Improvements in data capture and infrastructure are speeding up loan approval and processing, and bringing down fees.
“How do we get to know a consumer and their goals as quickly as possible and then understand the property income and credit they have, to offer them solutions online?” says Regis Hadiaris of Rocket Mortgage by Quicken Loans. The process is about providing people visibility to their options within minutes.
Hadiaris spoke with Nima Ghamsari of Blend and Michael Tannenbaum of SoFi at the CB Insights Future of Fintech conference in a conversation moderated by AnnaMaria Andriotis of The Wall Street Journal.
Quicken Loans has so far been successful with its mortgage business despite being a non-bank lender. In 2016 they completed $96B in mortgages, with $7B of those loans coming from their new Rocket Mortgage digital product.
Data has been key to helping unlock the mortgage business for digital-first companies, from quickly pulling financial data, to better understanding the customer’s goals, to processing applications.
Michael Tannenbaum of SoFi said mortgages fit into SoFi’s umbrella strategy in large part because of the “rich context” they glean on their customers at the top of the funnel in student or personal loan products. Understanding that customer journey relies on data capture that includes growth in income and credit worthiness.
Advances in data infrastructure, not just the quantity of data available, have also benefited the mortgage industry tremendously.
The traditional methodology of mortgages is tremendously manual as the data simply was not there, said Nima Ghamsari. “What I think is happening now is that there is enough data infrastructure out there that in the push of a button the consumer can authorize the bank to get financial information and aggregate it, machine read it against underwriting models and trust that it’s verified. That means that all the friction in the transaction of understanding my financial picture is going to zero.”
Granted parts of this process still need to be done in person, including property appraisal. However, here too there is an effort to simplify and speed up processes. “Fannie Mae is pretty innovative in technology [and has developed] a property inspection waiver. If they have seen that property or nearby property that’s similar they will waive the appraisal requirements,” Tannenbaum noted.
Because of these advances in data authorization and aggregation Quicken Loans has reduced some loan times to as little as 16 days compared to the 45-day industry average. According to Ghamsari, “when it costs $8800 to process one loan, of which $5000+ is human processing cost,” the opportunity to lower costs and increase transparency for investors and lenders, not to mention consumers, should serve to benefit the industry.
“Mortgages are a very competitive industry … as soon as a lender can lower their rate because their costs are lower to gain market share they will. You should assume that these kinds of savings will be passed on to consumers very soon.” Tannenbaum said.
Ultimately transparency and competition will drive the industry forward. “As people have a better understanding of the loans available to them they’ll be able to make better decisions when maybe they wouldn’t have been before,” Hadiaris said. “We’ll have a more financially educated, financially savvy group of consumers in the US.”
AnnaMaria: Great to be here. Thanks to all of you for joining us. So, I’m pleased to be joined by Nima Ghamsari, of Blend, Regis Hadiaris, of Quicken, and last but not least, Michael Tannenbaum, of SoFi.
Michael: Thank You.
AnnaMaria: Great to be here with you guys.
Regis: Great to be here.
AnnaMaria: So, a lot of interesting things going on in the mortgage market right now and I think the panel here kind of speaks for itself when this is a mortgage panel and there isn’t one bank here and that is very indicative of where we are headed. Non-banks recently took over banks in terms of the share of mortgage dollars being originated. Quicken Loans is no stranger to this. You guys are number three in the mortgage market based on mortgage origination volume, number one when it comes to some of the government programs like FHA. So, start with you, Regis, what do non-banks have to offer that banks can’t or don’t want to offer?
Regis: Well, I think, first of all, I think the term non-bank is sort of an interesting term because if we think about what we’re really talking about, it’s, do you take deposits or not? And I don’t think really taking deposits really is an indicator of how well you could lend money. So, if we think about Quicken Loans as a mortgage lender, you’re right. We did $96 billion last year in mortgages, $7 billion in our first year in market with Rocket Mortgage. And the reason for I think the growth that we’ve seen in direct to consumer mortgage lending is because you’ve got companies that are focused just on the mortgage experience. We’re focused on taking that experience and removing the friction from it, finding ways to deliver tools to clients that let them make good decisions on using the technology that’s available, and that’s what we see with Rocket Mortgage, and that’s what we see people doing today.
AnnaMaria: So, I’m going to get into the friction part of it in a moment, but before we go there, with any development, there’s always pros and cons, risks and advantages that are introduced into the market. And so, one of the bigger risks being talked about as non-banks take over is, you guys don’t have deposits. And so, what happens in the event of another sort of severe economic downturn? Will non-banks have the liquidity to keep operations running? That’s been voiced by the former head of Ginnie Mae, that’s been a concern raised by Moody’s. So, Regis, I’ll just start with you on that again because you guys are so big in the market.
