For a long time, the housing sector used to depend largely on the traditional mortgage market up
until next generation mortgages were born. Since 2010 non-bank lenders and financial technology
lenders (shortened to “fintech”) were starting to turn the sector on its head using data and new
technologies to make buying a home an easy and digital process. Fintech businesses use technology
to streamline and automate the mortgage origination process. Within 10 years they have increased
their total market share from about 5 percent to well over 15 percent.
Starting with digital mortgage applications borrowers can obtain without talking to a loan officer or
visiting a physical location. The needed documents can be uploaded electronically where they can be
processed by the fintech lenders. Furthermore, other information – like the borrower’s income,
assets and credit history – can be verified by accessing record and account directly which has
historically been a lengthy document- and labour-intensive underwriting process.
Digital mortgage applications are only one dimension of the FinTech model, they serve as an easily
observed indicator for the other, complementary technology enhancements. The mobility and
simultaneously the ease of access for the client during the entire process is a huge advantage for
digital lenders in comparison to traditional lenders. Oftentimes technology allows fintech lenders to
assess the borrowers default risk more efficiently through customization done complex,
sophisticated algorithms.
When looking at offered interest rates fintech firms tend to offer lower interest rates than
traditional nonbank loans, and similar interest rates to traditional banks. For mortgage loans,
interest rates vary by less than a percent between fintech and traditional banks. Overhead costs, as
well as operational costs, might be the reason that some fintech interest rates are lower than that of
banks. Introducing internet technology into the mortgage origination process has the potential to
make mortgages cheaper and more accessible by reducing the costs of information and by hosting
all necessary services on a single digital platform. Furthermore, people wanting to refinance their
property have been gravitating more likely to digital lenders. For instance, if interest rates fall
sufficiently, households can typically benefit from refinancing their mortgage to take advantage of
lower rates and therefore turning to digital lenders because their loan origination systems are easier
and less time-consuming. The overall time until closing is about 20 percent less than with traditional
lenders in general. The difference is larger for refinances than for purchase mortgages. Overall, the
financial service of fintech companies is provided quicker, more accurate, safer and more affordable.
There is still a lot of work to be done when it comes to ethnic equality when it comes to fintech
lenders. For instance, even though they improved access to the mortgage application process for
African Americans and on average a greater share of African Americans submits applications to
fintech lenders compared to traditional lenders, they are more likely denied by a fintech lender.
Fintech’s denial rate of black applicants is also higher than that of traditional banks, suggesting that
racial disparities exist in the access to fintech mortgage credit.
In conclusion, the usage of more automated data sources will continue to grow and will enable more
automated decisioning, less data entry and higher quality and depth of data.