Getting A Mortgage Without Leaving Your Couch
Wells Fargo, the US leader in mortgage lending, announced the upcoming launch of its digital mortgage application. But how quickly can Wells develop a full end-to-end digital mortgage origination and servicing experience, and can it fend off digitally-savvy competition?
Wells Fargo is the US’s largest mortgage originator, and its home loan business blossomed in the post-recession low interest rate environment.[i] The competitive advantage for Wells and other mortgage banks had, until recently, been their ability to make riskier loans and access cheaper funding through securitization markets.[ii] Under new lending regulations, however, mortgage fulfillment costs are up (from $5,137 per loan in 2012 to $7,046 in 2015), and Wells must now look toward digitization to reduce operational costs, drive speed and efficiency, and optimize the customer experience.[iii]
At the same time, upstart online mortgage originators – like Rocket Mortgage and SoFi – have given customers a viable alternative to the old brick-and-mortar process, with online applications and an expedited cycle time from application to closing. Moreover, other traditional originators have partnered with third-party software vendors that provide white-labeled web portals for mortgage applications.[iv] In light of these developments, Wells needs to adapt its technology to protect market share.
In August, Wells CEO Tim Sloan announced plans to launch a digital mortgage application by the end of 2018 to serve its 28 million digital users, who right now must apply through one of its mortgage branches.[v] The web and mobile mortgage applications will seek to enhance the customer experience and accelerate application timelines by minimizing the information that must be provided by the applicant herself. For example, if the applicant is an existing Wells customer, much of her information will be automatically populated into the mortgage application. Moreover, they will allow for the uploading of files digitally, and will integrate directly with data aggregators via API (i.e. the IRS for applicant tax documents, credit bureaus for credit information, and employment verification firms for paystubs).[vi] Self-service and ease of use are central to the system.
While Wells’ foray into digital mortgage lending with an online application is a solid first step, it’s imperative that they quickly create an end-to-end digital mortgage experience. This would first require investment in software solutions for the other stages of a full loan origination system: underwriting, processing and closing.
Specifically, Wells should automate the underwriting process. Pattern recognition technology would eliminate the need for humans to extract data from documents, instead automatically populating credit risk models. Moreover, automated pricing models could quickly be developed using machine learning on Well’s robust historical mortgage datasets. Once these features are integrated with the online application, conditional approvals and rates could be offered instantaneously to applicants at the time they hit submit, which would alleviate anxiety for the applicant, seller and realtor.[vii]
To round out the fully-digital loan origination system, Wells should evaluate investments in software that can enable fast and transparent mortgage closing. eClosing eliminates the need for long, multi-party in-person closing meetings. Moreover, digital loan trackers keep applicants, sellers and realtors apprised as the process progresses and triggers automatic mobile or email notifications if additional information is required.[viii] Taken together, these steps could expedite the mortgage origination cycle time weeks to hours or minutes.[ix]
On a longer horizon, Wells should look into how they can use digitization to streamline the servicing of its $1.5 trillion mortgage portfolio.[x] Direct mortgage servicing costs increased 14% annually from 2009-2014, primarily driven by increased personnel costs due to post financial crisis regulatory requirements.[xi] Wells should investigate software that digitizes paper-based servicing processes, enables borrower self-service through well-designed portals, and proactively reaches out to delinquent borrowers or borrowers showing signs of financial distress.[xii]
To support these technological investments, Wells should work with investors and guarantors (e.g. Fannie Mae and Freddie Mac) to get them comfortable with the use of new third-party technology vendors enabling online mortgages.[xiii] Secondly, Wells should consider other digital products they can create to cross-sell with online mortgages – like digital homeowner’s insurance and pre-approved renovation loans[xiv]
Concerns remain around how Wells will respond to new online competitors in the mortgage space. First, how quickly and seamlessly will Wells integrate its initial front-end application with the back-end underwriting, processing, and closing systems; will its legacy platform hold it back vis-à-vis start-ups that can build a new technology from scratch? Second, can Wells get its customers comfortable with providing required credentials over the internet so that Wells can directly aggregate customer data from other sources (e.g. the IRS, other banks, credit bureaus)?[xv] And finally, which pieces of software should Wells license or buy, and which should they build themselves?[xvi]
[i] “Riding High: The Big Winner from the Financial Crisis,” September 14, 2013, https://www.economist.com/news/finance-and-economics/21586295-big-winner-financial-crisis-riding-high, accessed November 2017.
[ii] Gebre, Biniam, Ahmet Hacikura, Sushil Raja, Kenan Rodrigues, Cosimo Schiavone, “Digital Mortgage Nirvana: Cheaper, Better, Faster,” Oliver Wyman, February 2017, p. 18, http://www.oliverwyman.com/our-expertise/insights/2017/apr/a-new-age-in-mortgage.html, accessed November 2017.
