Mortgage Analysis, Pt. 2

Part
01
of four
Part
01

Mortgage Aggregators: Notable Events

Four notable events that have taken place in the mortgage industry within the past 12 months that are specific to mortgage aggregators are the partnership between a mortgage aggregator and a fintech company, an increase on complaints about home loans, the launch of all-digital home loans, and a bill on best interest duty.

Mortgage Aggregator Partners with Fintech

  • Finsure, one of the largest mortgage aggregators in Australia, announced the integration of its brand-new Infynity CRM platform with the mortgage broker product of ActivePipe, a fintech company in Australia.
  • This is a notable event for the industry because the partnership addresses a critical challenge faced by mortgage brokers.
  • Paul Smith, head of mortgage channel at ActivePipe, hinted that "brokers struggle to stay in touch with people in their database who they’re not actively writing loans for. More specifically, leads that need time to decide and customers after their loan has settled."
  • In light of this, the partnership will see ActivePipe work in line with Finsure's highly-successful real estate communications platforms to create "meaningful and value-driven content and automated campaigns for every customer type and scenario" which will revolutionalize the Australian mortgage brokering industry.
  • Speaking on the partnership, Simon Bednar, the general manager at Finsure, said: "The partnership is part of our overall strategy to empower our network of mortgage brokers to work even more efficiently, enhance communication channels, leverage our data and better serve our customers."

An Increase on Complaints About Home Loans

  • The Australian Financial Complaints Authority (AFCA) reported that complaints about home loans rose by 20% within the last six months of 2019.
  • This is a notable event for the mortgage industry because it shows the level of disappointment felt by customers toward brokers in Australia.
  • Between this period, the financial services ombudsman received "2,201 complaints about home loans, averaging 367 per month", which Justin Untersteiner, chief operating officer at AFCA, referred to as a disappointing result.
  • The report by Broker News hinted that 49 complaints were about mortgage brokers, 38 complaints were about mortgage aggregators, and 135 complaints were about mortgage managers.
  • Speaking on the result, Untersteiner said: "There has been a dramatic increase in complaints about home loans. This increase has been driven by financial firms failing to respond to requests for assistance, the conversion of loans from interest-only to principal and interest and issues with responsible lending. Our hope by releasing this data is that we see improvements and the industry takes action to reduce the number of complaints that end up at AFCA."

The Launch of All-Digital Home Loans

  • 86 400 announced the launch of all-digital home loans through brokers.
  • This event is notable in the Australian mortgage industry because it is the first of its kind in the country.
  • The digital home loan allows "Aussies to get approved for a mortgage up to six times faster than the big four".
  • Melissa Christy, home loans lead at 86 400, hinted that the company is looking to be able to approve loans "six times faster than the average of the big four banks, so customers will know within 24 hours if they’ve been approved."
  • The home loans are available through mortgage brokers and are facilitated through 86 400’s platform.
  • 86 400 also partnered with "two mortgage aggregators, Vow Financial and Specialist Financial Group," to make it 2,800 mortgage brokers that offer 86 400's home loans in Australia.

Best Interests Duty Bill

  • In February 2020, a bill containing the best interests duty for mortgage brokers passed the third reading.
  • The bill implements "recommendations 4.7 and 4.2 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry by amending the National Consumer Credit Protection Act 2009 (Credit Act) and the National Consumer Credit Protection (Transitional and Consequential Provisions) Act 2009 (TCP Act)."
  • This is a notable event in the industry because the bill requires mortgage brokers to consider the best interests of consumers in the discharge of their duty; and also addresses the conflicted remuneration for mortgage brokers.
  • Speaking on the bill, Senator Richard Colbeck hinted that the bill will "ensure that consumers’ interests are prioritized when a mortgage broker provides credit assistance, as regulated by the National Consumer Credit Protection Act 2009." He added that the "period over which commissions can be clawed back from aggregators and mortgage brokers will be limited to two years, and passing on this cost to consumers will be prohibited."

