Some pain points that consumers face during their mortgage or refinancing applications include wait-time/length of the entire application process, credit analysis of the applications, and trouble in finding the right lender and loan. Some key trends that are impacting the mortgage lending and refinancing space include the increasing use of self-service portals and omnichannel capabilities, the rise in the number of refinance mortgage originations, and an increase in mobile-based mortgage lending. Additionally, some disruptive activities that are currently underway in the mortgage lending/refinancing space include the incorporation of blockchain technology in mortgage origination & servicing, leveraging MI and AL models across various mortgage functions, and growth of e-closing platforms. We have provided below a detailed overview of these trends, disruptive activities, and pain points.
Consumer Pain Points In Mortgage Application/Refinancing
1. Credit Analysis of Mortgage Applications
- According to a recent survey by CFPB and CNBC, credit analysis is the most problematic part of a mortgage application/refinancing for borrowers. The survey highlighted that almost 18% of borrowers felt that credit analysis was a major pain point of the mortgage application process.
- This is primarily because that the credit approval process is not always transparent or predictable as lenders may apply stricter guidelines, known as “overlays“, than the official rules supplied by Fannie Mae, Freddie Mac, or government agencies backing FHA, VA, and USDA loans.
- Borrowers feel that while automated underwriting software (AUS) provides very quick underwriting decisions, it is not completely transparent. It does not provide a comprehensive list of rules detailing how it renders a decision based on a unique combination of income, debts, credit, down payment, and assets.
- Additionally, a majority of mortgage applicants are uninformed about the credit score requirements to qualify for a loan, which leaves them frustrated after being rejected. As per a Fannie Mae survey, nearly 50% of the borrowers are unsure about the credit score requirements to apply for a mortgage, 14% think that the FICO score needs to be higher than 680 to apply for a mortgage, and 32% think that it needs to be higher than 620. The minimum FICO score is actually 550.
- Further, according to a report from the National Foundation for Credit Counseling, nearly 8% of American mortgage borrowers are concerned that credit checks are too expensive, while an additional 8% don’t even know how to check their credit rating. Nearly 36% think there is no reason for them to check their credit score, which leaves them uninformed about their eligibility to secure a mortgage loan. Hence, securing credit scores or reports can be a significant pain point for potential home buyers.
2. Wait-Time/Length of the Whole Mortgage Application Process
- As per a Fannie Mae survey, nearly 12% of home buyers find wait-time and the length of the whole mortgage application process to be a significant pain point. This percentage was similar for first-time as well as repeat home buyers. Also, as per a 2020 survey by Spruce, 45% of homeowners find the “time it takes to close” as the most frustrating part of the home buying process.
- Many lenders still use manual and paper-based loan approval procedures that extend the entire mortgage application process and result in slower decision times than what many mortgage borrowers want. Manual processes also result in internal data management problems that create more work for lenders, thereby delaying the entire approval process.
- In 2020, “the average loan refinancing transaction took 42 days from application to closing, up from 39 days in 2019. Accordingly, refinancing customer satisfaction with the timeliness of the application process and length of time from final loan approval to closing declined year over year.”
- According to a survey by McKinsey, mortgage borrowers feel that their mortgage providers should prioritize providing accurate and unambiguous information about mortgage pricing upfront and clearly communicate the time needed to complete each step in the mortgage process so that they are not left frustrated in the end. They expect lenders to provide real-time application status to avert any delays in the decision process.
- Consumers normally move fast with their mortgage decisions and find it really difficult and frustrating when the lending institutions are unable to keep up with them and delay the closing process. As per McKinsey, mortgage borrowers “typically select a lender within two to three weeks of starting their research into mortgage providers and submit an application within another week.” Additionally, 35% of customers in certain segments, such as repeat home buyers, select a lender within just three days after starting their search. These home buyers look forward to completing the application quickly and want a quick conditional decision from lenders.
