Question: We want to refinance our home and several lenders have mentioned “Fintech” loans. How do such mortgages work and are they better for borrowers?
Answer: For several decades technology has changed just about everything we do. It follows that mortgage financing is not any different.
Fintech is the use of automation and artificial intelligence to speed the mortgage application and approval process. From the borrower’s perspective, your mission is to get the best possible mortgage given your finances and preferences. You want the lowest available rate and best terms. Fintech may help you get to the promised land of great financing then that’s great.
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Fintech Advantages
A study just released by the staff of the Federal Reserve Bank of New York suggests that Fintech is more than a buzzword. The study found that Fintech has the potential to significantly change the mortgage application process in a way that can be very good for most borrowers.
First, given new technologies, we have a whole new class of mortgage providers. Mortgage originations from stand-alone Fintech lenders rose from $34 billion in 2010 to $161 billion in 2016 according to the study. Market share increased from 2 percent to 8 percent. More competition is good for borrowers.
It’s plain that Fintech’s marketplace impact is understated in the study because there’s no reason why Fintech should only describe new or stand-alone lenders. After all, what’s the practical difference between a Fintech lender in business for six months and a traditional lender that also uses software and automation to underwrite loans?
Second, we now have evidence that Fintech lending speeds the mortgage application process.
The report from the New York Fed finds that “Fintech lenders process mortgages faster than traditional lenders, measured by total days from the submission of a mortgage application until the closing. Using loan-level data on the near-universe of U.S. mortgages from 2010 to 2016, we find that Fintech lenders reduce processing time by about 10 days or 20 percent of the average processing time.”
The big advantage of faster mortgage processing is that if problems arise the borrower has more time to respond with an explanation or additional paperwork. Less underwriting time means reduced lender costs. Because of Fintech, we’re likely to see fewer situations where settlements are postponed, something which is important to both buyers and sellers in a real estate transaction.
Fintech Reduces Mistakes
Third, a big worry for lenders is that quicker loan processing might also produce more errors and therefore greater risk. However, the New York report found that “faster processing times by Fintech lenders do not result in riskier loans.”
It turns out Fintech actually reduces lender risk, that worries about “lax screenings” are overblown. Default rates with automated mortgage underwriting “are about 25 percent lower than those for traditional lenders, even when controlling for detailed loan characteristics,” according to the study. This is a very big deal because if mistakes are made in the underwriting process the lender may need to buy back the loan if it’s sold to an investor. In addition, lenders can also face fines and regulatory problems when underwriting mistakes crop up.
Fourth, Fintech eliminates paperwork burdens for borrowers.
“Online applications,” says the report, “mean that a borrower can be approved for a loan without talking to a loan officer or visiting a physical location. The online platform is able to directly access the borrower’s financial account statements and tax returns to electronically collect information about assets and income. Other supporting documents can be uploaded electronically, rather than by being sent piecemeal by mail, fax or email.”
There are really two issues here. For borrowers, the good news is that you won’t have to gather banks statements because the system gets the records automatically from the bank. There’s no paperwork to lose. Tax transcripts come from the IRS through the Income Verification Express Service (IVES). For lenders, the advantage of this system is that borrowers do not get an opportunity to modify bank documents or tax statements.
Fintech & Loan Officers
Fintech may be good for borrowers but if you’re a loan officer you can see the problem. If borrowers speak with you less then is your job at risk? The answer is plainly yes. According to the Bureau of Labor Statistics, there are now more than 300,000 loan officers nationwide. This is a number which is sure to fall with Fintech and more productivity.
Fintech is with us today. It will be better in the future but don’t miss your goal. As a borrower, you want lower rates. If that means spending a few extra hours to complete a loan application so what? You might save money for the next 30 years.