[iii] Gebre, Biniam, Ahmet Hacikura, Sushil Raja, Kenan Rodrigues, Cosimo Schiavone, “Digital Mortgage Nirvana: Cheaper, Better, Faster,” Oliver Wyman, February 2017, p. 18, http://www.oliverwyman.com/our-expertise/insights/2017/apr/a-new-age-in-mortgage.html, accessed November 2017.
[iv] Ryan Lawler, “Mortgage technology provider Blend raised another $100 million led by Greylock,” August 24, 2017, https://techcrunch.com/2017/08/24/blend-100-million/, accessed November 2017.
[v] Peter Rudegeair, “Wells Fargo, U.S. Bancorp Turn to Startup to Speed Up Mortgage Applications”, August 24, 2017, https://www.wsj.com/articles/wells-fargo-u-s-bank-turn-to-startup-to-speed-up-mortgage-applications-1503572580, accessed November 2017.
[vi] Gebre, Biniam, Ahmet Hacikura, Sushil Raja, Kenan Rodrigues, Cosimo Schiavone, “Digital Mortgage Nirvana: Cheaper, Better, Faster,” Oliver Wyman, February 2017, p. 20, http://www.oliverwyman.com/our-expertise/insights/2017/apr/a-new-age-in-mortgage.html, accessed November 2017.
[vii] Gebre, Biniam, Ahmet Hacikura, Sushil Raja, Kenan Rodrigues, Cosimo Schiavone, “Digital Mortgage Nirvana: Cheaper, Better, Faster,” Oliver Wyman, February 2017, p. 21, http://www.oliverwyman.com/our-expertise/insights/2017/apr/a-new-age-in-mortgage.html, accessed November 2017.
[viii] Gebre, Biniam, Johnathon Liu, Kenan Rodrigues, “The Future of Technology in Mortgage Originations,” Oliver Wyman, August 2016, p. 32, http://www.oliverwyman.com/our-expertise/insights/2017/apr/a-new-age-in-mortgage.html, accessed November 2017.
[ix] Gebre, Biniam, Johnathon Liu, Kenan Rodrigues, “The Future of Technology in Mortgage Originations,” Oliver Wyman, August 2016, p. 32, http://www.oliverwyman.com/our-expertise/insights/2017/apr/a-new-age-in-mortgage.html, accessed November 2017.
[x] Trefis Team, “Wells Fargo’s Mortgage Servicing Portfolio To Grow Thanks To Deal With Seneca,” September 8, 2017, https://www.forbes.com/sites/greatspeculations/2017/09/08/wells-fargos-mortgage-servicing-portfolio-to-grow-thanks-to-deal-with-seneca/#5cfc3c712d80, accessed November 2017.
[xi] Gebre, Biniam, Ahmet Hacikura, Vivian Merker, “A Model for Efficient Mortgage Servicing,” Oliver Wyman, December 2016, p. 36, http://www.oliverwyman.com/our-expertise/insights/2017/apr/a-new-age-in-mortgage.html, accessed November 2017.
[xii] Gebre, Biniam, Ahmet Hacikura, Vivian Merker, “A Model for Efficient Mortgage Servicing,” Oliver Wyman, December 2016, p. 41, http://www.oliverwyman.com/our-expertise/insights/2017/apr/a-new-age-in-mortgage.html, accessed November 2017.
[xiii] Gebre, Biniam, Ahmet Hacikura, Sushil Raja, Kenan Rodrigues, Cosimo Schiavone, “Digital Mortgage Nirvana: Cheaper, Better, Faster,” Oliver Wyman, February 2017, p. 19, http://www.oliverwyman.com/our-expertise/insights/2017/apr/a-new-age-in-mortgage.html, accessed November 2017.
[xiv] Gebre, Biniam, Ahmet Hacikura, Sushil Raja, Kenan Rodrigues, Cosimo Schiavone, “Digital Mortgage Nirvana: Cheaper, Better, Faster,” Oliver Wyman, February 2017, p. 26, http://www.oliverwyman.com/our-expertise/insights/2017/apr/a-new-age-in-mortgage.html, accessed November 2017.
[xv] Gebre, Biniam, Ahmet Hacikura, Sushil Raja, Kenan Rodrigues, Cosimo Schiavone, “Digital Mortgage Nirvana: Cheaper, Better, Faster,” Oliver Wyman, February 2017, p. 23, http://www.oliverwyman.com/our-expertise/insights/2017/apr/a-new-age-in-mortgage.html, accessed November 2017.
[xvi] Gebre, Biniam, Johnathon Liu, Kenan Rodrigues, “The Future of Technology in Mortgage Originations,” Oliver Wyman, August 2016, p. 34, http://www.oliverwyman.com/our-expertise/insights/2017/apr/a-new-age-in-mortgage.html, accessed November 2017.