Regis: Sure. I think there’s really two things to think about there. It’s really about regulation and capitalization. And if you think about regulation, as a mortgage lender, often we’re subject to regulations that even banks aren’t because they have federal preemption rules. So, we have to be licensed in every state we operate in, all 50 states, and different states have different requirements. And so, not only do we have the state regulation and federal, we’ve got Fannie Mae Freddie Mac, FHA, VA, Ginnie Mae, the CFPB, a wide variety of things to comply with. So, I would say, when you talk about risk, really, anybody who’s providing a mortgage is sharing the risk of lending to a consumer. So then it really becomes capitalization and I think that story really needs to be focused on, the capitalization of different companies. For example, the parent company of Quicken Loans has assets greater than 93% of all FDIC-insured institutions. So, really, I think it’s much more about regulation and adhering to that and then capitalization and how well capitalized a lender is.
AnnaMaria: So, those are fair points. I mean, one of the things that is brought up a lot in this conversation about the liquidity risk focuses a lot on some of the smaller lenders in the space, whether they have enough liquidity…by no means is SoFi a small lender.
Nima: It’s okay. Pick on the small guy.
AnnaMaria: But one of the things that I’ve been thinking about in terms of this risk is, you guys recently bought them Zenbanx, and so there’s just some questions there about, what is the goal here? Does this acquisition potentially mean that, you know, you could be lending against deposits down the road?
Michael: Sure. I mean, I think that is what it means. Zenbanx was not a bank despite the…it’s B-A-N-X, so, not quite a bank. But it was a technology platform on top of a bank. And I think what it allows us to do, I mean, it’s been pretty public that we’ve applied for a bank charter and I think the technology that we purchased was instrumental in that application. And then it also allows us to have a deposit. In the event we don’t receive that charter, it still allows us to have a deposit offering where we would work with, you know, a sponsor bank to offer FDIC-insured deposits to our customers. So, I’d think about it more as a customer strategy rather than a funding strategy. SoFi’s always been about serving a customer base. And while it’s funding strategy has allowed it to better serve that customer base, we lead with that strategy first, and then we figure out how we can most effectively fund what we’re trying to do and that makes the product the best product it can be.
AnnaMaria: So, you mentioned the process of applying to become, what is it? A bank? Like a bank?
Michael: So, I believe the…not I believe, I know that will be applied for us, called an Industrial Loan charter which is a type of bank.
AnnaMaria: And so there’s been some friction there, which has been playing out in the public eye recently.
Michael: SoFi is no stranger to friction as you know.
AnnaMaria: Yeah, well, the banks aren’t fully pleased. At least some of their reps in the industry aren’t. Your CEO and the head of the CBA, for example, have been going back and forth recently. Quite entertaining, but it touches on this question of, you know, the friction that’s playing out right now on several levels as mortgages, for example, are becoming more digitized that some banks aren’t pleased. And this is one example of that. So, what is SoFi’s take on that? Like, do you just not care? Like, too bad for them, we’re taking share?
Michael: No, I mean, I think that’s…look, when you have, you know, we’re talking about FinTech at this conference. It’s part of the broader tech, which one of the mantras is disruption. Everyone, all the three companies on the stage today, represent a version of disruption, which means changes in market share, changes in jobs, changes in outlook, changes in equity capitalization of companies. So, there’s always gonna be winners and losers in an economy, but I think it’s certainly too strong to say SoFi doesn’t care about, you know, what its impact is on the community. If you actually read the application, and I know you weren’t implying that, but if you read what the application, there’s, you know, specific plans for us to participate in the community in Utah where the bank is chartered. I think there’s certainly a concern that we’re, you know, being a good corporate citizen and a good citizen of financial institutions broadly in the country. I think SoFi maintains that we’re serving a customer that’s not being either adequately or served at all by the existing financial services ecosystem, and that’s why we exist.
AnnaMaria: And that dovetails nicely into the fact that you guys do have a customer base that a lot of the banks are eagerly trying to attract. Some are not doing such a good job at it. I mean, SoFi obviously at its core started out refinancing student loans, being in the student loan market essentially. That’s allowed you guys to get a lot of young adults. What you guys have dubbed as, you know, Henrys, where the goal here, as it appears to be playing out is, you get them with student loans and then you get them to get mortgages, right? So, talk to me about the marketing strategy on that front. How that’s all working out. You have all this…like, you have this data on these people and you’re marketing mortgages to them. How do the two things come together?
