At $14 trillion (total debt outstanding, USA only), the mortgage market is about 14x bigger than either Auto Loans or Student Loans (each about $1 trillion). Yet the mortgage market has so far remained relatively immune to disruption and has been a mainstay of bank profits. We believe this is about to change.
In this post we look at the players in the market and the forces driving disruption, plus one wildcard disrupter. Our analysis mostly focusses on USA, but we touch on other markets such as China.
We see 6 types of player – Banks, Altfi/MarketPlace Lenders, Technology Enablers, GAFA & BAT, Quicken, StartUps.
Wells Fargo dominates, with JP Morgan Chase, Bank of America and US Bank all having major market share. This is changing as big banks flee the market after all the troubles caused by the Sub Prime mortgage blowup in 2007/8. Look at this chart from the Mortgage Bankers Association:
Between 2007 and 2014 the commercial banks share went from 74% to 52%. Out of that 22% drop, 2% went to Credit Unions (i.e. small banks), but 20% went to Non-Banks.
TL:DR, this market is opening up and big banks losing 22% is a disaster for them.
Altfi and MarketPlace Lenders
So far, this has been the dog that did not bark yet story. SOFI has been the most aggressive about moving into adjacent lending segments, but they have not yet been big players in mortgages. Lending Club recently moved into Auto Loans but has so far steered clear of Mortgage Lending. So the 20% that went to Non-Banks came from somewhere else.
National Mortgage News has a great article on what it took to make a fully paperless mortgage transaction. The technology enabler, DocMagic, is worth keeping an eye on and there will be other tech enablers. Mortgage processing going paperless is one of the key drivers for disruption that we look at below.
GAFA and BAT
GAFA (Google Amazon Facebook Apple) and BAT (Baidu Alibaba TenCent) like massive markets that are ripe for disruption. Mortgage lending qualifies. So what are they up to?
So far, this is another dog that did not bark yet story. However, anybody entering this market must figure out how they will play with them when they do enter the market.
- Google: their natural role is in discovery and comparison. In March 2016 we wrote about them closing their comparison site and speculated that they would come back with a stronger offering. So far there is no sign of this; maybe worries about anti-trust hold them back?
- Amazon. This is not an adjacent market for them and there are no signs yet, but given the famous Bezos line – “your fat margin is my opportunity” – it must be on their radar screen.
- Facebook. They are a natural for P2P Mortgage Lending (see below) but no sign of them entering the market yet.
- Apple. “Siri, get me a mortgage” is still in the realm of science fiction.
- BAT are all in the Finance business, but with no clear focus on mortgages.
In China, the one to watch in mortgage lending is Pinganfang. This is a real estate e-commerce platform, helping home buyers to get mortgages. It is a collaboration between PingAn (a financial holding company with a historical focus on Insurance) with a major property developer in China called Shum Yip Group. They pitch it as “Real Estate + Internet + Financing”.
Quicken Loans is already a major player in mortgage lending and as a tech-centric player we expect them to benefit a lot from the coming disruption. This is a leading tool that the family uses to plan and manage finances, so it is natural for consumers and business owners to turn to them when the biggest financial decision that a family makes comes up, it is natural to turn to Quicken.
This thread on Fintech Genome has some interesting ventures and a great discussion of the issues. Please go there to comment.
Its more about Fin than Tech
Big players such as GAFA may be waiting for clarity on three things all of which have some political risk (aka “what will Trump do”):
- Interest rate policy
- What happens to Fannie & Freddy?
- Bank deregulation
Three Forces driving Disruption
- Going Paperless. This enablers new entrants without a lot of back office processing capability. Look at the company doing the mortgage in theNational Mortgage News has a great article on what it took to make a fully paperless mortgage transaction. They are small. Going paperless will eradicate one of the benefits of scale. New entrants can come in and Community Banks can compete better with Big Banks.
- Big Banks exiting after SubPrime blow up and nervous of more big fines. This is where Bank deregulation could reverse the trend.
- Consumer rejection of brand loyalty to big banks. Even if Big Banks jump back in if they don’t fear regulation so much, there is a whole generation of consumers who have never had a close relationship with a bank and if they think of them at all they have a negative brand connotation.
The P2P disrupter
In May 2000, a venture called CircleLending was founded and went through the normal VC rounds, but failed as a business after briefly being branded Virgin Money. It was a classic “idea ahead of its time”. The idea was simply to service loans between friends and family. This is fundamentally different from loans between strangers, because a relationship of trust exists. I financed my first property this way and it was a good result for me and for my sister as the investor. It is a fundamentally disruptive idea, because no external lender is involved. The intermediary only handles the back office part. The idea was reborn in 2010, when a former Virgin Money US employee launched a new venture, National Family Mortgage. The average interest rate is 2.96% as I write and they take zero points. The numbers loaned to date are a drop in the proverbial bucket, but this has the potential to scale fast.
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If you want to comment, please go to this thread on Fintech Genome.