With the costs of originating and servicing a mortgage at record highs and customer satisfaction rates at all-time lows seven years after the financial crisis, Washington, D.C.-based business advisory firm The Collingwood Group contends that "The Mortgage Industry is Ripe for Disruption," according to a white paper released Monday.
With no fundamental changes to the origination process in decades, the lost efficiency, increasing costs and decreasing profits, combined with ever-merging regulatory hurdles, have left a gap in the mortgage industry to be filled by "disruptors," who are innovators creating new business models to better serve the industry.
"Disruption is inevitable in any industry, but is most predictable in an industry faced with a set of conditions that render the existing model too challenging, too inefficient, too costly, too unresponsive to the needs of consumers and businesses alike," the paper said. "The best innovators recognize and capitalize on the opportunity presented by an increasingly ineffective approach and develop new capabilities to meet the needs of the marketplace. Mortgage finance has reached this stage."
The new innovators describe themselves as technology companies providing business solutions from the customer's point of view, as opposed to incumbent lenders who view themselves as mortgage companies who use technology as a business requirement, according to the paper. Two examples of emerging innovators in the mortgage industry that are building new platforms to meet demand for home loans and other forms of consumer debt are crowdfunders and marketplace lenders.
"They are making their mark developing and utilizing new technologies to improve the consumer experience, enhance efficiency, expand risk management techniques, and provide a solid return on investment," the paper said.
Whereas both crowdfunding and marketplace lending both leverage private capital to make loans, crowdfunding firms serve as operators to provide platforms to raise capital for a certain purpose, whereas marketplace lenders facilitate transactions directly between borrowers and investors.
"Both types of companies are engaged in activities that represent the very essence of 'disruption,' engaging the average citizen in the development and expansion of products and services - fulfilling the new demand coming from an ever-needy population of consumers and/or permitting the general public to support the company’s offerings, by raising capital from individuals in addition to financial institutions or investors," the paper said.
A major difference between traditional lenders and disruptors such as crowdfunding or marketplace lenders is that the disruptors view lending as an event with improved usability, documentation, communications, and decisioning, thus creating an efficient, transparent, low-cost, fully online way to approve a mortgage loan. Traditional lenders, on the other hand, have always seen mortgage lending as a process that is complex and burdensome for all parties involved.
"All of these innovators strive to automate verification and validation functions to reduce costs, subjectivity, and to expedite credit decision-making, and closing," the report stated.
While the goal of the mortgage industry has not changed, which is providing consumers with mortgages that are well-priced, suitable, and sustainable, the means to achieving that goal is changing, according to the Collingwood Group.
"The key to harnessing disruption lies in the willingness of incumbents and new entrants to bolster their transformative capabilities to eliminate inefficiencies, reduce costs, and improve customer satisfaction," the paper stated.
Click here to read the entire white paper.