Michael: You know, and I think when you talk about SoFi and you talk about student loans, it’s almost like you just take that for granted, but you have to remember that student loan is a new phenomenon, right? The idea of having tons of student debt is new to this generation and that’s why SoFi is relevant, that’s why the banks previously were not focused on it. It’s a newer concept as education has gotten increasingly expensive. And so, as we’ve acquired those customers which, again, that’s also taken for granted, but now, at this point, we’re doing, you know, almost 600 million a month of student loan refinance. So, we’re acquiring lots of customers and we know a lot about them from their financial picture, where they work, their income, you know, we know activity in their checking accounts. So, there’s lots of data that we have and we know that they’re typically not homeowners, but as they pay off their student loans, as they attend offline community events hosted by SoFi where they learn about home ownership, and as, you know, their income grows, we know that they’re looking for homes. And I think that’s where SoFi is well set up to offer a mortgage product. And, you know, that’s where we are. That’s sort of our go-to-market strategy.
AnnaMaria: And how do you do it? I mean, do you…you have all these young adults as your existing borrowers, are you sending them solicitations by email, by text, by…how are you finding them? And I’m assuming you’re not waiting for them to come to you and say, “Oh, hey, we want a mortgage.” But rather, you must be taking that initiative.
Michael: Yeah. I mean, we talk about something internally called Rich Contextual Outreach, so if anyone was in the audience from SoFi, they’d laugh because we say it so often. But the idea is to not present somebody with a, “Oh, by the way, did you know SoFi offers mortgages in your state, but you saved $231 a month on your student loan, when you were 28. You went to Stanford and, you know, peers at Stanford have select…have been buying, you know, homes in this zip code with this mortgage product 71-” Whatever it is, you know. So, trying to make sure, you know, we know your…oftentimes also, student loan customers identify by their profession. You know, what did you do to get your student loan? And so we…whether it’s your school, or your profession, or where you live, or when you became a customer, how much you saved, those are the data points we’re using for outreach.
AnnaMaria: So, Nima, I wanna get to you. So, you’ve been very obviously involved on the technology side of all of this. And so, really, I mean, at this point, as I think about mortgages and just the movement online, I just think about, you know, in this day and age, you can get a credit card, you can get a personal loan very quickly. Why is that still not the case with mortgages?
Nima: I mean, first of all, I think part of it is the fact that the mortgage itself has a property, a house behind it, and that has to be verified. But I think also the mortgage process is, you have to verify the person’s assets, and they might have three or four asset accounts or more. You have to verify that person’s income, you’re required by law to do these things. In a lot of cases, you know, you have to verify their credit history that they can repay this. And essentially, you wanna figure out if they can repay it. And doing that, the title of this panel is, “Reimagining the Mortgage Market.” I think all of the technology in the space is geared at doing those things in a different way than it was before. And so, the old way was, as a consumer, if I was applying for a mortgage and you were my bank, I would go to you and at first, you know, day one, you’d ask me, “How much money do you make and how much money do you have?” And you’d fill it in on some form. Day eight, you’d ask me to provide some supporting documentation, pay stubs, W-2s, bank statements from all the different accounts that I have, enough to cover the loan. And then day 15, you might go and call my employer and ask them for a proof of verification. And you’ve taken a pretty…I mean, to be fair, it’s a lot of money changing hands.
Nima: So it’s important to get it right, but you’ve taken that process and you’ve made it very manual. And the reason that you’ve made it manual as a bank is that, you know, fundamentally, historically, the technology wasn’t there and the data infrastructure wasn’t there to answer those questions in real time about your creditworthiness. How much assets you have, how much income you have, your credit history. Some of that was there, most of it wasn’t, and so you had to do it this old way. What I think is happening now is that, there’s enough data infrastructure out there that in the push of a button, the consumer can authorize the bank or whoever it is to go and get your financial data with your permission, my financial data with my permission, aggregate it. It’s machine readable data, so it can run directly against their underwriting models and it’s verified. And that means that all of the friction in the transaction of understanding my financial picture is going to zero. Now, there’s still psychological barriers to getting a mortgage. It’s a really important life decision. You don’t wanna be, you know, getting mortgages literally with one button every day, you wanna make sure…
Michael: Push a button, get mortgage.
Regis: Push a button, get mortgage.
Michael: I heard that somewhere.
Nima: No, I think…and I think everyone would agree that there are psychological barriers, but you wanna make it so easy that there’s enough information that you can pull together so that the consumer isn’t waiting and doing this onerous process. And it’s expensive for the consumer, it’s expensive for the bank, it’s expensive for…and it’s opaque to the investor who can’t see that data because it wasn’t machine readable before. And so, everybody in the chain loses without good technology.
AnnaMaria: So, I can’t not get to you with all that we’re discussing right now. I mean, this is what Quicken Loans is known for, right? Rocket Mortgage, you press a button, you know, you have a mortgage, but you still can’t do it all online. I mean, the ads somewhat suggest that, but there’s still several steps in this process that seem to have a long way to go. What can you do quickly as a consumer, you know, working with Quicken in the mortgage process and what can you still not do quickly?