Student comments on Getting A Mortgage Without Leaving Your Couch
Thanks for the submission on this interesting topic. The digitalization of the mortgage industry has been intriguing to watch with the entrance of new competitors, like Rocket Mortgage and SoFi. In my opinion, this industry is ripe for disruption given the cumbersome, tiring process required to get a mortgage. However, I do find the idea of taking the personal element out of this transaction alarming. This makes me think of our FRC case on Handelsbanken, where the firm operated with a competitive advantage given its human approach to retail banking. This allowed the bank to achieve tangible results, such as lower default rates on loans and much greater customer retention.
Given the level of trust required to digitally provide a significant level of very personal information, how likely do you think consumers will be to adopt this new underwriting approach? I think this point is particularly relevant for Wells Fargo, as their recent headline-making transgressions in their retail business went a long way to erode consumer confidence . With banks getting caught up in competitive selling tactics that lead to fraudulent business practices, how do you safeguard the digitalization of banking services?
 Matt Egan, “Wells Fargo uncovers up to 1.4 million more fake accounts,” CNN Money, http://money.cnn.com/2017/08/31/investing/wells-fargo-fake-accounts/index.html.
On the customer side, I can understand why a borrower might be skeptical of taking out a mortgage from a no-name upstart online lender. I think Wells Fargo will face less, albeit some, resistance given their brand. At the same time, Wells does not plan to close most of their brick-and-mortar mortgage branches – at least not immediately; they just want to provide a convenient alternative for their tech-savage, time-constrained customers.
Thank you for sharing this. I think the mortgage business, which has been around for such a long time, is finally becoming digital and convenient for the customers. However, I wonder if there would be any issue with assessing borrowers and their personality properly. Lending a loan without seeing the customer and simply making decisions based on paper work may be risky for the bank. In addition, easy, quick, and convenient process may cause identity fraud and cyber security issues that may jeopardy the bank and its borrowers. I agree that digitalization is inevitable in the banking business with start-ups threatening traditional bank models. However, I believe that the bank should be prepared with cyber security issues and doubtful borrowers.
HJ – good points.
I actually think that from a credit risk and fraud perspective, digitizing the process is risk-mitigating. Given Wells’ vast amounts of historical customer, loan and default data, they can create strong data-driven models that are not vulnerable to poor underwriting decisions on the part of human underwriters. On the fraud side, Wells can license strong third-party softwares that detect fraud based on identity-based questions, facial recognition, IP address, device fingerprint of applicants mobile/PC, and geolocation, among other tools not always leveraged by traditional lenders.
Cyber is a huge risk, and – given the recent stumblings at Uber and Equifax – I’m not sure how well-prepared financial services companies really are to protect our data.
Fantastic article, thanks for sharing!
You make a very persuasive argument from Wells Fargo’s perspective regarding the best way to enter the digital mortgage game and compete with Rocket and Sofi. As I read this however, I could not help questioning whether digital mortgages are even a good idea, and does Wells, as a huge financial institution, hold some moral resonsibility here. My concerns are first, that through the absence of face to face interaction, hands on document vetting, and relationship building that in-person mortgage application requires, Wells and others might be lowering their standards for who qualifies for a mortgage. Second, I fear that the more “quick and easy” Wells and others make this process, the more casually Americans will approach what should be a carefully thought out financial decision, leading to unnecessary credit score dings for those who are denied, and worse- a loan they are not prepared to service for those that are approved.
These issues taken together, I cannot help but be concerned that we are inviting a similar economic crisis as the 2008 great recession which was of course driven by inappropriately issued home mortgages. I would charge Wells to only enter this space if they could control against these concerns to the same degree that they are currently able to.
Leigh, interesting perspective. From a credit perspective, I believe the more that Wells underwrites risk based on available data and not human interactions, the less likely they are to see underperforming credit across the portfolio.
Agreed that they have to always be careful not to create “another 2008.” To that end, they have to be mindful about how they fund these loans – e.g. to what extent through securitization markets – and how transparent the cash flows and underlying credit characteristics quality really is.
Thought provoking post. I think the viability of digital mortgages for Wells has everything to do with the ultimate destination of each loan: i) is the loan fannie/freddie conforming and will be sold to the agencies, ii) will it be securitized in Wells Fargo’s own securitization shelf, or iii) will Wells keep the loan on balance sheet? (not sure what Wells’s current mix of these 3 is). Digital mortgage origination works for i) above, but would be, in my view, difficult to implement in ii) or iii). It’s a good way to maximize volume for an originate-and-sell model. Howeve,r if Wells is forced to retain the credit risk (iii), then it needs to understand the physical collateral it is lending against, which is difficult to do remotely – someone must be sent onsite. Suppose, for example, Wells develops an algorithm that values a home at $1 mil, and wells extends a 650k mortgage to the borrower. Then, suppose during an economic recession the house’s value drops to 650k, the borrower also defaults on monthly payments, and wells seizes the home. Finally, Wells tries to auction the home off thereafter to receive recovery of its principal, only to find that there is asbestos in the home that will cost $100k to remediate. Wells is forced to incorporate this cost as a discount to the selling price and can only sell the home for $550k, taking a 100k loss on its position.
