TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/883125
32 | TH E M R EP O RT FEATURE Consumers value the variety of different products and the conve- nience bigger banks offer, which is a major reason why they tend to remain at a given institution. Millennials Go Mobile W hile millennials are less loyal to their primary banks than other consumers, according to FICO, they are also significantly more likely to transact with their bank through mobile applications than other age groups. Customers who are frequent users of their bank's mo - bile applications are more satisfied with their bank and will recom- mend that bank to others—espe- cially younger consumers who prefer the largest banks because they think their technology is better, according to Jim Miller of information services company J.D. Power. Customers under the age of 40 give the bigger banks higher satisfaction marks for things like mobile banking. Therefore, strong customer satisfaction with a bank's mobile application is likely to be another competitive advan - tage in the digital mortgage race. Getting Their Fair Share T he increasing digitization of the mortgage process has the potential to significantly improve lender efficiency, reducing the time and cost required for processing some types of applications, as well as speeding up loan funding and delivery to the securitization mar - ket. Currently, it costs $42 billion per year to process mortgages, accord- ing to global information services provider Experian plc. Recently, the company partnered with data aggregator Finicity in a data-sharing agreement to automate the income and asset verification process of a mortgage application, which could reduce costs for lenders by up to 20 percent and loan approval times to as little as 10 days, according to Experian. For consumers, the data- sharing arrangement also eases the burdens of completing paperwork. This setup improves automation within a lender's credit approval process by connecting with its financial service providers, which could directly benefit millennials, who want a mortgage application process that feels more straightfor- ward and is easier. According to Experian and Finicity, the data-sharing partner- ship could also improve credit availability to communities that remain underserved because of an inability to prove income or assets to lenders. "While these consum- ers may have a limited credit history, most consumers have a checking and savings account, as well as other payment obligations such as rent, utility, and phone bills, which can demonstrate they are capable of repaying a loan." Once online mortgage lending becomes a significant portion of overall originations, lenders will need to focus on underserved communities, including low- to moderate-income consumers. Millennials' socially conscious mindset may be crucial to a lend- er's innovation strategy, according to consultancy firm SpencerHall. This cohort may seek lenders that act ethically and have demonstrat- ed fair lending practices. Obstacles and Opportunities W hile the digital mortgage has gained considerable traction with mortgage lenders and consumers, the lack of readi- ness by key industry participants (e.g., banks that provide financing to lenders; document providers; custodians; title/settlement agents, etc.) and policy alignment by the government sponsored enterprises (GSEs) represent potential road - blocks to the full adoption of an end-to-end digital mortgage, ac- cording to a joint survey by Fan- nie Mae and Freddie Mac. Given the growing importance of this issue to market participants, the GSEs expect to publish a follow- on report in the coming months to identify ways to address bar - riers and provide a plan for GSE strategy and policy alignment. Additional challenges to successfully implementing digital mortgages include fraud-risk, cyber-risks, and regulatory compliance concerns regarding the extent to which digital automation can replace human underwriting effectively. Violations of representations and warranties and "safe harbor" issues could also be amplified with automation due to the possibility of increased error rates, which means a lender may have to repurchase a loan previously sold to investors, negatively impacting its profitability. Unlike banks, fintech firms, along with mortgage lenders and other NBFIs, are not directly overseen by a federal regulatory agency. However, they may be subject to certain federal regulations that fall under the supervisory authority of the Consumer Financial Protection Bureau (CFPB), Federal Trade Commission, Department of Justice, and state regulators that enforce consumer protection laws. Regulators can take enforcement actions against companies that they believe have engaged in unfair, deceptive, or abusive acts or practices on the part of consumers, as evidenced by CFPB actions in recent years against banks and NBFIs engaged in mortgage activities. Fitch believes larger banks and financial companies with greater compliance resources and existing large IT teams should be in a better position to build an appropriate compliance framework to ensure adherence with governing laws and regulations, address quality control issues, and take corrective actions as required. Fitch believes continued progress toward full digitization of the mortgage application process has the potential to drive significant efficiencies, benefiting both mortgage companies and the end-consumer. Potential margin compression resulting from the initial start-up or infrastructure investment could be vastly outweighed by future scale benefits. Mortgage originators that do not adjust to the changing technological and consumer landscape could risk losing market share and scale, which in turn could impact future profitability, thus negatively impacting ratings, in Fitch's view. JOHANN JUAN is Director of Financial Institutions at Fitch Ratings where he serves as the primary analyst for Fitch-rated mortgage companies and other non-bank financial institutions across various sectors in North America including, captive finance companies, aircraft leasing companies, commercial fleet leasing companies, commercial finance companies, business development companies. "Strong customer satisfaction with a bank's mobile application is likely to be another competitive advantage in the digital mortgage race."