Regis: Sure. Absolutely. So, I think what Nima touched on makes a lot of sense. If we think about the experience, it’s really about how do we get to know a consumer and their goals as quickly as possible, and then understand the property, income, assets, and credit they have so we can offer solutions online. And so, instead of taking people through long questionnaires and trying to figure this stuff out now, we can use a lot of data. We can import property data for most properties in the United States. We can import their bank account information and analyze it and do digital verifications of assets and income on the spot. Same with credit. So, we can get people to solutions they can get a lot faster within minutes, today, online, on a mobile device, 24 hours a day, 7 days a week. And we’re offering that up today, roughly on average, every 60 seconds, we’re offering one of those customized mortgage solutions.
So, the days of these teaser rates online that aren’t really what a person can get and then they have to like figure out what they can get by taking a bunch of time out of their day, those days are over. And they’re able to do a lot more research on their own. So, that’s a good thing. They can click a button to get approved to, you know, through Fannie Mae Freddie Mac, FHA, VA. They can lock their interest rate, e-sign their mortgage applications. All those spots and points have been automated. Typically, there is still an appraisal, and so someone has to go to a property, inspect it, do a comparables analysis and that sort of thing. We still have that part in the process.
And then, when we think about the closing, there’s still typically signing papers today for the most part. And a lot of that is because the e-notarization component, where I could be standing in one state on a device and maybe closing with a lender in a different state on a property, maybe even in a third state., those rules are still getting put in place and that technology is still getting built. So, I think we’ll get to a day where we see that and I think that day will come quickly, but when it comes to the experience today… One last point, we’re seeing people go through fast. You know, the industry averages are 45 days. We’ve seen our fastest clients in Rocket Mortgage go from creating an account in Rocket to signing on those closing papers in 9 days in a refi, and in 16 days on a purchase.
AnnaMaria: So, 16 days from start to finish, you’ve had clients get a mortgage. They literally start the application with you guys and then 16 days later, they have it? They’re at closing?
Regis: Yes. Absolutely. And that’s great.
AnnaMaria: Is that an exception right now or is that becoming more…how common is that right now?
Regis: I would say the average for all of our clients is less than 30 days, and then [crosstalk 00:16:44]
Michael: Right. I mean, there are two parties to a purchase transaction.
Michael: So, someone’s gotta get out of the house and someone’s gotta, right, [crosstalk 00:16:54]. Real estate contracts have, yeah, as he just said, you know, you gotta have somebody come in, they look under the stuff. So, I mean, they take pictures, that takes time. So, you can’t go much faster.
AnnaMaria: Well, because that gets to the point of that. Obviously, these transactions are way more complicated. You have, as you mentioned, the appraisal. Have there been efforts to try to digitize that somehow? Like to basically remove the actual person…
Michael: Fannie Mae is doing that.
AnnaMaria: …going to the homes? How widely used is that for you guys, Michael?
Michael: I mean, one thing I’d say is not to plug a fourth party, but Fannie Mae’s been a pretty…is pretty innovative in technology, I would say, and they have what’s known as a property inspection waiver. So, if they’ve already seen that property or property nearby that’s similar, they will waive the appraisal requirements in certain instances. So, there are some lenders, I’m assuming Rocket Mortgage or Quicken is among them, that supports that product. We certainly do at SoFi. So, if we get that notification that there’s a waiver, we will go ahead and not require an appraisal.
Regis: And I think the bigger picture on that is that, as that data gets better about properties…
Michael: Yeah, more and more.
Regis: And property comparables, and as that data gets better and better, and if it’s properties that, you know, there is data about, as that data set gets better overall, we can all build experiences on top of it that make it easier and clearer for the consumer.
AnnaMaria: What are the biggest weaknesses in the data right now? So, we talked about the data that’s available easily online, right? But data is not error proof. So, what are the biggest weaknesses right now?
Nima: I mean, the data infrastructure is evolving quickly, but it does have some gaps. I think the breadth and depth of income verification data is not as good as it could be. It’s still improving. I know there are some bills in Congress to improve the way the IRS, you know, makes that available to the consumer, right? It’s not about making it available to the bank, it’s for the consumer to get that and send that over. It’s not a trivial task for them. And so, I think there’s a lot around that. And then just to kind of closed-loop, your original question was, you know, why is it so much easier to get these other products? And I think the fundamental reason is that I think all of those products, long-term, should…if we made it so that it was completely frictionless to get this information, with the consumers consent, of course, then all those other products would use this information too because you want to understand the customer before you give them a $45,000 auto loan too, right? Like, you wanna understand and be sure that they can pay you back because you don’t want them making a decision that they can’t afford either. It’s kind of a two-party thing. And then eventually, as we get the friction down to zero, I think it would kind of end up with, you know, what Michael said, where the things that are stopping the transaction are not, you know, getting paperwork back and forth. It’s gonna be, “Am I ready to move out of this house that I’ve lived in for 10 years and let the, you know, you, the new mortgagee, move into this house?” And so, those are the things that I think will become…and those are the psychological things that are not… And, you know, “What’s the right product for me? Do I want a 7/1? Am I gonna move? Do I want a 5/1?”