This scenario would also dangerous for ii) above. Since new risk retention regulations went into effect December 2016, banks are now forced to retain 5% of each securitization they issue to the marketplace, so wells would still have to eat its own cooking.
Agreed. Definitely good that originators now have to retain a chunk of each securitization.
There are some work-around solutions to address the valuation challenges. For example, even if the process is perceived to be 100% digital, end-to-end, for the consumer, Wells could still send someone to visit each house (costly, but possible).
Thanks for sharing JK. Digitization has truly taken the banking sector by storm. My personal wake up call to this trend came when a mobile payment provider founded less than ten years ago in Senegal put in a very serious bid to acquire the country’s second largest mobile network operator (https://www.developingtelecoms.com/business/operator-news/7222-millicom-backs-out-of-tigo-senegal-sale-to-wari-after-finding-new-buyer.html). That said, when it comes to the specific case of mortgages, I agree with the importance of the human interaction piece of the process that previous comments pointed out. In my opinion, taking out a mortgage is still a high-involvement purchase so I would expect people to want to ask a few questions to an expert (at the bank) before they take out the loan. To test the waters, I would start by offering the service to home buyers who already own a home/some equity as they are more likely to be well-informed on the process and product they are subscribing to. As those buyers will tend to be older, I feel better making mistakes will serving them than when catering to the millenial crowd who I rely on more for long term growth.
Thanks Abdoulaye. You’re the only one that points out that borrowers might want to meet the lending officer for advice. I completely agree, and some of the work-around solutions – like chatbots – are insufficient for many applicants.
Thanks for the article – exciting to see how companies are reacting the the shifting tides of technological advancements. I’m curious why you focused on the benefits of digitization in Wells Fargo’s mortgage business specifically – do you think the mortgage business is particularly ripe for disruptive technology enhancements versus Wells’ other businesses? It strikes me that another segment that would benefit from digitization (as much, if not more than the mortgage portfolio) is Wells’ retail banking system through ATMs. As the company’s leadership team discussed in its Q3 2017 earnings report, its 374.2 million branch and ATM interactions this quarter were down 1% QOQ and 6% YOY, reflecting “continued customer migration to virtual channels, lower customer growth, and the impact from lower activity in
hurricane-affected areas”.  Additionally, its 1,514.5 million total digital secure sessions were up 5% QOQ and 6% YoY, reflecting “continued increases in digital adoption”.  Seems to me that your overall thesis is not only applicable to the mortgage business, but to Wells Fargo’s holistic business acitivites.
This article made me think of what Roneal mentioned in the Watson case – where data can be used to easily discriminate against people and can be very dangerous for those in the weaker socio-economic classes. Even though I like the digitization and ease with which you can apply for the mortgage, I worry this may lead to some predatory practices where the computer algorithms based on race, address, credit rating, salary, profession, family size, etc. automatically create a worse mortgage plan than would have otherwise been done by a person that is adding the human touch. Granted humans are inherently biased, but I worry that computers can be taught that biased behavior over and over again, which leads to worse off structures for the poor. Doubt this would happen but throwing out there: just like I think companies should publish salary data for all tenures to be transparent on what everyone is making so there is no discrimination among men and women salaries, similarly the banks should publish their mortgage plans for different categories of people. If this transparency is enforced, I would be more comfortable with this inevitable digitization shift.
Thanks. Some of the underwriting data points that you brought up – e.g. race – would never be considered in an application – and some would definitely have to be taken into account to determine ability of the borrower to pay – e.g. income, credit rating. However, you bring up an interesting point about disparate treatment vs. disparate impact. That is, even if your credit models do not explicitly take into account protected/discriminatory data points (e.g. race, gender), the impact (i.e. who gets loans and at what price) might be discriminatory (i.e. applicants from one race are systematically being offered higher rates).
In order to evaluate the feasibility of this digitization it is essential to look first at the customer promise. I believe that one of the aspects would be “confidence” and “reliability” in bank. One of the main factors that make people trust a bank is the establishment of interpersonal relationships with the employees working in the branches. My point is that branches play a key role in building this trust, so it seems difficult for me that Wells Fargo could get rid of its branches so it will be difficult to reduce costs in this way.
I can see people applying for a mortgage via internet, but that does not mean that Wells Fargo can eliminate its branches and optimize its personnel, so the efficiencies will not be substantial.
Agreed. While the branch infrastructure is extremely costly, they can’t get rid of most of their branches – at least for now…