Research Strategy

To identify notable events that have taken place in the mortgage industry in the past 12 months, specifically those involving mortgage aggregators in the U.S., your research team commenced with an extensive search through media outlets and publications related to the mortgage industry such as Mortgage News Daily, National Mortgage News, and others. We sort to find recent developments related to industry news, mergers & acquisitions, IPOs, funding, announcements, and others. However, no notable event was identified from the U.S. mortgage industry within the past 12 months. We expanded our scope to include events from around the globe. While there was limited availability of information specific to mortgage aggregators in the mortgage industry, we were able to find four events in the Australian market that can be considered to be notable.
Part
02
of four
Part
02

Mortgage Aggregators: Buying and Shopping Habits

Impulse buying is identified as one of the influencing factors that enable the U.S. consumer buying habits of users of mortgage aggregators, as they make up for high-income earners of $80,000 and above. Four other consumer habits include the usage of credit cards which has put Americans into more credit debts by up to $35.6 billion, online shopping where respondents prefer to buy online, spending on wants such as apparel & personal care, and necessary spending which captures areas where various generations spend the most. More details can be accessed in the findings.

Impulse Buying or Purchasing

  • According to a 2019 Bankrate report, roughly 4 in 10 users have made impulse purchases over the past month. Some 64% of cardholders have saved their card online or on mobile apps, and while another 56% have it saved on a service's or retailer website.
  • This habit automatically enables impulse buying or purchases by its consumers. About 48% of Millennials were the more likely generation to have contributed to this growing habit within the past month.
  • Some surveyed respondents in households with an income of $80,000 or more seem to purchase items impulsively by 47% within the month, compared to households with income of $40,000 to the same $80,000 by 40%.
  • A respondent Rossman claimed that impulse buying can be fun but has the potential to make a wreck on personal budgets.

Consumers Prefer Credit Card Usage

  • Consumers are making use of credit cards to buy or purchase items. This is as consumer credit card debts were expected to increase by $70 billion in 2019, according to Jill Gonzalez, a senior analyst at the personal finance platform WalletHub.
  • A Federal Reserve data states that an outstanding credit card debt of revolving around the trillion-dollar mark was recorded in September 2017.
  • Though these debts are unintentional and with good intentions, a higher percentage of holiday shoppers during 2016, incurred more debt than those who shopped in 2015 holidays.
  • Another study by WalletHub states that U.S. consumers added another $35.6 billion credit card debt in the second quarter of 2019.
  • Chief industry analyst at CompareCards, Matt Schulz, states that people feel good using their credit cards, as it boosts their confidence to spend. In other cases, people depend on credit cards to make ends meet or to even get by.

Online Shopping

Spending on Apparel and Personal Care

  • Millennials are observed to be the generation that allocates a higher percentage of their total income on apparel and personal care, as they apportion about 5.0% of their spending on these items.
  • Gen Xers spend roughly 4.4% on clothes, personal care products, and personal care services, and while the baby boomers would allocate some 4.0%.
  • On average, Millennials spent some $2,600 on apparel and personal care in 2018. Gen Xers, on the other hand, spent about $3,278 on the average towards their apparel and personal care products.

Spending on Necessities

  • Data by Census Bureau indicates that people under 35 years had a homeownership rate of 33.7% in 2018 when compared to the national average of nearly 67%. Millennials apportion more of their annual spending on housing than others.
  • Housing makes up for 22% of annual expenses for Millennials compared to roughly 19% for Gen Xers, and 17.6% for baby boomers.
  • Spending on food takes up about 13.4% for Millennials, while baby boomers allocate some 12.5%. Gen Xers' gross spending on food, on average, falls into about $10,000 annually.
  • Baby boomers spent the most on healthcare in 2018 allocating almost $6,025, which is nearly 9.5% of their total spending. Conversely, Millennials and Gen Xers spend on the average about $2,831 and $4,786 respectively on healthcare.



Part
03
of four
Part
03

Mortgage Aggregators: Over- and Under-Served Markets

Mortgage aggregators are more likely to over-serve younger market segments defined as "Millennials" and "Generation X" than older market segments defined as "Boomers". Younger consumers make up a larger portion of the market segment that are looking to buy a house and they are more likely to use new financial technology. Older consumers are less likely to be purchasing a house and are less likely to use new financial technology.

Overview

  • Another study found similar results and reported that three in four consumers like to shop around before purchasing a house. This study named two mortgage aggregators (Bankrate and LendingTree) as two of its most frequent answers.

