1. Overview of US Mortgage Market
The famous lines by Old Sea Brigade, "With your hands in the dirt, you call up a friend, swore you would change but you’re at it again," are a metaphor for the considerable effort required to achieve growth and success amid challenging times. Highly successful digitally rewired mortgage lenders have also demonstrated the same conviction when it comes to making hands-in-the-dirt changes needed to compete profitably in the rapidly transforming competitive US mortgage landscape. Highly advanced digital mortgage platforms, a cutting-edge tech stack and an agile operating model are now critical battle zones to differentiate and win in the US mortgage lending market.
The value of the US residential and commercial mortgage market is staggering and is much greater than the country’s $27 trillion GDP or the $25 trillion value of its stock market. Though the US banks have substantial exposure to the mortgage market, the existing structural vulnerabilities in the market and several potential near-term risks could be seismic for the banks, real estate business and the US economy. The vulnerabilities inherent in the traditional mortgage lending model are becoming severe in the current distressed lending environment. As digitization continues to reshape the competitive landscape, banks following the old playbook are continuously losing their traditional advantages. Therefore, digitalization has become an imperative for the US lenders. However, large-scale digital transformation is certainly not easy and very few banks have successfully implemented their digital strategies. Imprudent risk-taking and inadequate digital investments can lead to significant stress. Therefore, creating digital transformation roadmaps requires a holistic set of capabilities. The effort will be significant, but so will be the reward.
This paper talks about the changing landscape, highlights the knock-on effects of the current distressed environment, and discusses how banks are approaching digital transformation.
Source: FDIC, 2023 Risk Review, Financial Stability Report, May 2023; www.federalreserve.gov; www.mba.org; *1- to 4-Family
2. Changing Landscape of US Mortgage Market
The US mortgage lending market shows fierce competition between banks and non-banks (i.e., fintech digital lenders). Therefore, entering the top quintile of banks / non-banks or even improving market share within the market is not easy. Most lenders have embarked on digital journeys to transform their operating models to survive the cut-throat competition, while a few have opted to exit the market. Given the changed market dynamics, large US banks, including Wells Fargo, have taken a step back from the residential lending business, which has given more space to non-banks. In an evolved market space, lenders are competing across three different business models – consumer direct (retail), broker direct (wholesale) and correspondent lending (lenders purchase completed mortgage loans and then sell them on a small mark-up). Rocket Mortgage, a fintech lender, dominates the retail channel; UWM leads the wholesale residential mortgage segment; and PennyMac leads the correspondent lending segment. In 2022, the top 25 lenders originated 2.6 million loans and accounted for around 37.2% of the total US mortgage origination market, a drop from 43.9% last year. Still no signal player accounted for more than 10% of the market share.
Source: *Housing Finance At A Glance Monthly Chartbook September 2023, www.urban.org
3. Challenges for Banks in Mortgage Lending
Banks in the mortgage lending business are facing challenging times. As a wave of distress rolls towards residential and commercial real estate, banks are pulling back from mortgage business.
3.1 Slumping Mortgage Lending Amid Rising Interest Rates
The mortgage industry is highly sensitive to interest rates as these dramatically alter mortgage financing costs and disrupt returns for banks. Therefore, interest rate uncertainty continues to weigh on markets and put downward pressure on borrowers and commercial real estate properties. Amid rising mortgage rates, the origination and refinance markets are shrinking, as fewer consumers are interested in making new property purchases or refinancing their mortgages.
Source: MBA Mortgage Finance Forecast
3.2 Structural Issues and Concerns in CRE Market
Prolonged stress in the US CRE (Commercial Real Estate) market poses a risk to banks, as CRE loans are the single largest category of loans they underwrite. The key structural issue is the heavy concentrations of CRE loans among Small and Regional banks. These loans account for 43% of small banks’ total lending, compared with just 8% of large banks. Small and Regional banks are more susceptible to deteriorating CRE fundamentals as compared to larger banks. The US CRE market faces significant risk of default as $2.75 trillion of loans are set to mature between 2023 and 2027 . Banks and Thrifts, with a combined loan portfolio of approximate $2.86 trillion are expected to face the maturity of $1.44 trillion of loans by 2027.
4. Mortgage Technology - Reshaping the Lending Market
Digitization and standardization of mortgages are rewriting the mortgage lending banking model. Initially, mortgage lending was judged to be too complex to be digitized, but now, digital native banks are reaping high benefits of digitization in terms of speed, efficiency, and profitability.
4.1 Accelerating Pace of Automation and Digitization in Mortgage Lending by Banks
Banks are undergoing a massive automation and digitization drive to modernize their antiquated mortgage legacy solutions. In the US, mortgage application volumes fluctuate heavily due to changes in interest rates, and banks face significant challenges in overcoming the mortgage demand shocks . Compared with banks, non-banks are technically better equipped to face frequent mortgage market volatilities. By automating mortgage lending process, banks are efficiently managing any short-run elasticity of loan supply in response to any mortgage demand shocks.
For lenders, acquiring mortgage digital capabilities has now become key business imperative for moving collateral through the digital mortgage ecosystem. Banks are continuously engaging third-party mortgage technology providers to automate their labor-intensive and paper-heavy mortgage lending workflow. Recently, some of the largest financial services firms including Wells Fargo, U.S. Bank, M&T Bank, and Truist have partnered with Blend Labs to modernize their mortgage technology infrastructure. BMO has also partnered with Blend Labs to leverage the latter’s mortgage eNotes capabilities and eClose product to allow customers to complete their mortgage refinancing from anywhere at any time.
Source: STRATMOR Group, Technology Insight Study; www.raymondjames.com, US bank technology spending
5. How Evalueserve can Support Mortgage Lending Institutions
Evalueserve offers a variety of solutions for real estate and mortgage lending sector, encompassing portfolio management and New Money underwriting processes. These solutions are designed to streamline the current lending process. Our team of credit experts applies a Mind+Machine approach, augmenting subject matter expertise with in-house-built digital and analytical capabilities. This integration enhances clients' operational efficiencies.
Evalueserve’s proprietary Lending Automation Suite, which includes AI-enabled automated spreading, has delivered significant cost and time savings for major banks globally.
