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   ARTICLE   |   From Scotsman Guide Residential Edition   |   January 2017

The Landscape Is About to Change

Faced with an uncertain future, mortgage originators must remain focused but flexible

The Landscape Is About to Change

Jeff Bezos, CEO of Amazon, while speaking at the 2016 Code Conference this past May, said you should be “stubborn on the vision and flexible on the details.” By this, he meant that having a clear and unwavering vision of your goals while also being nimble and flexible in pursuing that vision is the right recipe for companies looking to innovate. Bezos’ entire talk is worth listening to but this sentiment in particular could be prescient for the future of the mortgage industry.

Many originators who got their start in the 1980s remember those years as the Wild West days of residential lending. Almost anybody in those days could become an originator and make a good living — knowledgeable or not. Today is very different. Between regulation and technology, originators are expected to know it all. As for tomorrow — who knows? Signs point to another tectonic shift coming soon.

Before diving into the state of the mortgage business today and current developments that will impact originators directly, let’s step back and take in a few facts and trends.

  • Fact: Nonbanks now originate more than 50 percent of the mortgages in the United States.
  • Fact: Large retail mortgage banks are consolidating at a rapid clip, developing massive economies of scale.
  • Trend: Large private-equity companies have entered the mortgage business. Blackstone bought Stearns Lending and also sponsors Finance of America as a roll-up vehicle, for example, and PIMCO bought First Guaranty Mortgage Corp.
  • Trend: Online tools to prequalify and prepopulate loan applications are being developed and rolled out.
  • Trend: Big data is slowly entering the mortgage business in the form of machine learning — to improve market segmentation/targeting and credit decisionmaking. It also is playing a key role in the advance of artificial intelligence — to further develop decisionmaking algorithms that are beyond the scope of individuals to identify.

There are more, but these are enough to start to see a pattern, viewed from 10,000 feet, of where the industry is headed.

Likely scenario

It is a cliché nowadays to reference what computer giant Apple did to the music industry, what e-commerce innovator Amazon did to the book- selling industry, how the internet vaporized the travel industry, or how the computer’s encroachment altered the selling of insurance. But — and this is a serious but — mortgage brokers cannot ignore these trends, even if they are deemed cliché.

Being on the front lines of the industry, mortgage originators take most of the risk and are the first to suffer when markets take a downward turn. Originators compete on service, consumer advocacy and ethics, the same triad of benefits that independent insurance and travel agents touted as competitive advantages. As with those industries, these advantages are at risk of being usurped by automation and big money entering the mortgage business.

From the trends happening within the mortgage industry, here is a likely scenario for what will happen: First, large, independent retail-mortgage banks will get larger over time. Think of Quicken, Freedom Mortgage, Stearns Lending, Guaranteed Rate and others.

These mortgage banks will require very deep pockets to achieve larger market share and integrated services to maintain national presences — particularly if rates start to climb to natural historical levels. The capital for this will come from private equity, such as Blackstone and PIMCO.

These private-equity companies are not going to be in the mortgage business simply for the sake of mortgages, however. They see how the large banks have been penalized since the 2008 downturn and have zero appetite to take on the same kind of regulatory and contingency risk.

Large retail-mortgage banks, therefore, will become asset and fee accumulators for their private-equity overlords. The mortgage will be the Trojan Horse used to get people in the door to cross-sell them more profitable non-mortgage products.

Being on the front lines of the industry, mortgage originators take most of the risk and are the first to suffer when markets take a downward turn.

Don’t confuse this type of cross-selling with the practices used by Wells Fargo, which got them into trouble last year. The future of cross selling additional products will be based on sophisticated analyses of individuals’ financial data, age, demographics, outstanding debt, etc.

Take the company loanDepot, for example. They call themselves loanDepot and not mortgageDepot for a reason. They now offer unsecured consumer loans and closed-end seconds. It is not a stretch for a large company to add one or more financial services from a menu of products, including credit cards, student loans, auto loans and small-business loans.

Once a borrower has applied for a mortgage and given permission for a mortgage lender to maintain a financial file, it is not a large leap to imagine machine learning and artificial intelligence being applied to maximize a borrower’s customer experience and to sell that individual additional products. This is no different than Amazon recommendations — people who bought X also enjoyed Y — except instead of books, the suggestions will be financial services.

Avoiding redundancy

All of this cross-selling can lead to borrowers being in a perpetual state of pre-approval for financial products. If scale and technology and customer experience can combine to always having pre-approved financial products in front of consumers, the originator’s process of prequalifying borrowers becomes redundant.

Originators might argue that the wholesalers they work with will compete against these large retail shops for customers and provide originators with the same tools and products to keep them competitive. This may be a false hope, however, because in the originator/wholesaler relationship, there will be a battle for who owns the customer relationship.

Right now, wholesalers respect the role of originators, but in the future, when cross-selling becomes the norm, will wholesalers claim ownership of these clients? The economics of lending products enabled by financial technology may not allow for wholesalers and originators to both get paid.

So, what are you to do as an originator facing an uncertain future? First, you must immerse yourself in the trends and transactions taking place in the marketplace. Do not rely on your wholesaler to have your back. Nobody is watching your back. Originators will likely be the first casualty when a wholesaler can’t compete.

Second, as venture capitalist Peter Thiel is known for suggesting: Think about what you know will be true in your business in the future — even if nobody else believes it. Only you can provide this insight. Maybe you believe most borrowers will always want a human they can reach out to for assistance and clarification. This may well be one of the competitive advantages of retail shops as they become multiple- product companies that sell both mortgage and non-mortgage products across the lending product spectrum. You must, therefore, figure out the best way to stay in front of your borrowers.

Third, remember, in the short term, technology is path-dependent, typically making incremental changes to how things work, but in the long-term it is not path-dependent. Thus, once it seems inevitable that a technology is here to stay other unforeseen services and technologies will be built upon it. Smart phones and Dick Tracy watches, for example, could not have been imagined without the internet and cellular service paving the way.

There are enough unknowns in the industry right now that it would be foolhardy to ignore the technologies being developed that you can leverage to build services and relationships with borrowers and increase your business, while at the same time, keeping in mind what you believe will be true in the future. At a minimum, you should constantly scan the environment for competitive threats and opportunities.

•  •  •

The future laid out here may seem provocative and frightening. Even if all of these trends and predictions come to pass, however, there is still hope that the originator’s role in the mortgage industry of the future can be a pastoral utopia instead of a disruptive dystopia. The outcome will be based on how originators start responding now. Just remember, whatever your vision is, remain stubbornly devoted to that vision while being flexible on how to get there.


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