Innovations that reduce costs, boost borrower satisfaction drawing attention
In early 2020 the COVID-19 pandemic struck, and the subsequent lockdowns helped accelerate mortgage industry digitization and streamlining that continue today. Different factors currently in play, however, stand to accelerate the trend.
Venture capitalists are cautious about spending their money after this year’s public market rejection of tech stocks, which limits their exit strategy options for start-ups. Their newer investments are keyed toward start-ups that can bring quicker returns, such as those that boost efficiencies and can demonstrably reduce costs. Those factors are increasingly important in the face of rapidly rising interest rates, inflation and layoffs, which are forcing banks and lenders to scramble for ways to save money and boost sinking margins. Start-ups that can address those needs are gaining attention as a result.
The industry “is reducing staff … you’re seeing that across the board because they’re trying to salvage margin. In doing that, they’re also trying to maintain higher customer levels,” said Lisa Springer (pictured top), a senior partner and CEO of STRATMOR Group, a mortgage industry advisory and consulting firm.
Beyond, that however, lenders have specific technology priorities in the current climate, according to Seth Appleton, president of Mortgage Bankers America subsidiary MISMO (Mortgage Industry Standards Maintenance Organization) which serves as a standards development body for the real estate finance industry.
“Lenders are looking for technologies that reduce costs, improve their cycle time, increase their productivity, and improve borrower satisfaction and experience,” he said.
Mixed venture capital picture
Venture capital data from mortgage fintech investments indicates a potentially mixed picture of tech investment priorities on the start-up side.
VC investment levels reached $5 billion in 2021 covering 129 deals. That number hit approximately $1.4 billion as of May 13, 2022, and 43 deals, indicating a potentially significant slowing of VC investment rates, according to data compiled by PitchBook. Tech venture investment in general started declining in 2022 after the public markets began to reject new technology companies by driving down their stock prices or forcing them to abandon strategies to go public at all.
Based on investments so far in 2022, venture capitalists appear to be shifting their priorities more toward back-office business operations.
As of mid-May 2022, venture investors committed nearly $59 million to mortgage fintech companies focused on business products and services, up from $8.8 million in all of 2021, the PitchBook data indicated. Consumer products and services fintech investments, on the other hand, hit just $2.6 million through mid-May, compared to more than $208 million in 2021.
Financial services fintech investment surpassed $178.6 million as of mid-May, but that compares to nearly $780 million in 2021, PitchBook said.
Information technology fintech spending still eats up the bulk of VC commitments but appears to be trending lower. It surpassed $1.1 billion in the first five months of 2022, but it was just under $4 billion in 2021.
Technology investments by mortgage lenders and bankers also appear to be targeting back office/business processes. Spending has increased through the first half of this year, for example, on e-signatures for closing disclosures, and online notarization technology. More companies are also investing in data production, Appleton said, citing MBA survey data.
The rising interest rate environment has led to “an interesting time” for the industry, Appleton said. with the resulting slowdown creating greater pressures to save money and streamline. Now, it is increasingly all about operations efficiency.
While rising interest rates have slowed the volume of mortgage refinancing, there’s still a strong purchase market, Appleton said. That means that operational efficiency matters in terms of boosting revenue to make up the difference.
Additionally, he said, lenders in the pandemic environment who made technology investments and adopted new processes and procedures to better handle what was an escalating refinance volume are well positioned for what’s to come. Technology is still front and center, he said, with the industry now exploring how to leverage it to boost operations efficiency in other areas.
“Those conversations are definitely ongoing within the executive ranks of many mortgage companies right now,” he said.
According to Appleton, mortgage closing technology will see a big jump in demand in light of this trend.
“Closing technology and how to bring more efficiency and speed to that part of the loan lifecycle has been a big focus of a lot of companies these days,” Appleton said.
Spending has also focused on back-end processing that boost customer experiences, he said. In addition, mortgage processes in the middle are getting a second look.
“More and more lenders are trying to figure out this stuff in the middle, the processing, the underwriting – all the way through” post-closing servicing of the loan, he said. “These are areas that haven’t gotten attention from the technology perspective in the past. Because of the environment we’ve now entered into [they] are getting a lot of focus as things change.”