Michael: I love the 7/1. It’s my favorite.
Nima: Yeah, I love the 7/1. I just got a 7/1.
Michael: California people like 7/1. That’s just how we do.
AnnaMaria: Because you’re staying in the home probably not for a longer period than that.
Michael: Younger people and people with higher payments like 7/1s. Because they’re not saying and because the payment’s lower.
AnnaMaria: For the time being.
Michael: For the time being.
AnnaMaria: I mean, the ARMs…
Nima: For seven years.
AnnaMaria: …discussion is a very interesting one.
Michael: Well, look, it used to be a risky product. I mean, the GSEs don’t support it. So, I think for the right demographic, it makes a lot of sense. For someone who can’t afford the fully amortizing payment, it makes no sense. So, it depends. And also, we’ve been in a flat low rate environment for over seven years, so people that got 7/1s in 2009, floated down.
AnnaMaria: Right, no, you’re doing pretty well if you got…
Michael: Right. And look…look, maybe I’ll be…you’ll be looking at me in five years laughing and saying, “Ha ha, you’re stuck with that crappy 7/1.”
AnnaMaria: Well, one of the things that I found…
Michael: But then, as you know in mortgage, you can always refi. That’s the…
AnnaMaria: Well, sure. I mean, one of the things I found really interesting as we’re talking about the low rate environment is, after the election, when there was the spike in rates. Pretty quickly after that…
Michael: Well, that was a big deal.
AnnaMaria: …as applications started to dry up, hearing from at least the big banks that they were already having those sharpening, let’s say, those discussions, to have with would-be borrowers about consider the ARM. And yes, there’s ways to sort of work your way around that, but it’s still risky, right? I mean, you could say you’re gonna stay in the home for seven years, I’ll get a 7/1 or 10/1, but nobody really knows what the market’s gonna be like. So, ARMs are still a pretty small part of the market, but it’ll be interesting to see where that goes once rates really do start to pick up.
Regis: You know, I think it’s interesting too as we provide these tools where clients can really get insight into what their options are and compare and contrast. You know, we offer term options from 8 to 30 years and different pricing options within that.
Michael: Eight years.
Regis: So, there’s people who, you know, if they’re refinancing…
Michael: There’s all kinds of…the world takes all types, I guess.
Regis: That’s right. If someone’s refinancing and they don’t wanna go back to a 30-year, and they’ve been in a house 6 years, then get a 24-year mortgage, right? And…
AnnaMaria: So, you customize basically?
Regis: They can customize it themselves in Rocket Mortgage. And I think the point of that is that there are tools now that people are only starting to become aware of like this, where they can really see what their options are. I talk to people all the time who are still in interest rates that they shouldn’t be in regardless. They could get a fixed-rate mortgage a lot less than the interest rate they’re in. The perception is, it’s painful, it’s confusing, it’s complicated, it’s scary. I don’t want that pain in my life, so I’m just not gonna do it. When really, they could be making a better financial decision using the tools that are available now.
AnnaMaria: So, the low rate environment has obviously been very favorable for mortgage lenders, but especially so for non-banks. Refis tend to account for a greater share of the mortgage volume coming out of the non-banks. And so, how are you guys preparing for whenever it is that we reach the point where we’re not, you know, at near record low rates? I mean, everybody keeps saying it’s coming. I mean, who knows when that will be, right? But you must have some groundwork.
Regis: Yeah. I have two words for that, Rocket Mortgage. So, two-thirds of…
AnnaMaria: So promotional.
Regis: No, but seriously, two-thirds of people who open accounts in Rocket are buying a home. They’re not refinancing. You know, and half of those are Millennials. So, we’re seeing people come into market to buy homes that weren’t before. And I think that’s one signal. The other, you know, and we see the movement. Last year when Brexit, the announcement and vote happened, rates ditched. Huge influx of people coming to Rocket to refi. When rates have ticked up at the end of last year and early this year, we see the move to cash out. So we see those consumer behaviors playing out in real time as the market shifts.
AnnaMaria: So, one of the other areas that has been a point of friction between the non-banks and the banks has been just related to scraping, right? So, obviously a lot of what’s going on…
Michael: It’s a hot topic.
AnnaMaria: Hot topic, right? A lot of what’s going on…
Michael: That’s his area more.
AnnaMaria: I think that’s all of your areas to a certain extent.
Michael: Yeah, sure.