Over-Served and Under-Served Markets

  • In order to get a holistic view of who would be looking for mortgage information it is helpful to know who the average home buyer is and how their age groups are defined. A recent report by the National Association of Realtors found that the largest group of home buyers are Older Millennials (26%) who are 29 to 38 years old. This is followed by Generation X (24%) who are 39 to 53 years old, Young Boomers (18%) who are 54 to 63 years old, Older Boomers (14%) who are 64 to 72 years old, and Younger Millennial (11%) who are 21 to 28 years old.
  • Younger consumer groups, known as Younger and Older Millennials and Generation X, are over-served by mortgage aggregators. They are now the largest population segment in the market for purchasing a home and are therefore more attractive to mortgage aggregators.
  • Millennials and Generation X are also more likely to adopt financial technology such as mortgage aggregators so it makes sense to cater to their consumer habits. In one report it was found that the average rate of financial technology adoption among 25-34 years olds was 48%.
  • Older consumer groups, known as Young and Older Boomers, are not as likely to be targeted by mortgage aggregators. They are less likely to be in the market for obtaining a new mortgage because they are more likely to already have one or have paid off one.
  • Boomers are also less comfortable using financial technology such as mortgage aggregators. One report found that the average rate of financial technology adoption amongst 65-74 year olds was 15%.
  • While data does point to Boomers being under-served, there are reasons to believe that this trend may change. A recent study found that 66% of consumers say they would want to complete the mortgage process online and this included "Millennials as well as their technologically adoptive parents." This may point to older consumers relying more heavily on information provided by mortgage aggregators in the future.
Part
04
of four
Part
04

Mortgage Aggregators: Regulatory Concerns and Barriers

Mortgage aggregators are becoming a more common method for potential borrowers to find and compare mortgage loans online. From a regulatory perspective, these online platforms are considered the start of the lending process and, as a result, are held to many of the same regulatory standards. Relevant regulatory barriers for launching a mortgage aggregator include legal standards for consumer data privacy, quality control of mortgage offers, loan transparency, and consumer protection. Additionally, a company considering launching a mortgage aggregator should examine mortgage borrower usability expectations when using such platforms, as user experience will affect their ability to attract consumers.

BARRIERS TO ENTRY WHEN LAUNCHING A MORTGAGE AGGREGATOR

DATA PRIVACY
  • Mortgage aggregators need to develop "dedicated resources" to make sure than any consumer data that is collected is kept private.
  • When collecting and organizing loan offers for borrowers, mortgage aggregators must deal with sensitive information (such as credit score, income level, tax returns, and pay stubs) that is currently under consideration for future legislative oversight in many states across the U.S.
  • Mortgage aggregators that deal with residents of California and Vermont must follow recently enacted laws regulating consumer data privacy, the California Consumer Privacy Act of 2018 (CCPA) and Vermont's Act 171, which stipulate security and transparency standards for online data brokers that handle sensitive consumer information.
LOAN TRANSPARENCY
  • According to the Consumer Financial Protection Bureau (CFPB), mortgage lenders are expected to provide clear and straightforward information about loans being shown to potential borrowers.
  • Mortgage aggregators would also be held to this standard and should give platform users adequate time and information to consider mortgage loans with sufficient knowledge of starting and future costs.
CONSUMER PROTECTIONS
  • The Equal Credit Opportunity Act and the Fair Housing Act dictate consumer protections against discrimination towards protected classes (race, color, religion, sex, disability, family status, or national origin) in mortgage lending and real estate sales, and these laws "apply throughout the loan process," including when consumers compare loans on mortgage aggregators.
  • Recent research has shown that algorithms used by mortgage aggregators to match consumers and mortgage lender offers have resulted minority users paying 5.3 percentage points more in interest compared to interest rates paid by non-minority users. Annually, mortgage loans have cost Latino and African-Americans borrowers an additional $250 to $500 million in mortgage interest. It is likely that future state and federal legislation will be proposed and/or enacted to address these recent insights.
  • Additionally, the Dodd-Frank Wall Street Reform and Consumer Proection Act (DF) and the Consumer Financial Protection Bureau (CFPB) require lenders and mortgage comparison platforms to clearly disclose pertinent loan details from the first contact or offer to consumers. The relevant disclosure requirement are held to the "Know Before You Owe" standard detailed in the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA).
MORTGAGE BORROWER EXPECTATIONS
  • Between 2017 to 2019, the majority of loan applications involved online or mobile transactions or communication. Consumers are largely comfortable applying for mortgage loans online, with 2 out of 3 potential borrowers interested in applying on a laptop or desktop and 29% prepared to use a mobile device when applying.
  • The rise in consumer confidence using online loan applications has allowed for growth in the mortgage aggregator industry, however, a mortgage comparison platform needs to invest time, money, and personnel resources into developing high-level user experience into their site. Unlike traditional mortgage loan shopping, borrowers are less committed to the initial process of digital loan offers and will quit or exit the offer if the usability is lacking.
QUALITY CONTROL
  • Mortgage aggregators need to develop systems for accurately communicating financial information between consumers and mortgage lenders to provide high usability for both ends of the mortgage lending process.
  • When showing users mortgage loan offers to compare, mortgage aggregators must rely on adaptable, automated technological tools that are both efficient and cost-effective, so they can provide a consistent experience for users and mortgage lenders to each analyze the loans and potential borrowers that with which they want to work.