Servicing technology is another area that will generate more investment, Appleton said, because it is a way to buffer against declining originations.
“If you use technology and do it really well … if you maintain connectivity with that consumer [and he or she] has a good experience, these are potential refinance opportunities in a different rate environment,” Appleton explained.
Less point of sale, more servicing
Technology that helps mortgage companies acquire customers has drawn lots of investor attention this year and the market may be maxed out for now, according to Nate Levin (pictured immediately below), managing director of Parker89, the venture capital arm of First American Financial.
“Point-of-sale, lead generation and other technologies that sit at the top of the customer acquisition funnel have been the lowest hanging fruit for innovation,” Levin said. “As a result, the space has largely been saturated by a number of early movers.”
Because of this, Levin said, he hasn’t seen many new proptech or mortgage technology start-ups focusing their activities in this area.
A more likely area of focus in the months ahead will be mortgage servicing – the end of the value chain.
“It’s probably the most challenging component of the mortgage value chain, and we’ve yet to see a new venture backed [by] technology in this space gain significant traction,” Levin said. “That could be one area of future investment.”
Loss mitigation or interim servicing may be other areas that attract new investment, though it has been “a slow-moving space” in terms of innovation and drawing new products and technology. The current market could change things, he said.
“Similar to back-end infrastructure, investors are starting to get smarter about the servicing space, and founders are starting to get smarter as well, so I think you’ll see more investment there going forward,” Levin added.
Automation and other alternatives
Springer argued that automation will be an important tech tool for lenders to remain competitive as their margins shrink.
“They have to create better automation to continue to gain market share and be more competitive,” she said.
Ben Madick (pictured immediately below), founder and CEO of digital insurance agency Matic, agreed. His company relies on mortgage lenders and servicers for its primary distribution channel. (Nationwide Insurance is an investor).
The main area of investment is going into creating automation and cost reduction for lenders and servicers, Madick said.
With interest rates rising and moving season in the second half of the year, he added, the pressure will worsen to find those savings.
“There will be even more desire to try to find ways for lenders and mortgage companies to create profit and squeeze on cost is where they are going to look to make that happen,” he said.
Some of those savings will happen beyond automating lending and servicing functions.
Madick argued that start-ups such as his can help make a difference. Launched in 2017, Matic employs 275 employees and has raised $33 million in venture capital to date. As a digital home and auto insurance market, it has embedded in platforms and systems with mortgage lenders, banks and other fintech companies.
“What we do for lenders or mortgage companies is we help their customers close loans faster, and that creates cost savings for them, and also pays revenue to mortgage companies as well,” Madick said. “That helps them when they’re trying to be profitable.”
More companies like his offer options for mortgage companies to survive the downturn, he said.
“It’s the perfect time for lenders to think about new ways to create revenue or cost savings,” he said. “We do both of those and we’re learning into it in this environment. We’re stepping up our sales and marketing efforts and we know that this is the cycle … when the lenders are looking for more help and support to drive their business forward.”
Use what you have
Whether or not lenders rely on start-up partnerships or internal investments to digitize and boost efficiency, they have plenty of work to do before they succeed, Springer noted.
Citing STRATMOR’s annual peer group study, she said that the cost to produce a loan is back over $9,000 per loan, with only 5% of that total production coast going toward actual technology investments. That means lenders aren’t optimizing the profits they made in 2020 and 2021 toward boosting efficiency, Springer said.
Lenders that invested before the pandemic in tech modernization are competing better now, she said, as they face lower profits and tighter margins. But those tighter margins will still hurt.
Lenders need to continue to invest in automated technology that’s focused on getting more purchase business and increasing back-office efficiencies.
“It is not the investment in new tech that is holding lenders back—it’s the adoption of the new technology,” she said. “Where they should invest is really getting their originators and their back-office staff to use the technology tools that they did purchase over the last couple of years. We’ve found that that’s been the biggest problem – that the tools are sitting on the shelf, so they’re not seeing those efficiency gains.”
Appleton agreed. He predicts inflation and rising interest rates will accelerate industry-wide technology adoption.
“Lenders are putting their foot on the gas when it comes to innovation and technology,” Appleton said. “A lot of folks in the ecosystem are looking at that investment as a way to bring more efficiency, accuracy and speed to the loan lifecycle.”