- Due to the lengthy mortgage closing process being a major pain point, 50% of borrowers prefer to take out a mortgage loan from lenders who offer an online application or portal, and 47% of borrowers consider having access to an online portal for uploading documents as a key factor in their decision-making. As per the 2019 Ellie Mae survey, the top three reasons why mortgage borrowers prefer the online mortgage process include quicker time to close (66%), a simpler application process (61%), and information more readily available (54%).
3. Finding the Right Lender and Loan
- According to the Fannie Mae survey, 13% of homebuyers regard finding the right lender to be the most difficult part of the mortgage process, while 7% of buyers consider finding the right loan to be the most arduous part of the application process.
- Customers, who do not have subject matter knowledge, have a hard time identifying the right loan and lender for them as choosing the right mortgage lender and loan offer requires thorough research. Apart from the interest rates, the other key considerations that borrowers need to focus on while choosing a loan include closing costs, origination fees, mortgage insurance, discount points, and other expenses. This makes the entire loan selection process convoluted and frustrating, especially for inexperienced home buyers.
- While selecting the right mortgage lender, borrowers need to consider different options like their bank, local credit unions, and online lenders, among others. They need to inquire each of them about rates, loan terms, down payment requirements, property insurance, closing cost, and fees of all kinds and then compare these details across lenders to arrive at the best decision. Given the plethora of loan and lender options that borrowers have at their disposal, the selection process becomes a pain point.
- According to Freddie Mac, borrowers can save an average of $1,500 over the life of their loan by getting at least one additional rate quote, and an average of $3,000 by getting five quotes. Further, as per Fannie Mae, more than 33% of homebuyers who received multiple quotes were able to successfully negotiate lower interest rates with their lenders, and also lower their insurance costs, origination fees, and appraisal fees. However, nearly 50% of all homebuyers find the search process to be too complicated and do not rate-shop during their mortgage search.
- As per Fiserv, some top factors that borrowers consider while selecting a mortgage lender include the best interest rate (76%), no or low fees and service charges (65%), customer service (54%), company reputation (49%), and knowledgeable staff (40%).
- According to a 2019 survey by Freedom Debt Relief, nearly 58% of the homeowners regretted their lender and loan selection decision and felt that they should have “shopped around more for the mortgage”. Nearly 41% of buyers indicated that they were not aware of all their mortgage options at the time of selection, while 33% highlighted that they did not take closing costs into account when purchasing. Additionally, 29% of buyers indicated that they did not fully understand the terms of the mortgage at the time of purchase. These statistics corroborate the fact the loan and lender selection continues to be a key pain point for mortgage borrowers.
US Mortgage Lending Trends
1. Increasing Use of Self-Service and Omnichannel Capabilities
- The increasing use of self-service portals and omnichannel capabilities by borrowers, especially during the current pandemic, is one of the key trends impacting the mortgage lending space. The customer contact centers of mortgage lenders have seen volume spikes of up to 2000% as an increasing number of borrowers are opting for mortgage moratoriums or mortgage holidays during COVID-19.
- As a result of these increased interactions, lenders are beginning to increasingly leverage self-service tools such as interactive voice response (IVR) and chatbots, which enable them to provide a differentiated customer experience to the borrowers. Mortgage lenders are also leveraging chatbots to perform transaction requests, such as changing payment dates and amounts and updating payment details. The role of smart chatbots in the mortgage lending industry ranges from lead generation all the way to default management.
- Self-service capabilities allow borrowers to get funds without having to visit the branch offices and have the entire lending process digitized with little to no manual intervention. It also enables lenders to get rid of redundant work and enhance their employee productivity. Further, self-service tools allow borrowers to have access to loan products and their portfolios at all times and provide the capability to easily compare it against other similar portfolios.
- As part of this self-service trend, most modern mortgage lenders are incorporating borrower portals for better customer satisfaction. Customers can leverage these portals to generate their own pre-approval applications, check their credit score and credit line, and run their files through automated underwriting processes, among other things.
- Apart from providing operational assistance and valuable information, some modern self-service channels also provide borrowers with access to educational tools, which allow them to educate themselves about various mortgage concepts and cut down their costs. Smart chatbots also function as a mortgage calculator that allows “home buyers to fully understand the available financing alternatives and the financial implications of changes in variables.”