RESEARCH STRATEGY

Explicit regulations for mortgage aggregation platforms are not available, however, mortgage aggregators are generally considered the starting point of a mortgage loan offer. As a result, they are often held to the same legal and regulatory standards as other elements of the mortgage industry. Regulations for data privacy, loan transparency, and consumer protections that apply to mortgage lending were researched to identify potential barriers for a company wanting to launch a mortgage aggregator. Additionally, the value of user experience in attracting and retaining consumers throughout the digital mortgage loan offer process was researched.
Sources
Sources

From Part 02
Quotes
  • "56% of those who shopped during the 2016 holiday season incurred credit card debt versus 48% of those who shopped during the 2015 holiday season."
Quotes
  • "“Impulse buys can be fun, and the high volume of unplanned purchases speaks to consumer confidence and the strength of the economy, but these expenditures have the potential to wreck your budget,” said Rossman. "
Quotes
  • "Some online shopping trends expected to become more commonplace in 2015 and beyond are an increased focus on mobile compatibility, more collaboration between brands’ online stores and retail locations, improved encryption technology, increased ability to shop via social media sites, faster shipping speeds, and more opportunities for consumers to get free shipping."
From Part 03
Quotes
  • "An aggregator is an entity that purchases mortgages from financial institutions and then securitizes them into mortgage-backed securities (MBS). Aggregators can be the issuing banks or subsidiaries within the financial institutions themselves or brokers, dealers, correspondents, or another type of financial corporation."
Quotes
  • "The typical home buyer was 46 years old, married without children living at home, and has a median income of $91,600."
Quotes
  • "Web self-service is the preferred method of research and the most common form of interaction with lenders across all age groups."
Quotes
  • "Approximately three-in-four consumers say they like to shop around before making a purchase."
Quotes
  • "Although the mortgage process is extremely complex and heavily regulated, digital experiences in other businesses have increased the demand for digital resources to speed up the onerous mortgage process. "
Quotes
  • "Today’s borrowers are different from yesterday’s. Millennials (and their technically adept parents) have become accustomed to the way technology speeds up life. According to new research, 66% of homebuyers would prefer to handle their mortgages entirely online."
Quotes
  • "Consumers aged 45 years and above had already established long-standing relationships with incumbent providers before the arrival of FinTech. Preference for traditional financial services is the highest barrier to FinTech use, while lack of need and not perceiving the advantage are also higher than in other age brackets. It is not that these users consider services provided by FinTech firms inferior, but rather that they prefer incumbent providers and lack a sufficiently compelling reason to switch."
Quotes
  • "In a move that could shake up the financial services industry, Bankrate announced earlier this week that it agreed to be acquired by Red Ventures, which bills itself as a “digital consumer choice platform,” in a deal that values Bankrate at $1.4 billion."
Quotes
  • "Today, Tim Chen is CEO and co-founder of personal finance website NerdWallet, which sees 10 million monthly visitors and is valued at more than $500 million."
From Part 04
Quotes
  • "Consumer protections for home loans are in many cases determined by the type of loan. For example, there are disclosure requirements specifically tailored for adjustable rate loans so consumers know how their payments may increase. Other protections are particular to property located in flood zones. The next section lists some of these consumer protections, focusing on those that provide the most benefit to the greatest number of consumers."
  • "Certain laws apply to mortgage lending and prohibit discrimination practices by lenders in the mortgage lending arena. The Equal Credit Opportunity Act (ECOA) prohibits lenders from discriminating against credit applicants in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, whether all or part of the applicant's income comes from a public assistance program, or whether the applicant has in good faith exercised a right under the Consumer Credit Protection Act."
  • "In addition, the Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status, or national origin. Under ECOA and the Fair Housing Act, it is illegal for a lender to refuse a loan based on these characteristics or charge more for a loan based on such characteristics. The laws apply throughout the loan process, from the time you inquire about a loan application until you pay off the loan."
  • "In addition, a major regulation issued by the Consumer Financial Protection Bureau (CFPB) requires that lenders provide clear and accurate disclosures to consumers during the mortgage lending process. The regulation, which implements disclosure requirements under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA), is referred to as the “Know Before You Owe” rule by the CFPB."
