Dear Friends, Colleagues & Clients:
- Is Big Data going to disrupt the Mortgage industry? I don’t have an answer to that question. But I can say that technology is going to disrupt all industries. Now that may sound like a very generic statement, and it is indeed a generic statement. So rather than answer that question with a yes or no, I want to present some evidence of how some of the most innovative companies in the world are disrupting the overall lending industry and what lessons they hold for mortgage industry in the US.
- You may ask, how am I qualified to discuss this topic. Being at the helm of a mortgage technology company (Vaultedge), I get to work with some of the leaders across the world that are at the forefront of using tech & data to stay ahead of competition and even disrupt the market. While our own solution footprint may be small, by working with the leaders we get to see what is happening in the overall industry. At the same time, I don’t want to discuss all areas where technology is making a difference. I will specifically focus on Underwriting and Loan Production. So let us see how companies are using technology to rewrite Underwriting, pun intended :)
- In India, we work with HDFC Ltd. HDFC is the largest housing finance company (the equivalent of a mortgage lender in the US) in India with a production volume of a million mortgages per year. HDFC lends to both salaried employees as well business owners. Underwriting a loan for a salaried employee is relatively simple - you look at the borrowers paystubs and bank statements to understand the income and expenses and hence the borrowing capacity. But underwriting for a business owner (self-employed category) is different. When you underwrite a mortgage for a business owner, you are underwriting not only the business owner but also the business. So it is similar to underwriting a small business loan.
- Pre-covid, for self-employed category mortgages, HDFC used to collect paper copies of all financial statements: 3 years worth of Balance Sheets, Profit & Loss statements, Cashflow statements, Tax returns, Bank statements and more. Few months before Covid hit, HDFC implemented Vaultedge Digital Lending APIs to digitise their mortgage lending process. Today using Vaultedge APIs and with Borrower consent, HDFC gets access to the Borrower’s financial data from source - which is 100% authentic, is available in real-time and comes in a standardized format. Thanks to this, HDFC could keep the mortgages going throughout the Covid period with minimal impact. Are you doing anything similar for your non-conforming mortgages?
- Lot of innovation in lending space is coming from outside the industry. Great examples of this are Amazon Lending and Ant Financial. Traditionally, small business lending was run in a way not very different than how a pawn shop operates. This is the case not only in less developed markets like China, India etc. but also in the developed markets of US and Europe. While lenders supposedly underwrote the business, what they were really doing was lending based on collateral (Asset based lending). So a small business owner with no collateral would find it extremely difficult to borrow, even if her business is doing great. What Amazon and Ant Financial did was to use the rich transaction data they had on their sellers as well as social data to underwrite the loans (Cashflow based lending), and do it in near real-time. Why couldn’t the banks do it all this while? One might say that, Amazon and Ant Financial are successful only because they control the borrower’s cashflows by virtue of the borrower being on their e-commerce platforms. I would like to believe that, it is because Amazon and Ant Financial understood how to use the transaction data, something that traditional banks could not. What do you think?
- Now you might ask, how does this all translate to mortgage loans. Can you really use this data centric approach to mortgage loans? You don’t need to look far, for an answer. Check this announcement from Rocket loans and budgeting app, Mint. If you’re a Mint user, you can apply for pre-approval with Rocket Mortgage directly from your Mint app. This surely is a sign of things to come in mortgage industry.
- Lenders use of data centric approach goes beyond initial underwriting. They use data to better service and manage the loans and borrowers during the entire life cycle of the loan. Think about what you can do if you have access to a borrower’s bank statements, credit card statements, pay stubs, credit reports, tax returns, financial statements on a continuous basis. Will that help you to predict a loan that is going to foreclose? Will it help you to proactively offer assistance to the borrowers? Will it help you to reduce your write downs? If yes, then what is stopping you from getting that data with borrower’s consent?
- We had another fantastic speaker on Mortgage Vault podcast this week. In this week’s episode, Bryan Budd, SVP at Mr.Cooper talks about how technology helped Mr.Cooper scale their loan handling capacity from $500 million per month to $5 billion in just 120 days, all in the middle of Covid. Trust me, you don’t want to miss this episode.
Have a great week ahead.