- Self-serve portals are making lending businesses much more customer-centric. Digital lending also underpins omnichannel communication, which allows borrowers to communicate with the lenders using any channel of their choice, such as the website, the app, text messages, or even social media platforms.
- According to Fannie Mae, some potential areas where the use of self-service tools such as chatbots is trending include loan production, especially loan application originations and verifying borrower information and documents, loan administration such as receiving payments from borrowers & responding to customer inquiries and helping borrowers in regulatory compliance.
2. Refinance Mortgage Originations On the Rise
- Owing to an extended low rate environment, refinance mortgage originations have been on a rising trend in the US and form a bulk of the total mortgage lending. The refinance activity has continued to rise all through 2020 and reach historic levels.
- As per the latest available data, lenders issued 1,955,668 residential refinance mortgages in Q3′ 2020, up 15.7% from Q2′ 2020 and 84.5% from Q3′ 2019. This increase in refinancing activity is also broad-based. As compared to Q2’2020, the refinancing activity increased in 183 of the 215 MSAs analyzed (85.1%) and rose by at least 25% in 56 metro areas (26%) in Q3’2020.
- In Q2’2020, refinance mortgage originations secured by residential properties reached the highest level in 7 years. Additionally, the total dollar amount of refinancing in Q2’2020 increased by nearly 130% from a year ago and reached the highest point in almost 17 years.
- Further, in Q2’2020, the refinance activity rose to represent nearly two-thirds (62%) of all lending activity and helped drive the total number of home loans up to 2.72 million, an 11-year high. The number of refinance originations doubled in 158, or 74.9%, of MSAs that had a population greater than 200,000 and at least 1,000 total loans. Also, residential refinance mortgage originations increased from Q2’2019 to Q2′ 2020 in all but one (Pittsburgh, PA) of these 211 metropolitan statistical areas.
- As per data from Freddie Mac, the total mortgage refinance originations are estimated to increase by nearly 4 times by the end of 2020 as compared to 2018. They are expected to reach $2.2 trillion in 2020 as compared to $537 billion in 2018. In early 2020, the Mortgage Bankers Association (MBA) had doubled its projection for refinance originations in 2020 to $1.23 trillion, almost 36.7% up from last year.
- However, the pace of growth in the refinance originations is likely to slow down in 2021, as per forecasts by Freddie Mac and MBA. Freddie Mac expects the refinance originations to be lower at $1.2 trillion in 2021, slightly lesser than the purchase originations of $1.4 trillion. Similarly, MBA anticipates mortgage refinance originations to slow down next year, decreasing by 46.3% to $946 billion, after a substantial 70.9% jump in the activity in 2020.
3. Increase in Mobile-Based Mortgage Lending
- The use of smartphones in mortgage lending is another key trend that is fast gaining pace and resulting in the development of a mobile-first attitude as a major business model in mortgage lending.
- According to a 2019 survey by Fiserv, 41% of consumers indicated that they would be comfortable using a mobile when applying for a home loan, compared to only 29% in 2018. Additionally, the survey indicated that 65% of recent mortgage loan applicants reported using computers or mobile devices to complete at least a portion of the application, up from 56% in 2018. This corroborates that mobile lending is fast becoming popular among home buyers.
- As per data by Land Gorilla, borrowers are showing an increasing preference for digital touchpoints, and nearly 74% of all borrowers, in 2019, used an online portal to work with their lender. Further, in the last 2 years, more than 50% of all mortgage loan applications included some online or mobile components. An increasing number of lenders are taking cognizance of this changing trend and designing their operations from the ground up for mobility to compete with others in the lending space.
- According to statistics by DataFacts, millennials, especially, have a strong preference for mobile lending, and 57% of millennials stated that if they were applying for a mortgage today, they would choose a digital channel. Additionally, 24% of millennials indicated that a lack of a mobile app was seen as a barrier to communicating with financial institutions.