AnnaMaria: Not to point the finger at anyone. But I mean, in order to get this data so quickly, that is part of what’s involved, right? And so, the banks aren’t pleased with a number of different companies just being able to go in and grab that data. There’s been a lot of sort of back-and-forth on that.
Michael: But like Nima said, it’s consumer data, right?
AnnaMaria: It’s consumer data that rests with the banks and maybe it’s just the banks are pissed off and they’re trying to find different ways to kinda stick it to the non-banks. But it is something that they’ve been making noise about and to the regulators as well. So, let’s talk about that, Regis.
Regis: Sure. So, I think the narrative in the media actually is a little bit off. And what I’ve seen and in my interactions and working in the industry is, the banks aren’t being bad actors, they’re custodians of their clients’ data and so they’re trying to figure out the right ways to do this. I think the bottom line is that they want the ability to import their clients’ accounts from other financial institutions too. You know, because then they have a better picture of a client’s full financial life and can make better decisions. So, I think what it really comes down to is FIs, data aggregators…
AnnaMaria: Like a bit skeptical.
Michael: They really have more to…I’m not sure, right? I mean, if you’re the primary checking account of your customer, one, you’d have to ask, are they already using the data, which they should be, and I think we know the answer is typically not, but some are. Some of the banks will…you make in-funnel credit card offers or they’ll be able to underwrite. But one of the things that SoFi is…the premise of SoFi has been that, if you’re a customer of bank A, I won’t pick on one, and you’re a checking account customer, you go to apply for mortgage at bank A, you’re starting by writing your name down, again. Right? You’re writing your social again. You’re writing your address. So, they’re not necessarily talking to each other, so I feel that they maybe have more to lose by allowing access to the data. I agree, I don’t think it’s as contentious as maybe the media makes it, but at the same time, I would imagine if I was running a bank, I would not be indifferent about the idea of other financial companies coming and grabbing that. I would prefer they didn’t.
Regis: Well, I think as an industry, we have an opportunity to really rally around this. The FIs, the data aggregators, the FinTech companies, the mortgage lenders, and create a standard by which you connect things to your bank account.
AnnaMaria: And are you guys are working on that? What are you doing?
Regis: We are, because I think that there’s a lot that can be done there that if the industry comes together and does that in a really solid way, it just makes it better for every American.
AnnaMaria: So, tell us, what are you doing to try to create that standard and who is involved and…
AnnaMaria: …is this a Quicken only…it doesn’t sound like it’s a Quicken only thing?
Regis: No, there’s a lot of folks in the industry right now getting together with a similar idea of…if you think about even just like something completely different. You think about wireless connectivity, you see the Bluetooth icon, you know that, oh, I can connect my wireless headset or whatever, my watch to this device. We need a standard like that for connecting different applications to a bank account. And so, that’s really where the focus is starting to go.
AnnaMaria: And are the non-banks working with the banks to do that or…?
Michael: We’re working with vendor. I mean, there’s technology vendors that kind of sit in between typically.
AnnaMaria: But are the banks involved those initiatives, that conversation?
Michael: Yeah. Those technology vendors have agreements with the different banks. But I mean, one thing we’re doing that is an…that anyone who’s self-employed in the audience…self-employed is always nasty, right? It’s much more difficult to underwrite someone who’s self-employed. Nima mentioned the difficulties of getting IRS information, particularly around tax season. Also for those who are students, their tax returns, they’re actually not that easy to understand, and they don’t always tie to cash, which is just a peril of accounting. So, the reality is for people who are self-employed rather than paging through reams of tax returns electronically, and then verifying them with the IRS, that the returns you receive were actually the ones that were filed, which is a form of fraud, probably the most common mortgage fraud is with self-employed because it’s kind of hard to fake a property. You know, that’s the…income fraud is the most common fraud. And so the point is, we’re trying to use bank account cash flow to underwrite self-employed borrowers without asking for tax returns rather than try to get a static view of the business, we would say, “Let’s just look at the activity in the primary checking for the past year of this consultant, this 1099 worker, this Uber driver who also consults on the side and does legal… Whatever they do, let’s just look at the cash and can we underwrite there?”
The problem is, as we all know, mortgages, there’s an ability to repay standard, which has also been mentioned. Like, that’s the big thing with mortgages, that you can’t just do whatever you want because there’s a set of rules that non-banks, as you mentioned, are more subject to, right? We don’t have the preemption over certain regulations, and as a result, we have to follow certain things, you know, ability to repay standards all the time. And so, we can’t just say, “Well, we think the income is this and we think this person is gonna pay it back. We could…that loan could come back to us and the customer could sue us.”
Regis: Well, I think the key consumer insight in that too is that, what we see is, when we talk to our clients about the experience, they appreciate that they can import that data and be able to get decisions made on and they’re not chasing bank statements and other things later on and trying to, you know, send us documents and things. The group that says, “Thank you. We don’t wanna have to go find that stuff anymore,” is bigger than the group who says, “I’m not comfortable doing that,” and it keeps getting bigger every month we’re in market.