  • "The Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) required the CFPB to implement the “Know Before You Owe” rule to improve the process and content of mortgage disclosures provided to consumers."
  • "The Know Before You Owe rule combines the disclosures required by TILA and RESPA into two forms. The first form, the Loan Estimate, emphasizes the key loan features, risks and costs of loans and is intended to aid in comparison shopping. The second form, the Closing Disclosure, highlights all the costs of the mortgage transaction. The two forms are designed to be used together to help consumers to understand the information in the forms, compare loan terms and prevent surprises for consumers at “closing.”"
Quotes
  • "The faster we can get paper out of banks and credit unions, the better it will be for everyone. Digital transactions and processes reduce costs, increase transparency and make finding needed information easy for lenders. Look for 2019 to bring our industry closer to a completely electronic mortgage experience, from origination to close."
  • "Process automation is not just about tools and technology. It's about financial institutions getting a clearer understanding of how to efficiently and cost-effectively process and evaluate their mortgage portfolios."
  • "More than half of all loan applications in the past two years included some online or mobile component. Of those who have an existing home loan, 67 percent would feel comfortable completing a home loan application on a laptop or desktop computer, and 29 percent would be comfortable using a mobile device, according to Expectations & Experiences: Borrowing and Wealth Management, the latest quarterly consumer research from Fiserv."
  • "Borrowers won't get up in the middle of a sentence and walk out of a branch, but they will abandon a digital transaction or interaction that isn't intuitive or valuable. As those types of engagement replace face-to-face conversations, every channel must deliver a rich, digital experience."
  • "While most of the industry's focus has been on getting the user experience right for the consumer, it's just as important to provide an intuitive experience for lenders. If mortgage lenders' jobs are made more difficult by employers' inability to provide the right tools and solutions, they will likely be looking elsewhere for new positions."
  • "Lenders have always used data points to help them make decisions, but technology enables an enterprise-wide, 360-degree view of borrowers and the lending operation. The more lenders get the transparency, visibility and quantity of data right – and make it easily accessible – the more it enables quicker, better decisions and reveals additional opportunities. Automation and faster decisioning affects closing speed, the user experience and loan quality, which in turn impacts market share."
  • "Starting with a borrower's first entry into the process – the application – information can now be secured from a data source rather than documents. Financial records from banking accounts can replace statements, pay stubs, W-2 forms and tax returns, and lenders can automate more of the underwriting process."
  • "Creating a clear data strategy, assigning dedicated resources to manage data initiatives and partnering with data-focused technology providers lays the foundation for coming innovations."
  • "Most mortgage lending in the U.S. has moved in some fashion to nonbank providers and aggregators, which are able to compete without many of the regulatory challenges placed on banks and credit unions."
Quotes
  • "The researchers found that minorities paid 5.3 basis points extra in interest with online mortgage applications, little different than the 5.6 additional points they shell out with the overall set of lenders."
  • "Yet algorithms can be just as biased as a loan officer sitting across a desk, according to a new study by professors at the University of California, Berkeley titled, “Consumer-Lending Discrimination in the Era of Fintech.”"
  • "Each year, Latino and African-American borrowers pay between $250 million and $500 million extra in mortgage interest, the study said."
  • "One potential explanation, however, is that online lenders utilize variables other than the traditional financial ones like credit score; they might be factoring in a borrower’s geography or education level to price their loans, Bartlett said."
  • "However, the increasing use of “big data,” in algorithmic lending, Bartlett said, could deepen discrimination further. For example, the high school someone attended might predict their default rate. But it could predict their ethnicity, too."
Quotes
  • "The California Consumer Privacy Act of 2018 (CCPA) was enacted in June 2018 and amended in September, and will become effective Jan. 1, 2020 (with likely additional amendments in 2019).The CCPA is one of the broadest online privacy laws in the U.S., affecting companies across the country that do business with California residents."
  • "Vermont in 2018 enacted a law that requires data brokers (businesses that collect and sell or license personal information to third parties) to disclose to individuals which data is being collected and to permit them to opt out of the collection. "