Mortgage lenders from fifty years ago would hardly recognize the industry now. Alternative lenders, online loan applications, e-sign documents, AI-powered algorithms for applicant screening are all technology-induced disruptors in the rapidly evolving real estate lending market.
Changing demographics and consumer demand for responsive services have also spurred change in the mortgage lending industry, and the result is that lenders can reach a broader market, including millennials who sometimes lack a credit history.
This article looks at how the mortgage lending industry has changed, what factors have contributed to the changes, the role of new technology in facilitating change, and a look at how technology is benefiting both consumers and lenders.
Four Catalysts of Change in Mortgage Lending
Organizations and people often resist change. But eventually, the pressure becomes too great, and adaptations occur. In recent years, various events have created pressure on the banks and lending institutions and forced change.
First, there has been a change in the largest target demographic for mortgage lenders. Millennials, those aged in their thirties and early forties, are less likely to have extensive credit histories than the generations before them. Also, the world experienced a paralyzing pandemic, which froze economies worldwide. Next, interest rates hit record lows, which paved the way for alternative lenders who took advantage of the gap in the market and entered center stage.
1. Millennials
Changing demographics and consumer behavior have forced lenders to find new ways to serve their target market and new ways to assess their credit risk.
People aged in their thirties and early forties have traditionally been the largest market for mortgage lenders. In the past, this age group tended to have steady jobs, income, traditional bank accounts, and a credit history that lenders could rely on for lending decisions. Many of today’s millennials (the generation born in the early eighties to the mid-nineties) and upcoming Gen Zs are used to doing business through their phones, and they are more comfortable with digital transactions through neo-banks like Chime or Venmo than they are using their local high street bank.
According to the Bureau of Labor Statistics, Millennials are showing the largest gains as a percentage of any age group in the workforce, which represents the target market for lenders. However, according to Investopedia, this age group has a lower credit score than other generations. Gen Z is following a similar path. These generations are following a more conservative approach to borrowing following the Great Recession. Many have student debt and are delaying life events like marriage and having children.
2. The COVID-19 Pandemic
During the COVID-19 pandemic, digital banking soared. Banks shuttered their physical locations as users warmed to the convenience and speed of remote banking. As users grew more comfortable with digital and online banking, startup alternative lenders stepped in and grabbed a share of the market.
Lenders like LendingClub, OnDeck, and Funding Circle provided quick loan approvals and streamlined application processes. They did so by leveraging technology, AI, and data analytics to assess creditworthiness. But digital banking also created a monster. The growing number of digital transactions opened the gates for hackers to breach networks and commit rampant fraud.
3. Low Interest Rates
In 2020, when interest rates were at historic lows, there was a huge increase in mortgage applications. The Consumer Financial Protection Bureau reported that the total number of originated closed-end loans increased by around 67 percent, and refinance originations for properties increased by 150 percent. Traditional banks were forced to use technology and automation to keep up with the higher volume of loan applications and to stave off the competition from speedier alternative lenders.
A study published by The Federal Reserve Bank of New York reports that the market share of technology-based lenders, Fintechs, increased from 2 to 8 percent from 2010 to 2016. According to Housing Wire, Quicken Loans announced in early 2018 that it officially surpassed Wells Fargo as the leading lender in the United States, and UWM (United Wholesale Mortgage) announced it was on track to beat Wells Fargo in 2020.
The study published by the Federal Reserve Bank of New York found that Fintech lenders process mortgage applications 20 percent faster than other lenders, and the speed does not come at the expense of a higher default rate. Also, fintech lenders can respond to mortgage demand shocks faster alleviating capacity constraints.
How Mortgage Lending Has Evolved
One reason that fintechs have been able to corner a large part of the mortgage lending market is that they are serving a broader audience – people who don’t have credit histories and the unbanked. To do so, they are using new credit scoring solutions to mitigate their lending risk.
Lenders are Serving a Wider Market
Both traditional and alternative lenders are using new tools to assess borrower’s creditworthiness. Traditional credit scores rely on the established credit reporting agencies and FICO scoring. However, for those who don’t have a credit history, or who don’t use traditional banking services this does not give an accurate picture of a borrower’s risk profile.
New credit scoring methods and tools, such as the solutions Oscilar and Provenir, consider other factors when predicting an individual’s likelihood of paying back a loan. Socio-demographic data, psychologial data, and behavioral data are plugged into AI-based predictive algorithms to aid risk assessment.
- Socio-demographic data: These data include age, gender, marital status, and profession of loan applicants.
- Psychological data: These data are not widely applied but an example of psychological data could be how an applicant uses credit. If they tend to spend impulsively that could be a red flag.
- Behavior data: AI and real estate analytics can determine how someone has managed their money historically. For example, purchase history data and debt repayment patterns.
Mortgage Applications Are Online
Most mortgage applications are now online. Applicants access a bank or a lender’s portal, upload documents electronically, and sign legal documents with e-signatures. These natural evolutions streamline processes and reduce administrative costs.
A Constant Stream of Anti-Fraud Artificial Intelligent Solutions
Tech companies are working hard to develop new tools to fight hackers, and traditional banks and mortgage lenders are subject to regulatory requirements to prevent fraud. For example, banks must comply with anti-money laundering (AML) verification and follow a Know Your Customer (KYC) process.
Private lenders are also following AML security mechanisms to prevent loan application fraud and to convince borrowers to use their services. Here are some of the technologies used by lenders to combat fraud.
- Verification Software: This software scans ID documents, such a drivers’ licenses and passports, to confirm they are not fake documents. The information given from the applicant on the application is verified against the documentation.
- Artificial Intelligence and Machine Learning: New AI-based anti-fraud solutions can parse endless data and detect potential fraudulent transactions or behavior. The new solutions are more flexible than traditional rules-based tools and can be adjusted to address new threats. Machine learning is a technology that allows fraud detection systems to learn from behavioral data and adapt
- Biometric Authentication: This technology is now widespread and uses a person’s unique physical characteristics to verify their identity, such as their voice, facial features, or fingerprints.
- Two-factor and/or multi-factor authentication: Two-factor (2FA) and multi-factor authentication (MFA) add a layer of security to traditional password software to validate a person’s identity and provide access to portals.
Reaching the Unreached
Mortgage Lending in the digital age would be unrecognizable to those in the industry fifty years ago. Technology and AI are now at the forefront of lending operations and combined with human input to direct and verify the outputs, the market is expanding.
The mortgage lending industry has been put through its paces in recent times, but technology has helped lenders to better serve a wider consumer market, including those without traditional credit histories and the unbanked.
ATTOM can help your business adapt to the evolving real estate market. Learn how our industry-leading AI-based solutions based on extensive data can take your business to the next level. Contact an ATTOM representative today!