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The $14 trillion mortgage market disruption game is about to start

mortgage-house

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.

Mortgage players

We see 6 types of player – Banks, Altfi/MarketPlace Lenders, Technology Enablers, GAFA & BAT, Quicken, StartUps.

Banks

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.

Technology Enablers

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.

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

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.

StartUps

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”):

Three Forces driving Disruption

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.

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