The Dawn of “Mortgage 3.0”

A new era of mortgage technology is nearly upon us.  Mortgages will be fast, painless, transparent, simple processes with much smarter lenders providing more accurate decisions with more granular rates and terms. And the whole process will be mobile.

• Consumers will be happier
• Real Estate Brokers and Loan Officers will be freed from tedious paperwork
• Mortgage Lenders will be more scalable

Companies that establish a leadership position in Mortgage 3.0 will derive disproportionate increases in revenue and profitability in this $30 billion / year industry. Clearly, this is a massive opportunity.

How We Got Here

Historically, if you wanted to get a mortgage, you had one option. You needed a fax machine, a phone, FedEx envelopes, a broker, and at least a month of lead-time. By the time 2000 rolled around, a number of online non-bank lenders emerged to give would-be homeowners a second option, to apply for loans (typically refinancings) via the web (“Mortgage 2.0”). Now, looking forward at 2017 and beyond, the new shape of mortgage lending is finally coming into focus: the mobile-first lender (“Mortgage 3.0”).

• The Mortgage 1.0 Era: Brick-and-mortar lenders like Wells Fargo and Bank of America will have their work cut out for them when it comes to developing products that work for millennials.
• The Mortgage 2.0 Era: Existing non-bank lenders (online, desktop-first) like Quicken Loans will have an easier time nimbly creating products that millennials need. For that reason, PE firms are providing capital to these players so they can grow—and they’re doing exactly that. Other players in this category include LoanDepot (backed by Parthenon Capital), Stearns Lending, Nationstar Mortgage (backed by Fortress), and Amerisave.
• The Mortgage 3.0 Era: Brand-new mobile-first mortgage banks are popping up. Companies in this space include Rocket Mortgage (Quicken Loans), Sindeo (backed by RenRen and SecondCentury Ventures), Better Mortgage (backed by IA Ventures and Moderne Ventures), Movement Mortgage, Eave (MetaProp), Lenda (MetaProp), LendingHome (MetaProp), and SoFi (backed by RenRen and Softbank).

Millennials Driving Change

Like those who came before them, millennials are going to want to buy homes as they get older. Millennials are already a large part of the economy, and they will be the next group of people who take out loans to buy homes.

Millennials were reared on the internet. They want to partner with lenders who are mobile by design and are completely transparent. Millennials don’t want to wait around forever; they want loans quickly. They also want to be able to choose loans on their own terms (i.e., self-service).

In order to attract business from millennials, lenders are going to have to meet those needs.

Demand from Millennials represents a massive opportunity, so developing solutions that fulfil their needs is critical to the mortgage industry.  Furthermore, a highly automated and mobile-first mortgage process will benefit both Millennials and mortgage originators. This is accelerating the rate of change, new companies and products, like Quicken Loan’s Rocket Mortgage, are already coming to market this way.

Opportunities Abound—Right Now

The opportunity for startups to disrupt the mortgage industry is very clearly there, and many new companies are taking advantage of it. Entrepreneurs and investors need to find segments of this market that are underserved or less developed. They need to figure out how to innovate in ways that automate parts of the mortgage process, bring it only and mobile-ready, and make it more transparent. Anything that decreases the time and cost needed to get a mortgage should be a goldmine.

Any company that figures out how to innovate correctly will have the revenues to prove it. The mortgage market, after all, is a trillion-dollar market—there’s a lot of room to play here. Because people need homes, you don’t have to worry about a lack of customers, either.

Mortgage 3.0 Enablers and Technology Innovators

In addition to the millennial mortgage gold mine, there is also a huge opportunity to sell the right tools (i.e. integrated software, automated process, and verification services) to the emerging class of Mortgage 3.0 lenders.  The most critical new tools include:

• Modernized Consumer Interface: Roostify, Floify, and Blend Labs are great examples of an improved, intuitive, and transparent front-end solution that integrates the whole process
• Automated Asset and Income Verification:  FormFree and FinLocker are automating the asset verification process by collecting and validating the consumer’s documentation, turning what was typically a 30-60 day process into something that is wrapped up within two or three weeks, and targeting shorter timelines — precisely what millennials want.
• eClosing:  Bringing all of the documentation and information into one package, eliminating paper, and enabling seamless electronic signatures is the final step in accelerating the mortgage process, which is where Pavaso, DocMagic, and eLynx shine.

But innovating in this space is not without its challenges. There are so many different types of banks, real estate companies, and other players. It can be quite challenging to integrate everything together, particularly when most forms are non-standardized.

Active Investors

Investors have already begun to take note.  Capital is flying into this sector at unprecedented levels. Seed firms—like MetaProp, Grey Wolf, Camber Creek, Second Century, ElmSpring, Moderne Ventures, and Zen Stone —are focused on this sector and cultivating whole portfolios of companies to address the opportunity.

Considerations

Regulations, Compliance, and the Economy can all slow this train down.   But one thing’s for sure: Whoever figures out how to integrate and standardize processes across the mortgage industry can look forward to an impressive payday.

If you liked this piece and are currently building something great in the mortgage tech space, please reach out so we can chat.

About Inertia Advisors:

Inertia Advisors is a boutique investment banking firm focused on the technology industry. Our team has been active with companies in real estate tech for several years, including advising the following transactions: StreetEasy — Zillow, IDX — Main Street Capital, and most recently Real Matters — Linear Title. Inertia has offices in New York and San Francisco. Inertia Advisors, a division of KEMA Partners LLC is a SEC licensed and FINRA member broker-dealer.