AnnaMaria: And is that because the group that likes the place where this market is headed is just comprised of younger people? Have you seen an age difference there, and is it those coming into the market as like first-time home buyers that are much more into this and more comfortable with the, you know, digitization of mortgages or is it something else?
Regis: You know, I think it’s something else because we’ve seen adoption across the age range and across demographics. It’s really… I think everybody expects that they can pull out their phone and amazing things can happen with the push of a button, you know, whether it’s getting a car or getting an Airbnb or whatever it may be.
AnnaMaria: Instant gratification.
Regis: That’s the expectation. And so, the mortgage industry has to live up to that expectation too and the experiences we deliver have to be that easy. And so, the way you do that is to build experiences on top of data and other things to make it easier for the client. I mean, the key insight we see all the time is that, people are actually fairly comfortable sharing their data. What they’re hung up on is they don’t want to share their username and password, because they’ve been told their whole life not to.
AnnaMaria: So, how do you…how does one get around that concern?
Regis: So, really it becomes a thing where people are willing to do that if there’s a benefit to them. And so they know, “Hey, it’s 10:00 at night and I’m on my phone and I wanna see what my mortgage options are because there’s something happening in my life and I really need to refi.”
Michael: It’s 10:00 at night, do you know where your mortgage is?
Regis: You know, if they wanna answer that type of question, they’re more comfortable doing it.
Nima: Yeah. I mean, and also there is a trust with the financial institutions that some people will have and say, “Look, I know you’re using it because you’re gonna give me a lot of money if I’m able to give this to you.” And so, I think that there’s a belief that their friend got funded by whether it’s Rocket or it’s SoFi, whoever it is, and, “Hey, if I do these steps, maybe I’ll get that money.”
AnnaMaria: So, but taking the other side of this whole thing, obviously, given everything that’s been going on in recent years with data breaches and just the sort of the system is not as sound, right, as everybody would want it to be in terms of, you could give your username/password to your mortgage lender, but what happens if that mortgage lender’s data system, right, gets breached and that information becomes compromised? So, as a consumer, you’re thinking about, “Well, not only am I hoping that nothing goes wrong with my bank system, right, where my information is, but I’m now choosing to give it to a mortgage lender, non-bank lender, right, and is that gonna be okay.” So, there’s some of those questions about peace of mind and not only peace of mind, but in reality, like you’re now increasing your chances just by giving your data to another firm that something could go wrong with it.
Nima: Well, I’d say information security is a technology problem. You’re gonna be giving that data because they need to calculate ability to repay. You have to give that data to get the mortgage. And so, you know, I would say, one, you know, solving the security is something that is relatively important and all the good companies in this space spend a lot of time and money building that as a core part of their business. And two, for the consumers who don’t want to, he said a lot want to. You know, we have 70+ %, in some cases, 80% of consumers opting in to do that. There are still the 20% who say, “You know what? I don’t trust doing that.” And then the third thing I would say is, as the infrastructure gets better, it’s moving away quickly from username/password. I would say you could expect passwords to be gone in 10 years.
AnnaMaria: And then how would that work? So, if the loan applicant isn’t giving you that information, how do you get in? How do you see that…?
Nima: Well, the password as a concept is gonna be extinct.
AnnaMaria: And why do you…like, what’s the basis for that? Why do you say that?
Nima: Because there…I mean, there are better forms of authentication that are harder to breach like two-factor auth with biometric authentication and those kinds of things where you’re not necessarily relying on a password at all. And those kinds of things are becoming more prevalent. And in some cases, I think are probably, as modern systems are being built or the way that people are building modern FinTech companies in the crowd here. A lot of the FinTechs here aren’t having passwords as part of their applications.
AnnaMaria: Is that something that Blend is involved in at all, in terms of the removal of the passwords being a necessity?
Nima: We are a huge proponent and moving quickly in that direction, going towards things like biometrics when possible, when it’s not possible, moving to other forms of authentication that are even stronger I think in some cases.
AnnaMaria: So, are there any mortgage lenders now that are doing this? That are using biometrics as opposed to passwords?
Nima: I mean, there are some.
Michael: Mortgage isn’t gonna lead with that.
Nima: Mortgage, I mean, I would say the banks themselves are moving… You can see in some of your banking apps you can…
Michael: Yeah, Chase has…
Nima: …you can already authenticate with your fingerprint instead of a password as an example. And that’s not even the most secure. I think that there are other more secure things over time that will come out. But I would say, I think at a high level, you know, the things that we see now is that it’s really high… it’s about $8,800 to process one loan.
AnnaMaria: Eighty-eight hundred?
