Technology & Innovation Key to Growth in Tough Mortgage Loan Market

A challenging combination of high rates, high home prices and limited inventory are taking a toll on purchase originations and refi volume, forcing lenders to improvise. Millennials won't be denied in their quest for a home, but lenders need to meet them on their terms — digital and efficient.

It’s unlikely anything a mortgage lender can do will even out the industry’s inevitable boom and bust cycles. But if bank, credit union and nonbank mortgage lenders seize the opportunity to adapt to a changing industry landscape (especially meeting the needs of house-hungry Millennials), the result could lead to lucrative long-term opportunities.

As 2022 approached midyear, however, the mortgage market has become quite challenging, to be sure. “We have a classic case of a mortgage boom to bust cycle,” Gerard Cassidy, head of U.S. Bank Equity Strategy at RBC Capital Markets, told Reuters. “As the rates go higher the refinancing business is cooling, which it always does, and is going to force a massive shrinkage in the mortgage banking business.”

And interest rates are only going to climb through 2022 as the Federal Reserve seeks to tame surging inflation.

Gloomy, But Not Moribund:

Sales volume is declining, but rising home prices will still generate a 4% annual gain in originations.

Overall, analysts and industry observers outline the 2022 situation this way: home loan rates are going up fast; fewer houses are for sale; the ones that are available are more expensive. The impact was being felt well before midyear, with the Mortgage Bankers Association adjusting its annual forecast to a 36% decline in purchase mortgage originations for the full year and a huge 64% drop in refinance originations.

Even through the first quarter, three of the four biggest U.S. banks saw mortgage origination declines of 20% to 33%. The one exception was Bank of America, which managed a modest gain.

Despite these downward indicators, homes are being bought. In fact, MBA believes purchase originations will still be up 4% over 2021. Millennials are the biggest demographic of home buyers. The crucial point to remember is that these 26 to 41-year olds are searching and buying digitally. To respond, mortgage lenders need to understand the needs of those most likely to buy, and to invest in the technology that streamlines the homebuying process.

A Window of Opportunity to Upgrade Tech

According to mortgage industry consultancy Stratmor Group, there is a window of opportunity for mortgage lender prospects in 2022, although that window could close quickly toward the end of the year. The firm acknowledges that the industry is in the bust area of the boom-to-bust home lending cycle — but there is good news, for those lenders that can stomach big technology investments.

“Lenders that take advantage of this window of opportunity, when they have both the time to choose and implement new technologies and the cash to do so, will lead through this downturn and emerge as stronger competitors when the next upturn arrives,” says Senior Partner Jim Cameron in a Stratmor Group blog. “Making good choices will require them to fully understand the needs of their borrowers and invest in technologies that will deliver high levels of borrower satisfaction.”

Read More: Top Mortgage Lending Trends in Banking

Who Is Buying Houses Now, and How?

The driving force behind whatever kind of year 2022 turns out to be for mortgage lenders is Millennials. As a group, they’ve struggled to become homebuyers, saddled with student loan debt and whipsawed by the pandemic job market, among other challenges. But they will not be denied. They’re not the only act, of course.

The National Association of Realtor’s annual 2022 Home Buyer and Seller Generational Trends report lists these demographic facts:

  • Millennials make up 43% of homebuyers, the most of any generation and up from 37% last year.
  • Three out of five recent buyers were married couples; 19% were single females; 9% were single males; 9% were unmarried couples.
  • Gen X (currently 42 to 57) had the highest median household income at $139,000. This generation also bought the most expensive and second-largest homes, at a median price of $320,000 and median size of 2,300 square feet.
  • Older Millennials purchased the largest homes at 2,400 square feet.
  • Across all generations the largest share of buyers purchased in suburban areas (51%) and small towns (20%).

Millennials Are Changing The Rules:

Solidly accustomed to digital connections, many young adults prefer online house hunting, applications and closing.

“Some young adults have used the pandemic to their financial advantage by paying down debt and cutting the cost of rent by moving in with family,” says Jessica Lautz, NAR’s Vice President of Demographics and Behavioral Insights. “They are now jumping headfirst into homeownership.”

A more apt term for Millennial homebuyers than “jumping,” however, would be “clicking.”

Digital Mortgage Lending Becomes the Norm

One of the outcomes of the Covid pandemic was the acceleration of the digital economy, and the mortgage market was no exception.

NAR’s profile of home buyers found these trends related to mortgage technology:

  • The first step of 41% of buyers was to look online at properties for sale, while only 19% of buyers first contacted a real estate agent.
  • Buyers typically searched for eight weeks, looked at a median of eight homes, and viewed three of these homes only online.
  • Nearly all buyers used online tools in the search process.

“Many home buyers are actually purchasing homes without even seeing the physical property,” says consultant Jackson Forelli in a Lendstart blog. “For these fast-acting buyers it is critical for mortgage companies to have a chat feature on a home buying website. If the buyer is going to buy without visiting the property, there is a good chance they will finance the property digitally as well.”

Another tip: “Many prospective home buyers will tell their Siri or Google Assistant to search for a home in a specific area,” Forelli states. “Clever mortgage companies are creating YouTube ads that can prompt a user to speak to their smart home device about the mortgage opportunity. Advertisements that cater to verbal devices are a new way to attract home buyers.” Having timely follow-up is also crucial for mortgage lenders, either by phone, text or email.

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Fintechs Are Changing the Game

The main point of using the new mortgage technology is “getting to yes faster,” says Jeff Ostrowski in a Bankrate blog. Fintechs like Roostify automate paper-intensive parts of the mortgage process, like verifying tax returns and pay stubs such that the lender takes much less time to give the prospective buyer a yes or no on their mortgage application.

Other fintechs have entered the market, each aimed at digitalizing aspects of the mortgage process. As noted by mortgage technology company BeSmartee, these include:

  • FlashSpread, a cloud-based solution that converts PDF tax returns into financial reports.
  • Candor Technology, which replicates expert decision-making capabilities to underwrite loans.
  • Sales Boomerang, which combines machine learning and big data to generate automated alerts related to loans, such as a mortgage inquiry, credit score increase and equity.

Appraisals are another major time-consuming part of the home-buying process. Late in 2021 the Federal Housing Finance Agency announced that remote valuations will take the place of some traditional appraisals, instead of requiring onsite inspection by appraisers. By using online sources, including property photos posted in multiple listing services, it’s estimated that a digital appraisal can be finalized in 72 hours.

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