FinTech and the Mortgage Industry: Replacing Roadblocks with New Lending Models

FinTech Industry

Barring any mitigation actions by banks, up to 40% of their revenues could be lost to fintech companies in the not-too-distant future.

From peer-to-peer lending to instant applications, financial technology is revolutionizing the mortgage industry. Once the exclusive purview of the major financial institutions, mortgage lending has been upended by a new breed of companies looking to simplify the loan process.

What’s at stake in the fintech revolution? Up to 40% of existing bank revenues by 2025, according to research by McKinsey & Company. That’s how much revenue fintech is prepared to take away from traditional financial institutions, barring any mitigation action.[1] In a market like the United States, which his home to 85 million digital natives, banks will be under increasing pressure to innovate their payments and lending segments to account for consumer demand.

Investors are quickly taking notice to the shifting financial landscape. That’s why they poured $36 billion into fintech start-ups in 2016 alone,[2] a figure that is accelerating rapidly as the value proposition of financial technology grows.

To understand the relationship between fintech and real estate, it’s best to start with mortgage applications. Processing a single mortgage application requires hundreds of pages of documentation and up to five hours of processing time – a five-fold increase since 2002.[3]

Digital mortgage solutions are already sweeping the industry and taking billions in market share from traditional service providers. Between 2008 and 2015, large banks saw their share of the mortgage market shrink from 50% to 24%. During the same period, non-depository lenders saw their share climb from 24% to 48%. Credit unions and community banks were relatively unchanged during this period.[4]

In addition to quicker applications, fintech is also leading to fewer appraisals. To see why, we need to go back to an October study by the National Association of Realtors (NAR), which found that appraisals were associated with 11% of all contract cancellations. Although industry may not agree, appraisals continue to be a major bottleneck in the application process, especially for subdivisions with similar unit sizes. That’s why Fannie Mae is moving toward digitization and fewer appraisals to deliver greater speed and simplicity for borrowers and lenders.[5]

Digitization is also leading to the emergence of new lending models dominated by peer-to-peer technology and other innovative financial products. Although these trends have been mostly associated with consumer and business financing, peer-to-peer mortgage loans are a growing trend. For example, San Francisco-based SoFi already offers P2P mortgage and mortgage refinance loans across 23 states and the District of Columbia. LendingClub Corp, which claims to be the world’s largest P2P lender, is also planning to expand into the mortgage industry soon.[6]

As the debate over the future of the mortgage market continues to swirl in Washington and on Wall Street, consumers are voting with their feet. Although banks are increasing their adoption of fintech, the transition has focused more on payments and less on disintermediating the mortgage application process. Already today, 16.5% of digitally active consumers in the U.S. have adopted at least two fintech products over the past six months, according to Ernst & Young.[7] As digital mortgages see increased foot traffic, traditional lenders will face increasing pressure to innovate in this space.

We’ve said it before – the $14 trillion U.S. mortgage market is undergoing a major transition. How banks respond today could impact their long-term success in a market being slowly overtaken by a younger, more digitally savvy demographic.

[1] McKinsey & Company (February 2016). “Cutting through the noise around financial technology.”

[2] Elena Mesropyan (January 2, 2017). “Global FinTech Funding Reached $36 Bn in 2016 With Payments Companies Securing 40% of Total Funds.” LetsTalkPayments.

[3] Ten-X (December 29, 2017). “We’re All Fintech Mortgage Lenders Now.”

[4] Jacob Passy (January 10, 2017). “Embrace the Digital Mortgage as a Competitive Advantage.” American Banker.

[5] Ten-X (December 29, 2017). “We’re All Fintech Mortgage Lenders Now.”

[6] Jim Probasco (February3, 2017). “P2P Mortgage Loans – A Growing Trends.” Investopedia.

[7] Ernst & Young. EY FinTech Adoption Index.

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This article has been exclusively written for GoRion by...

Sam Bourgi

Sam Bourgi

Sam Bourgi has more than seven years of progressive experience in economic analysis, market research, public policy and the financial markets. He has a broad expertise in the financial markets, including commodities, real estate the foreign exchange. As a published author in both peer reviewed and industry research, Sam has covered topics ranging from mortgage-backed securities to consumer spending and labor. Sam's resume includes more than 40 government and industry publications, thousands of financial articles and hours of educational resources on personal finance and trading.

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