Fitch: Big Banks Could Develop Edge in U.S. Online Mortgages
Fitch Ratings, Chicago, said the growing trend in digitization of the mortgage application process should continue in the US over the long term, and that large banks with greater resources, competitive pricing and the ability to link online mortgages with other bank products could have an edge in developing this segment over time.
Fitch also warned that companies that do not invest in this area will risk losing market share and could have their profitability negatively affected.
Fitch Managing Director Roelof Slump said digitization has opened space for new and non-traditional entrants, including online marketplace lenders and internet banks such as Social Finance and Ally Financial. Fintech firms have also been applying digital technology to grow within the mortgage sector, while some larger NBFIs that were early adopters of online lending have particularly benefited in terms of growth. Quicken’s Rocket Mortgage is an example, with $7 billion in conventional, VA and FHA loan originations in 2016.
“The increasing digitization of the mortgage process has the potential to significantly change mortgage applications, improving efficiency and reducing the time required for processing some types of applications. A fully online mortgage process does not yet exist. However, banks, non-bank financial institutions, internet banks and online marketplace lenders have been digitizing portions of the mortgage application process to varying degrees.”
However, over time, Fitch said, the larger budgets and IT resources of the big banks could provide a competitive advantage over non-bank mortgage originators. Large brick and mortar banks have been investing heavily to digitize their mortgage process, despite some banks’ initial lag in developing their online consumer experience. This includes actively buying and entering into joint ventures with fintech firms. JPMorgan Chase announced last month that it would be partnering with Roostify, San Francisco, a fintech firm, to build an online mortgage platform.
“This is part of a broader trend that will continue over the medium term,” Slump said. “Large banks will continue to benefit from their lower cost of funds which will help them maintain competitive pricing–rates should remain a significant determinant of consumers’ decision-making. Their large deposit franchises and other financial product offerings may also make it easier to reach potential customers and integrate online mortgages with other bank products.”
Fitch said depending on the types of digital processes involved, risks to online mortgages can include fraud, cyber-risks, and regulatory compliance and concerns over the extent digital automation can replace human underwriting effectively. Representations and warranty and “safe harbor” issues could also be amplified with automation. Larger banks with greater compliance resources and existing large IT teams should be in a stronger position to manage these issues as they arise.
Changes in demographics and technology are helping drive the evolution in the mortgage lending process, Fitch said. Millennials, who are increasingly familiar with online financial transactions and borrowing, accounted for more than 80% of loans for new home purchases in December, reported Ellie Mae, Pleasanton, Calif. At the same time, online mortgages have been growing market share in recent years. A National Housing Survey by Fannie Mae on consumer attitudes showed that homebuyers with higher incomes are significantly more likely to fill out a mortgage application online and younger borrowers are more likely to use mobile or online technology for their mortgage application.