- To cater to this trend, mortgage service providers are coming out with apps with varying degrees of functionality. These apps assist users in tracking the updated mortgage rates, complete the underwriting process online, make scheduled payments, sign documents electronically, seek pre-qualification and pre-approval, get real-time updates, and stay connected with their home loan team.
- US banks are also picking up investments in websites and mobile apps to eliminate error-prone paperwork and make it easier and quicker for customers, particularly younger borrowers, to get mortgages. For example, Bank of America has launched a mobile app that automatically fills in customers’ information to simplify the process of applying for a mortgage. The bank has spent over $1 billion on digital banking during the past six years, including a line of tech-focused mortgage products.
- Wells Fargo and JP Morgan are also making investments in technology initiatives and launching digital mortgage products. Rocket Mortgage, a mobile mortgage app launched by Quicken Loans in 2016, has already gained a lot of traction, with over 98% of Quicken customers accessing the app at some point during the loan process. The app has played a pivotal role in making Quicken Loans emerge as one of the biggest mortgage lenders in terms of volume.
Fintech & Disruptive Activities in Mortgage Lending/Refinancing
Incorporation of Blockchain Technology in Mortgage Origination & Servicing
- The use of blockchain solutions in mortgage lending and servicing is fast gaining ground, and an increasing number of fintech companies and disruptors are creating applications and platforms to leverage the same in mortgage originations.
- Blockchain technology has immense potential in improving the mortgage origination processes and can assist in accelerating the loan approval process, tracking and managing loan payments, providing data on real-time transactions, connecting borrowers with private lenders, and giving borrowers more control over the loan.
- On the origination side, blockchain is assisting mortgage lenders in getting quick access to the financial position of the borrowers through credit scores, bank information, earnings reports, tax returns, and asset holdings. It can also be leveraged to “validate information such as loan packages and third-party property evaluations, all in one place through the distributed ledger.”
- It also allows for secured maintenance and transfer of documents and contracts such as proof of ownership, registration, and insurance. This results in the creation of incorruptible transaction records and a drastic reduction in the operational overheads of the lenders and consumers. According to Moody’s analysts, the total annual cost-savings consumers would see as a result of blockchain-based application processes could be as high as $1.7 billion.
- Blockchain technology is also helping in creating and supporting smart contracts during the mortgage process. Smart contracts are “self-executing contracts that contain the terms of an agreement written directly into the lines of the code, and they work automatically without human intervention.” They are verified by electronic signatures from all parties. These contracts allow the loan status to be visible to all parties at all times, thereby bringing transparency to the lending process.
- Certain municipalities in the US, such as the city of South Burlington, Vermont, have started to explore the use of blockchain technology in mortgage originations and are piloting title exchange digitally. Liquid Mortgage, a blockchain platform based in Denver, Colorado, is helping borrowers to track and manage payments and protect their data using encryption. It provides lenders with smart contract abilities and real-time transaction data.
- Additionally, Synechron, a New York-based company, has developed a blockchain mortgage lending application that automates mortgage initiation, execution, and servicing for lenders, buyers, and their appointed representatives. The company estimates that its application would result in savings of $177 million on a loan book of $97.7 billion for a typical mortgage lender, and reduce total transaction time throughout the mortgage value chain by 25%, to 30 days from 40 days.
ML and AI Process Automation
- Fintech firms are leveraging artificial intelligence (AI) and machine learning models (ML) to predict outcomes across all mortgage functions and improve inefficient, error-prone, and time-consuming processes in the mortgage lending and refinancing space.
- Lenders have thus far been using AI and ML for basic mortgage data analysis and to undertake loan appraisals but advanced versions of AI and ML are now being used to analyze large volumes of data, find the hidden financial relationship of borrowers, and predict borrowers and loan book behavior. Apart from advanced mortgage data analysis and organization, AI is being used to automate the collection of that data as well.
- In mortgage originations and refinancing, AI and ML are being utilized to identify the creditworthiness of the borrowers and fraud identification. AI helps lenders make sense of over 5,000 data attributes of borrowers collected during the lending process and develop an alternate credit scoring system, which serves as an alternative to the credit bureau data.
