Big Data Means Small Mar­gins in Mort­gage In­dus­try of the Fu­ture

Au­tomat­ing the mort­gage process will force tighter mar­gins, but drive higher vol­ume, for lenders.

National Mortgage News - - Voices - By Jeremy Sick­lick Jeremy Sick­lick is co-founder and CEO at HouseCa­nary in San Fran­cisco.

The big story in mort­gages to­day is the rise in mort­gage loan rates. For the first time in years, we’re see­ing 30-year fixed mort­gage rates con­sis­tently above 4%, and a 5% rate is in sight. Higher rates make sense if you look at it one way: the econ­omy is strong, in­fla­tion is climb­ing, and it’s safe to ex­pect Fed­eral Re­serve hikes in 2018 and 2019.

In­dus­try vet­er­ans might be sigh­ing with re­lief. In the 10 years since the burst of the hous­ing bub­ble, we’ve seen a slow eco­nomic re­cov­ery, a fed­eral funds rate stuck at 0, and 30-year mort­gage rates in the high 3% range for fixed-rate loans and lower for float­ing-rate loans. Is this the long-awaited re­turn to nor­malcy, even if that nor­malcy comes with stricter lend­ing stan­dards?

The an­swer, I’m afraid, is no. Macro fac­tors are push­ing mort­gage rates higher, but another el­e­ment is go­ing to start in­flu­enc­ing mort­gage rates, too: tech­nol­ogy. And the di­rec­tion of tech­nol­ogy’s pres­sure on rates only goes in one di­rec­tion — down. It’s not in­con­ceiv­able that, 10 years from now, we’ll be re­mem­ber­ing a 30-year fixed rate of 3.75% as the “good old days” of mort­gage mar­gin.

As rates have risen in the last 12 months, many peo­ple have pointed out that rates are still low by his­tor­i­cal stan­dards. And they’re right: when I bought my first home in the early 2000s, I would have killed for a rate that was un­der 5%. But it’s worth ask­ing if those his­tor­i­cal stan­dards still ap­ply in 2018?

The fact is that the his­tor­i­cal stan­dards emerged from a real es­tate and mort­gage in­dus­try that is based pri­mar­ily on gut de­ci­sions — peo­ple fall in love with homes, or think they’ve got just the op­por­tu­nity to make a quick buck to pay for next year’s va­ca­tion. The prob­lem is that gut think­ing ap­plies col­lec­tively to ev­ery­one, not just in­di­vid­ual home­buy­ers.

I got into the busi­ness of real es­tate in 2009. My goal was to help clean up the mess that all th­ese gut-led in­vest­ment de­ci­sions had cre­ated. There were in­vestors buy­ing up the homes of NINJA (no in­come, no job, no as­sets) bor­row­ers from fore­clo­sure and deal­ing with rip­ple ef­fects from the res­i­den­tial real es­tate “bub­ble” pop­ping.

It’s not like the lenders had no in­for­ma­tion about the prop­er­ties or the buy­ers. Credit scores were avail­able, and prop­erty de­tails and records ex­isted in a mul­ti­tude of bank, city and state of­fices. But the tech­nol­ogy to col­lect this in­for­ma­tion and make sense of it wasn’t avail­able. So we re­lied on hu­man judg­ment … and, well, we all know how that turned out. To­day, the tech­nol­ogy is here. The dis­parate data sources are be­gin­ning to col­lab­o­rate and stan­dard­ize how data is en­tered and pro­cessed in the cloud. Fi­nan­cial in­sti­tu­tions have got­ten smart about al­low­ing ac­cess to data and sys­tems through APIs. Most im­por­tantly, ar­ti­fi­cial in­tel­li­gence is ad­vanced enough to ef­fec­tively an­a­lyze data and make ob­jec­tive, data-driven de­ci­sions.

This is all head­ing to a place that can be summed up with a sin­gle word: au­to­ma­tion. Many of the tasks that hu­mans per­formed to help a buyer ob­tain a mort­gage — from as­sess­ing a prop­erty’s value to pin­point­ing the buyer’s cred­it­wor­thi­ness to shar­ing doc­u­ments for buyer and seller to sign — can now be done us­ing soft­ware. That’s mak­ing the in­dus­try faster. Home­own­ers can get a loan in a few days, rather than weeks. More and bet­ter data will also mean more and bet­ter loans, as val­u­a­tions be­come more ac­cu­rate and faster ap­praisals send ear­lier alerts to lenders and buy­ers about any po­ten­tial loan is­sues.

But this trend will also mean lower rates. To­day, the sup­ply chain of a real es­tate trans­ac­tion eats up about 12% (3% buy­ers agent com­mis­sion, 3% sell­ers agent com­mis­sion, 2% clos­ing costs and 4% loan orig­i­na­tion costs) of the money ex­changed. That 12% pays the mort­gage bro­ker, the real es­tate agent, and, of course, the lender. That num­ber is go­ing to fall by at least a third in the next 10 years — and mort­gage lenders will see their shares fall the most.

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