Mortgages: A Perfect Storm Shapes the Future
Digital technology got its rightful share of attention from lenders during the pandemic. Today, it shapes the future of mortgages – maybe for good.
When ICE Mortgage Technology launched a new survey in May 2021, revealing how lenders had embraced digital mortgages more than ever before during the pandemic, its president, Joe Tyrrell, stated: “Last year brought our industry a perfect storm”.
The survey revealed a striking perception among lenders: 99% of them believed that technology could help improve the mortgage application process.
Forbes, quoting Joe Tyrrell, noted back then that “the rise of digital technology ushered in a new era for the mortgage application process”.
Some of the benefits that technology brings to mortgage application processes, as indicated by lenders, were:
- simplifying the entire process (74%),
- reducing time to close (70%), and
- minimizing data entry (67%)
Why are these three major benefits important to lenders? And why are they likely to shape their expectations – and the future of mortgages, maybe for good?
“The largest generation ever”
It all starts with the consumer. Those who usually purchase mortgages are mostly young – active millennials. According to the National Association of Realtors, millennials made up the largest portion of homebuyers in 2019 with 37% of home sales, “so it’s essential for mortgage companies to cater to these buyers”.
Add to that GenZers, who are already emerging as a powerful generation of future consumers. By the year 2034, Gen Z will comprise the largest generation ever in the U.S., peaking at 78 million, according to Morgan Stanley’s population forecasts.
Older and younger GenZers combined already represent approximately 40% of the USA’s consumer purchasing power, as reported by The Financial Brand.
So, if you work in financial services, you already know this: no matter the products and the services you design, build and launch, if you want to attract and retain tomorrow’s customers, you need to act today.
And this is because, as Morgan Stanley puts it, “Gen Z and Millennials could reshape the financial industry in their tech-savvy, mobile-first image”.
Seven key features
They are digitally native, social, anxious, and demanding. They’re looking for instant gratification – and this is reflected in the experiences they expect to have. They are your future customers. Are you prepared to serve them?
Maxwell, who builds enterprise software and products for mortgage lending, observed that “when a younger borrower comes to the lending table, they’re definitely not expecting a physical table”. Young customers look for a one-stop mortgage interface with features that simplify everything.
Maxwell spotted seven key features that might be common in the future mortgage industry:
- Pre-fill loan application forms
- Seamless content (branded, clickless)
- Online chat options
- Easy document imports (direct from institutions)
- Mobile readiness
- Reduced complexity (intuitive forms with clear instructives)
- Integrated reminders and loan processing updates
However, human interaction remains key throughout the mortgage process. It makes perfect sense since buying a house remains a major purchase for anybody, no matter the generation. Ellie Mae’s 2019 Borrower Insights Survey (Ellie Mae is now part of ICE Mortgage Technology) found out that borrowers “still crave human interaction” throughout a digitally-driven loan origination process.
Mortgages – why they matter
Firstly, mortgages have historically been a profitable business for banks and lenders. According to the Mortgage Bankers Association (MBA), independent mortgage banks and mortgage subsidiaries of chartered banks made an average profit of $4,202 on each loan they originated in 2020, up from $1,470 per loan in 2019. The jump is obvious.
Secondly, mortgages’ major impact on the broader economy is also undeniable. Let’s take the US market as an example again, where the mortgage industry usually contributes 10% to the country’s GDP, estimated at $22 trillion in 2020.
In Europe, the leading markets are United Kingdom (UK), Germany, and France. Residential mortgage lending is the largest in the UK, reaching a value of 1.66 trillion euros as of the fourth quarter of 2020 (See Fig. 1).
Last but not least, mortgages continue to have a significant impact on consumers’ personal finances, accounting for 79% of loans to households across EU Member States (MS) in 2020, up from 77.5% in 2015. “However, (…) the COVID-19 pandemic lowered, at least temporarily, the demand for these loans and led to a general decrease in the number of mortgages granted”, as shown in “EBA Consumer Trends Report 2020/21”.
“An asset class”
Fintech players disrupted almost every corner of the financial industry. The mortgage industry is no exception. Non-traditional lenders, who are on the rise, are estimated to account for 37% of mortgage origination in the USA. Only five of the top 20 mortgage originators in 2006 are still active in today’s mortgage market.
Neobanks’ eagle eye spotted the opportunity. Their appetite for transactions in this segment says it all. Just recently, British digital bank Starling acquired specialist buy-to-let mortgage lender Fleet Mortgages in a £50 million ($68.93 million) cash and share deal, as reported by Reuters. Fleet Mortgages has around £1.75 billion of mortgages under management.
Starling said the deal was part of “a wider plan to expand lending”. The message to the industry is clear. This acquisition is “the start of our move into mortgages as an asset class,” Starling CEO Anne Boden said.
What traditional lenders can learn from new entrants is the main innovation they bring to the mortgage industry, which is highly process-driven: online applications, efficient and streamlined data collection, and automated decisions (RPA accelerates many processes, hence reduces the time to close a loan). The outcome? A speedy launch to market and satisfied customers.