How AI is Transforming Mortgage Lending

Digital Mortgage Lenders are taking center stage.

Digital lending is the use of online technology to originate and renew loans in order to deliver faster and more efficient decisions.

Driving The news

• Better.com Digital Mortgage Provider Raises $200M in Series D Round L Catterton served as lead investor, joining existing shareholders Activant Capital, Ally Financial, American Express Ventures, Ping An Global Voyager Fund, and 9Yards Capital in the round.
• Maxwell just raised $16 million in a Series B funding round, round led by Fin VC and TTV Capital. Existing partners Anthemis Group, Route 66 Ventures, Cantos Ventures, Thirdstream Partners, and Sovereign’s Capital also participated, along with new investors Rotor Capital, Prudence Holdings, and The Mortgage Collaborative Emerging Technology Fund.
• Digital mortgage lender Molo has raised a further £266m in debt and equity funding. Led by Macquarie and Patron ​Capital, Yabeo, and Andenes Investments, GPS Ventures and others.
• Digital lender Blend raises $300m in Series G funding round led by Coatue and Tiger Global

The Big Picture

• There is a need to streamline the mortgage process
• There are too many intermediaries
• There is too many paperwork, like in paper, paper
• 24% of the Millennials surveyed said that a lack of a mobile app was seen as a barrier to communicating with financial institutions.
• 57% of millennials stated that if they were applying for a mortgage today, they would choose a digital channel.

So What

• The Mortgage market is hot
• Interest rates are low
• Mortgage rates dropped over the last week, falling from 3.18% to 3.13% on 30-year, fixed-rate loans. Forbes
• Millennials account for 36% of homebuyers in the market.

Be Smart

• Digital transformation is taking lending by storm
• Admin tasks need to be automated
• More than 50% of all loan applications in the past two years included some online or mobile component.
• Customers favor digital experiences
• We spend 4.2 hours a day on Apps
• 74% of all borrowers used an online portal to work with their lender

Why It matters

• Technology-based (“FinTech”) lenders increased their market share of U.S. mortgage lending from 2% to 8% from 2010 to 2016.
• FinTech lenders process mortgage applications about 20% faster than other lenders,
• Technological innovation has improved the efficiency of financial intermediation in the U.S. mortgage market.
• 53% of Americans have the necessary income to qualify for a median-priced home in their state.
• In 2018 Q3, the average sales price of a home was $390,200.
• 29% of borrowers named “speed of the process” as the most important factor while applying for a loan online.

Yes but

Mortgage brokers are scared of the new environment. From the Mortgage Bankers Association.

Things got interesting last week when United Wholesale Mortgage, Detroit, issued a news release announcing a “trailblazing move” in support of wholesale channel growth. Speaking during the company’s State of the Industry Address, UWM President and CEO Mat Ishbia said as of Mar. 15, mortgage brokers had to make a choice; if they want to work with UWM, they can’t work with two of UWM’s main competition — Quicken Loans and Fairway Independent Wholesale.

“Independent mortgage brokers are leading a seismic shift in the mortgage industry and this does not align with the business model of some retail lenders,” Ishbia said. “That’s why they are attempting to circumvent the mortgage broker in the lending process. As the #1 advocate for independent mortgage brokers, protecting the wholesale channel is part of UWM’s responsibility, which is why we’re asking our partners to go all in with lenders who support them and their growth.”

The ultimatum comes as all three companies have stepped up their product offerings in recent weeks — and amid increased competition among them to recruit and retain mortgage brokers.

What I think

• Quicken Loans introduced their fast Rocket Mortgage application in 2015. Two years later, they became the nation’s largest loan originator by volume, surpassing leaders in the banking industry. Mortgage lending is being disrupted by digital specialists.
• In a study by the Federal Reserve Bank of New York it was found that technology-based lenders process mortgage applications about 20% faster than other lenders, while decreasing the default rate by about 25%.
• There are no incentives for customers to pursue non digital based experiences to apply for a mortgage
• The incumbents are trying harder
• The American Bankers Association, in its recent report, “The State of Digital Lending.” report found that only half of banks with assets over $1 billion and 38% of those under $1 billion currently use a digital origination channel. Of the banks that do offer digital loan origination:
• 96% provide digitized the loan applications
• 47% provide digitized document uploads
• 41% provide electronic loan agreement signature
• 34% use digital channels like email or instant messaging for customer service
• 19% offer instant credit decisions

Between the lines

• Beware the bias, as lending becomes more algorithm driven, biases are cropping in..not that personal lenders were less biased anyway..
• AI in lending can and will trigger legal challenges
• Companies are struggling to reduce AI bias in financial services
• At some point the regulator will come in and dig deeper to rein in cases of unfair use of AI

The catch

• Legacy players try to catch up by building better digital experiences
• Borrowers want an Amazon-like experience, where the knowledge gained from their past activity with a financial institution is kept and incorporated into subsequent interactions, including mortgage applications.
• Machine learning also helps create a better borrower experience, adding automation for greater accuracy and speed.

What changed

• 6 years ago, a 2015 study by Bain & Co. found that only 7 percent of bank products were handled digitally from start to finish (including 0.1 percent of small business loans).
• Better.com’s platform works by moving the mortgage process completely online. Customers are able to upload and eSign documents and can leverage technology to complete every step of the mortgage process, thereby cutting the closing time from an industry average of 42 days down to 21 days, it claims.
• Technology focused companies are launching mortgage dedicated products like
• TAVANT VΞLOX an AI-powered digital lending platform that maximizes the use of data-driven processes in the automation of loan origination lifecycle.
• SigniaDocuments,, a document engine built entirely of Category 1 SMART Docs. All of its documents, not just the note, are SMART and can be “read’’ electronically before and after signing because the source data, documents and audit trail all travel as one.
• Pavaso allows lenders, title companies and real estate attorneys to complete real estate closings in all 50 states. Through one collaborative platform, Pavaso connects all parties to exchange information and documents, communicate and collaborate in real time to streamline the entire closing process.
• Calyx is a provider of mortgage software solutions used by banks, credit unions, mortgage lenders, and brokerages nationwide. The technology includes an online borrower interview, loan origination systems, and secure electronic signature software. It is designed to streamline, integrate and optimize all phases of the loan process for customers of various sizes, workflows, channels and complexities.

What people say

Our loan officers are on average 1200% more productive than your average industry loan officer. — Sarah Pierce, Head of Sales, Better.com

Banks already compete against a large and powerful shadow banking system. And they are facing extensive competition from Silicon Valley, both in the form of fintechs and Big Tech companies (Amazon, Apple, Facebook, Google and now Walmart), that is here to stay. As the importance of cloud, AI and digital platforms grows, this competition will become even more formidable. As a result, banks are playing an increasingly smaller role in the financial system. Jamie Dimon

Read

• Fintech adoption is accelerating amid the global COVID-19 pandemic, an online survey conducted by The Harris Poll on behalf of Plaid.
• Is an Algorithm Less Racist Than a Loan Officer? NYT
• Fintech algorithms charge minority borrowers 40% less on average than face-to-face lenders, they still assign extra mortgage interest to borrowers who are members of protected classes. OW

Watch

• Automation and Digitization are Simplifying Lending
• Speed and compliance in digital lending
• Coded Bias on netflix

Listen

• Can digital closures be a reality for the mortgage industry in 2021: In conversation with Mike Lyon, EVP at NexsysTech
• Lending in Digital Time‪s‬ by John Michael of Conduent
• Digital can make the mortgage process Amazon-like

This post is part of Convergences by Melvine. A series exploring how software is changing every corner of human activities. Melvine Manchau