- Fraud detection and mitigation is another area where MI and Al are helping mortgage lenders. According to the data from CoreLogic Research, nearly 1 in 123 mortgage applications in the US contains fraud information. The fraud can be in the nature of financial misrepresentation by borrowers, fake income/property documents, usage of false identities, and inaccurate appraisals, among others. Since AI systems are capable of analyzing decades of financial data and background information of the applicant in real-time, they are being used to flag loans that are at risk of having fraudulent elements. Such loans are then passed on to loan officers for another round of comprehensive review.
- Some other mortgage lending areas where MI and AI applications are being built by fintech and other disruptors include default prediction, prepayment prediction, retention management, collection management, and servicing call prioritization. For example, AI and ML tools are being used to help predict customer behavior three to six months in advance and allow lenders to design customized discounts and offerings for individual borrowers. This assists lending and refinancing companies to enhance customer lifetime value and turn borrowers into lifelong customers.
- Blend is a San Francisco, CA, based lending platform that leverages ML and AI to expedite the “paper-heavy mortgage application process by requesting needed information from applicants with no human intervention and fewer errors. The Blend system is also capable of analyzing both submitted documentation and user behavior to look for signs of fraud.” In another example, the US-based Citizens Bank is currently utilizing an AI-powered product called CollectEdge. The same is helping the bank in modernizing its collection process and ensure better risk segmentation of the mortgage borrowers.
- Capacity, a Missouri based new kind of helpdesk powered by artificial intelligence, is another example of a disruptor in the mortgage AI space. Its AI-powered bot helps in borrower education. West Community Credit Union (WCCU) was able to reduce its call center costs by 20% and grow by 40% without adding any call center staff after implementing Capacity’s AI solution. The NPS of the company has also increased from 75 to 85 because customers are getting answers quickly. Capacity’s AI-powered bot is capable of correctly and instantly answering 92% of all prospective and current borrower questions without any human intervention.
- E-closing is a relatively new process and refers to the act of closing a mortgage loan electronically without or with minimal human intervention. An e-closing occurs when one or more closing documents for a mortgage are signed electronically. Several fintech firms have developed e-closing platforms and are working on constantly evolving the same.
- According to the data firm ClosingCorp, from mid-March to the end of August 2020, nearly 89% of home buyers and 84% of refinancers e-signed their closing disclosures or documents. Of these, 82% stated that they preferred signing documents electronically prior to closing, and more than two-thirds (66%) indicated that they would want an e-closing instead of an in-person closing in the future. This indicates the growing preference for e-closing platforms.
- E-closing platforms developed by fintech companies are helping lenders reduce the overall life cycle time for mortgage origination. They offer more flexibility to borrowers with a busy schedule, reduce the risks associated with operational errors, data quality, and validation, and allow borrowers to review all documents before closing.
- Some major mortgage lenders that have started to leverage the various fintech e-closing platforms in at least some capacity include Bank of America, Better Mortgage, Caliber Home Loans, Fairway Independent Mortgage, Freedom Mortgage, LoanDepot, Rocket Mortgage, United Wholesale Mortgage, and Wells Fargo.
- Pavaso, a Texas-based fintech company and a digital disruptor, offers a true full-service e-closing platform that can perform a completely paperless e-closing in as little as 15 minutes. The company leverages one single collaborative platform to connect “all permissible parties to exchange information and documents, communicate, and collaborate in real-time to streamline the entire closing process.”
- DocMagic, a California based fintech innovator, has also developed an industry-leading eclosing platform called Total eClose. It is a “single-source, end-to-end platform that provides a 100% paperless workflow that seamlessly integrates every component of the closing process for borrowers, lenders, settlement agents, notaries, and other relevant parties.” Southeast Wisconsin-based Community State Bank has recently implemented the company’s Total eClose solution to transform the bank’s mortgage closing process and make it completely digital.
- eOriginal is another example of a fintech company with an industry-leading e-closing platform called eNote. Fannie Mae, Ginnie Mae, Guild Mortgage, and MERSCORP Holdings are among the industry leaders currently leveraging eOriginal’s eNote technology to expand the digital mortgage market.