Nima: Eight thousand eight hundred dollars, of which, you know, 5000 plus are human processing costs. I mean, essentially, it’s manual…
Michael: Think about that, right? I mean, average mortgage is 250,000. It’s pretty big cost.
Nima: Hundreds of hours.
AnnaMaria: So, as technology begins to eliminate, right, that’s the goal, right, to eliminate some of those costs, the time-consuming aspect of getting a mortgage, doesn’t that also raise questions about employment?
Nima: I would say, I mean, definitely I think…
AnnaMaria: Loss of jobs in the sector?
Nima: I think a lot of the jobs in the sector will be more around the counseling of the customer and making sure they know what they’re getting into and helping them with the loan options, helping them with the process of, you know, working with their realtor to do the things the right way and less about copying information from this system into information, and from this system…or information off of this piece of paper into information at this system. And I think it’s two ways, right? It both hurts…it’s both complex and expensive, but it’s also opaque. Opaque to the consumer, opaque to the lender, opaque to the investor. And so as costs come down and transparency goes up, I think that there’s an incredible number of people who are affected by the cost, right? It’s not just the lender, a lot of those costs are, you know…
AnnaMaria: They get passed on to the borrower.
Nima: You can’t be making unprofitable products. If you make unprofitable products for too long, you know, you can be a loss leader, but at some point, you’re just gonna lose.
Michael: Mortgage is a very competitive industry. So, cost…
AnnaMaria: That’s the understatement.
AnnaMaria: I mean, it’s a competitive industry, right? I mean, especially when you have Fannie Mae and Freddie Mac and the GSE, you know, and Ginnie Mae buying…they’re very equalizing. They buy everybody’s mortgages at the same price, just dependent on what rate they’re charging. So it’s up to the lender to figure out what rate they wanna charge, and as soon as a lender can lower their rate because their costs are lower and gain market share, they will. So you should assume that these kinds of savings are gonna be passed on to the consumer very quickly in mortgage.
Regis: And I would say…
Nima: That, plus the transparency to the consumer around the process and having it be easier and having lower friction for the consumer means more people will at least try to apply. Now, they might not get approved, but at least having people who are aware. I was probably eligible for a mortgage five years ago, six years ago based on, you know, basic understanding now of the space. Pre-Blend, I didn’t have that and I just didn’t do it. Why? Because the first lender I talked to asked me to fax them things. And I said, “You know what? I just don’t really wanna do this.”
AnnaMaria: You just found that too time-consuming, too much of your time.
Nima: I had no idea what was coming. They said it was gonna be a lengthy process, an expensive process, and I just said, “You know what? I’ll just rent.” I lived in San Francisco. Now, of course, San Francisco rents were high and the house prices have gone up 50% so I look like an idiot, but that’s because it was a really opaque process to me. And so, as people get more comfortable with the idea of this process, because it’s better and it’s more transparent and lower friction, at least more people will apply and try to get it. And I think that will be good because…
AnnaMaria: You think that’s a certainty pretty much, because that’s one of the things that, you know, I’ve been thinking about which is that, okay, so things are becoming easier on the tech side. Does that mean that we’d see people trying to refi, let’s say more often than they are, you know, the serial refinancers? Or does that mean that people like in your example, who are sitting on the sidelines, “It’s too much work, I don’t know, I’ll just stay as a renter for now,” might take that leap? And if so, what evidence do we have for that?
Regis: Yeah, I think we’re definitely seeing it today with our client base. What’s happening is, people now have tools to make good decisions, and so they can choose to make changes to their mortgage or choose to buy a home when maybe they wouldn’t have before. So, in Nima’s example, you know, he stops…
Nima: I would have been a great Rocket Mortgage customer.
Regis: You would have.
Nima: Or Blend customer.
Regis: He stops because of needing to fax, right? So, as people understand what the tools are that are available out there to them, they’ll make better decisions, different decisions, and I think we’ll have a more financially educated, financially savvy consumer in America when it comes to mortgages.
Nima: And a broader variety of products because you’re gonna have more data around customers. You’re gonna have eight and a half year products probably at some point, 8.25-year products. And so, you know, you’ll have that product flexibility as a consumer, which is important because everyone’s situation is slightly different. You’ll have, I think, you know, better risk understanding of the GSEs, the Fannie and Freddie, being able to look at this file and really understand it. And I think the cost going lower for the consumer as well as the transparency, yeah, it’s a certainty.
AnnaMaria: And on that note, we are wrapping up.
Michael: Thank you.
AnnaMaria: We could talk about mortgages forever. Somehow, 40 minutes have already gone by and I look forward to having this conversation a couple years from now again. And hopefully, we’ll be way more advanced than where we’re at now. So, guys, thank you.
Regis: Thank you.
AnnaMaria: Thanks, everyone, for joining us.
Michael: Thank you.
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