behind the Structured products desk (where my post was), there was the Salomon Brothers Mortgage Desk. This was one of the trading isles where Financial Innovation was happening during trading hours. Sophisticated analytics were applied to arbitrage mispricing of all sorts of mortgages. The creation (in collaboration with Freddie Mac in the mid 80s) of CMOs (Collateralized Mortgage Obligations) happened right there. The slicing and dicing of home mortgages was invented on that trading floor; the stripping of IOs (interest Only), POs (principal Only), PACs, TACs ….etc
The entire ecosystem (agencies, underwriting banks, lenders, brokers etc) was thereafter, involved in growing the market through the securitization process which allowed replenishing of capital. Of course, many more benefits and risks that I won’t list here.
The accident happened in 2008. It started from the subprime lending part of the market (which seemed small compared to the overall size) but permeated the entire financial system in a way that NOBODY had predicted. There were players that had foreseen the subprime blowup and had shorted the shares of subprime lenders or had entered in credit default swaps with financial counterparties that had large exposure to the business; but the Black Swan that unfolded was not foreseeable.
Over the next couple of years, after the Lehman debacle, there are many noteworthy lessons to keep in mind around the complexities of the mortgage market. I will only pick on one, relatively simple, which Fintech can solve today in a heartbeat. This is the clock that was created in the US justice system, due to foreclosed houses that couldn’t actually be sold. The reason being that the lenders (pledging the collateral) were not able to find the Original promissory note (debt). The homeowners that found themselves in this situation, were lucky.
Back in 2009 I taught Real Estate Finance at Mcgill University and I created a fun fictional video, of an interview of Madame La Lendie from Larry King about his issue. Enjoy the storytelling, from the origin of Mort & Gage, to the facially defective foreclosure procedures.
Was the note not found because of negligence during robo-signing? Could it be that the mortgage ended up in a pool of securitized mortgages and the Trustee of the SPV (special purpose vehicle) was negligible? Could the lender have incorrectly, pooled this mortgage in more than one SPV?
DocMagic, providing solutions for loan document preparation, compliance, eSign and eDelivery solutions for the mortgage industry, can surely can deal with these issues. Roostify, has integrated the solution, as they have developed mortgage automation technology targeting all the chain form origination, issuance to servicing. Just a few days ago, they also announced their collaboration with the Mortgage Collaborative, an independent mortgage lending network of small, mid-sized and community-based lenders, in order to provide network members with access to Roostify’s mortgage technology platform.
Regulation around the mortgage market is one of the pain points that is keeping up at night those involved in the market. The costs associated with the reporting and monitoring requirement of this complex market, have been rising after the 2008 crisis. This is probably the main driver for innovation.
…that by 2020, today’s traditional lenders, who are not agile, do not embrace online technologies and are unable or unwilling to become more customer-centric, could lose up to 35 percent market share to new and current institution and non-institution lenders who adopt new business models.
…. Coupled with an expected rise in interest rates, which could slow the pace of refinancing and purchases, and as much as a 79 percent increase in origination costs since 2009, it’s clear that institutions need to focus on increases in efficiencies to reduce expenses.
Today, I close noting that the first Digital Mortgage conference is scheduled for December in San Francisco. Tomorrow in the second part of this series, I will look at companies that are using tech to address the issues at stake, some of which are presenting at the conference.
Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.