By Aaron Nawrocki, Capital M Lending
What’s new in the mortgage business in 2018? More of the upward cycle in homebuying and competition for mortgage borrowers like we haven’t seen since 2006. After 10 years of fragmentation, big players are entering the mortgage space. Zillow is rolling out a mortgage provider to go with its real estate arm. Additionally, there are likely rumors that Amazon is working to build its own mortgage platform. Questions abound about what disruption Amazon and Zillow mortgage products may bring.
Historically, mortgages have been among the most regulated financial products. The government acts as a mortgage purchaser (Fannie Mae and Freddie Mac) and as a mortgage insurer (FHA). Along with their support for the mortgage industry comes a very specific set of rules for how mortgages can be originated -– we call this compliance– and an arcane set of rules that determine who gets a mortgage or not – called guidelines.
The “guideline” portion of the mortgage business – how loans are approved – could change with the arrival of these new players. Amazon and Zillow have both made a business of predicting consumer behavior by aggregating and analyzing data. It isn’t a big stretch to imagine them using that type of analysis to develop their own set of metrics for approving loans.
Compare how car loans are originated to how mortgage loans are underwritten and approved. Car loans are typically based on verbal information, heavily credit-based and approved in minutes. The value of the collateral (the car) is determined automatically based on a database of actual sales. The automated underwriting system amalgamates the credit, income and collateral data and analyzes it with an algorithm to determine if the loan will be approved. There is a wide spectrum of terms offered, based on risk. “good” loans get lower interest rates, “risky” but approved loans get higher interest rates.
Mortgage loan approvals are rule-driven – has the borrower been self-employed for two years, is the down payment borrowed, etc. There’s a loose correlation between meeting standardized underwriting criteria and loan performance, but at a micro level, loan decisions are not made based on how “good” a loan is. They’re made based on whether the right boxes are checked. While terms vary somewhat based on credit score, for the most part it’s a pass/fail system. It’s all very 1970.
With these new players entering the market, it’s possible that the next wave of change in the mortgage business will be to integrate big data and change the way mortgage loans are approved and priced. Amazon and Zillow mortgage products could mean quicker, easier loan approvals for the consumer. There would be a wider range of terms that more accurately reflects overall risk and makes mortgages available to riskier borrowers. It’s been just about long enough since 2009 for to see the business cycle open to change. The mortgage business has been among the most resistant to change – but five years ago, who thought you’d get into a stranger’s car instead of a taxi?
Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.
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Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.