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Ask the Economist: An Increasing Interest in Financial Services

Editor’s note: This feature originally appeared in the April issue of DS News.

As the CFO and Co-Founder of Blend, a technology company transforming the $40+ trillion consumer lending industry, Erin Collard is a seasoned professional in economics, technology, and the housing sector. He attended the University of Sheffield where he received a bachelor’s degree in Economics. From there, he attended the University of Warwick where he earned a Master’s of Science in Economics. Before Blend, Collard served as an early employee and head trader of Clarium Capital Management (hedge fund founded by Peter Thiel) and Armored Wolf.

DS // Why did you first become interested in the study of economics?

Collard // I was always obsessed with statistics when I was young. I found the application of mathematics to real-world problems endlessly appealing, so it was a natural path to studying economics. Spending the majority of my postgraduate time researching Central Bank reaction functions, my academic career was cut somewhat shorter than intended when Peter Thiel asked me to join and help build his global macro hedge fund. It was exciting to spend years dissecting and analyzing the world of data where economic theory and market reality finally met. Even today, as CFO and Co-founder of Blend, I still view the world through the lens of an economist with the same passion that got me interested in economics in the beginning.

DS // What trends do you think the economy will see throughout 2018?

Collard // In 2017, the U.S. experienced a slowdown in home sales but not in prices, which was primarily due to the lack of housing available for purchase. In 2018, we’re not going to see this improve dramatically. While homebuilders are continuing to help on the supply side, their focus is currently on the “moving up” market vs. the entry level market for millennials and first-time homebuyers.

Affordability will remain front and center for 2018 and will be made sharper because of the current administration’s changes to mortgage interest tax deductions. As a byproduct of this, the U.S. housing market will experience an increased demand for smaller, more affordable homes and the role of homebuilders to meet that need will become increasingly important.

Investment in technology seems poised to continue increasing following a very strong 2017, particularly in early and later-stage companies. Th is is great news for the financial sector and economy as a whole. While many are focused on blockchain and its ability to power a multitude of platforms and applications, we will also continue to see a strong focus on cybersecurity and fraud prevention. As a result, I think the industry will see a lot more regulation, as various regulatory bodies struggle to keep up with the pace of development.

One trend I noticed last year that I hope continues is a focus from fintech companies on encouraging and almost ‘gamifying’ savings and wealth management for millennials. This could be a massive win for the economy as millennials continue to increase their slice of the economic pie.

As we look globally, one of the more interesting trends we may see is a divergence in central bank policy, a stark contrast to the last 10 years of the coordinated policy. While we may see the U.S. and U.K. continue to have steepening yield curves in relation to the E.U., this will have consequences for global trade and asset relocation. As a result, we can expect a continuation of asset infl ation in the U.S., and quite possibly for our net exports to form an obstacle to growth in the years to come.

DS // What technological innovations are you seeing that can help housing experts better gauge the current economic environment?

Collard // Over the past five years, we’ve seen an ongoing amount of notable investments taking place in fintech. A recent report from KPMG titled, “The pulse of Fintech Q4 2017” helps map out some of the major investments and trends. Investors see a significant opportunity for technology to drive change across different areas of financial services, and I believe we’ll only see this interest grow in 2018 and beyond.

One of the areas where we see this take off is the level of visibility for lenders, specifically in assessing the risk of lending to borrowers. Now, lenders have direct access to data, instead of printed, scanned, uploaded pieces of paper, and are getting more detailed and reliable consumer fi nancial profi les to assess risk.

One example of this is Fannie Mae’s Day 1 Certainty program, which allows lenders to know within 24 hours whether a loan will meet Fannie Mae’s underwriting guidelines, and protects them from buyback risk later on. Th is allows them to make a more informed decision about whether the borrower is creditworthy.

We’re also seeing homebuyers benefi t substantially from the various technology options they have available throughout the process of purchasing a home. For everything from the initial research on available properties to evaluating diff erent loan pricing options, to scheduling an appraisal, they have many choices and can easily identify the best service or provider for their situation.

DS // Interest rates have been at a historical low, but are now starting to climb again. What impact does this have on housing?

Collard // Typically we see interest rates have ripple effects throughout the economy, not just housing. While the monetary effects take many months to translate into tangible impacts on the
economy, mortgage rates may see a slight increase as a result. Nonetheless, there are positive outcomes for housing. With higher rates, lenders are more incentivized and have a larger cushion for risk. Lenders should show greater bandwidth to consider borrowers who may not have had access to certain credit. I predict we'll see lenders expand access to a broader population, of course with the appropriate risk models in place. Refinancing will likely decline, which lenders may try to offset with more purchase loans. Finally, rising interest rates can push ‘onthe-fence’ prospective homebuyers to finally make that new home purchase, as they are incentivized to make the purchase sooner while rates are still low.

DS // The future of the GSEs is uncertain, what do you foresee for the enterprises moving forward?

Collard // As we look forward, we will see this become a serious topic of discussion for reform in 2018, as the majority of government bodies that help shape mortgage finance will themselves see major leadership changes. It is tough to say which direction GSE reform will take, but given White House rhetoric, I expect the GSEs will continue to play an important role in our economy (even more so if placed into receivership), and the system will continue to rely on them in the absence of a complete overhaul.

Also, there has been a lot of talk on Capitol Hill about leveling the playing field, so it's likely we will see some increased competition. This may come in the form of more guarantors and more uniform terms (price, credit, etc.) for large and small lenders. In essence, if we see the guarantor model remain intact, and there is an opportunity for more competition, the economy should benefit from retaining the 30-year mortgage, lower rates, and increased access to the credit market.

About Author: David Wharton

David Wharton, Online Editor at the Five Star Institute, is a graduate of the University of Texas at Arlington, where he received his B.A. in English and minored in Journalism. Wharton has over 15 years of experience in journalism and previously worked at Thomson Reuters, a multinational mass media and information firm, as Associate Content Editor, focusing on producing media content related to tax and accounting principles and government rules and regulations for accounting professionals. Wharton has an extensive and diversified portfolio of freelance material, with published contributions in both online and print media publications. Wharton and his family currently reside in Arlington, Texas. He can be reached at David.Wharton@DSNews.com.
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