Mortgage tech will eliminate 270,000 jobs, but the gains for consumers are immense
There are around 300,000 mortgage brokers in the country, each of whom processes 2 loans per month on average. If you look at the pitch deck for any new mortgage startup, what you quickly notice is that all of their financial projects ultimately come down to one number: monthly loans closed per broker, which they project to increase from 2 to something like 20 loans per month. That projection looks something like this:
On it’s own, it may not seem like anything to impressive. In fact the top mortgage brokers in the country routinely close 20+ loans per month. So startups aren’t proposing to do anything that individuals haven’t already figured out.
When you start thinking about what this means at an industry level, it’s pretty remarkable. These startups are expecting to be 10x more productive than the industry average, which means that employment in the industry is likely to decline to 1/10 of current levels sometime in the 2020s. In other words employment will decline from 300,000 to 30,000, a decrease of 270,000 people.
Is an 10x productivity improvement likely?
Within the next 5 to 10 years, a resounding YES (and no artificial intelligence required). In fact, for some companies it may have already happened. The field is getting crowded with contenders like, Sindeo, RocketMortgage, Lenda, Clara, Better and software providers like Blend and Roostify. At least one of them will figure out how to close north of 20 loans per month per broker, if they haven’t already (RocketMortgage by Quicken closed $7 billion in originations in 2016, but it is unclear what their per broker productivity level is for this new product). Furthermore, cultural, technological and regulatory headwinds are are blowing in the right direction.
These startups will only find it easier to run paperless process, collect e-signatures (Docusign, HelloSign or custom software), verify assets (Plaid, Yodlee), interact with Loan Origination Systems programmatically (EllieMae is rolling out a restful API for their LOS, Encompass), verify income through integrations with Fannie, WorkNumber or via banking data.
Finally, Customers are increasingly comfortable transacting online, even via their mobile devices. And online gateways like Zillow RateTables or CreditKarma’s new mortgage product make it easier to shop and engage with the new class of online mortgage brokers.
Consumers Win Big
The gains for the consumer from a more efficient mortgage process and marketplace are immense, since ~7 million mortgages are closed annually.The savings fall into three buckets:
$5 billion in reduced time. The average mortgage takes 43 days to close and around 25 hrs of work on behalf of the consumer (doc gathering, emails, phone calls, signing things, yelling at your broker for missing the settlement date). The days to close will fall to around 1 week and the hours of work for a consumer to around 5 hours. With time valued at $25 / hour, which is the US median wage rate, that equates to $5 billion in savings.
$10 billion in reduced fees. The average mortgage has over $1,000 in origination fees. That will likely fall close to $0. The 30 year trend has headed in that direction, but stalled since the recession.
$25 billion in reduced interest. As closing a mortgage becomes faster and easier, consumers will be empowered to shop for better rates. Right now many consumers end up paying a higher rate than necessary because they simply refinance with their existing bank or whomever their realtor recommends. If a more competitive market reduces the interest rate is reduced by even 0.125% (an eighth), that results in $2,500 in interest saved over the first seven years of $300,000 loan (the average size for a new mortgage).
Total Annual Savings ~$40 billion. That’s around $5,700 for each of those 7 million loans.
But that’s just the beginning…
A more efficient mortgage process also creates pressure to improve other broken parts of the system. As the mortgage market becomes more efficient, borrowers are more likely to refinance, which can further reduce the weighted average interest rate paid on the $10 trillion in outstanding mortgage debt. A 0.1% reduction would be around another $10 billion in annual savings (to what extent the average rate would decrease is a complex question, but there are many borrowers who should refinance, but do not).
As fees charged by the lender fall, third party fees for items like title and appraisal will stick out even more. Companies working on improving title and appraisal services are much earlier in the cycle, but they will gain momentum overtime. States Title for example, is only a few months old with plans to “make homeownership simpler, safer, and more accessible — starting with title insurance.”
Mortgages are about to change and as that happens that will precipitate other exciting changes throughout the financial system. 270,000 mortgage brokers will be out of work, but consumers will be much better off.