Fintech has been changing the process of buying a residential home for years, but the pandemic has boosted the speed of change into hyperdrive. While some of these innovations may not be required after shutdowns are eased and social distancing becomes a distant memory, consumers may still be drawn to the technology that made these trends possible as it increases the efficiency and convenience of the home buying and financing process.
Many have noted the effect that companies like Zillow and Trulia have had on the traditional process of searching for a home, as well as the role of realtors and brokers in that search. Before these tools became available, potential buyers’ sole sources for information were weekly newspaper listings and realtors, who acted as filters and gatekeepers to the multiple listing service (MLS), the central database of all homes on the market. The information and pictures initially available from these sources were limited. With the rise of online search tools like Zillow and Trulia, potential buyers suddenly had direct access to constantly updating listings, with a full set of facts about the house, its school district and neighborhood, and loads of staged pictures. While consumers previously became adept at finding homes that interested in them using those online tools, very few would be able to finalize their short list with apps alone. Hours on home search apps would often result in days of hopping from open houses to appointments and back to apps again. With homeowners reluctant to open their homes to potential buyers, open houses heavily restricted and in-person browsing curtailed, consumers have had to rely more than ever on online home search tools. This has led not only to the democratization of the MLS, but additional fintech tools have sprung up in short order to replace more and more aspects of the home search process. We have seen virtual tours (both as curated walkthroughs and as 360-degree photo manipulation tools that users can direct to explore on their own). In some cases, drones even lead tours around a property or through a neighborhood. Even supplemental tools, like neighborhood watch apps, local Facebook groups and Google street view now provide additional ways to learn about a place without physically going there. Despite anecdotal reports of “sight unseen” home purchases increasing dramatically in recent months, most prospective buyers will still need to do some in-person visits to confirm the house they love online is just as magical in person. After all, it is difficult to tell that the basement smells like mold, or that when the light comes through the kitchen windows in the late afternoon just so, you know you already feel at home there, without actually stepping foot inside. Nonetheless, instead of visiting twenty or more houses in person, if a prospective buyer only has to visit one or two in person before reaching a final decision, that relieves pressure not only on the buyer side, but on the seller side as well. It may even result in fewer days on the market for many properties. Even once concerns around indoor meetings and social distancing subside, this is one fintech-enabled trend that we do not think will go away.
The rise in online financial transactions may have started with online banking, but consumers have quickly embraced online-only financial transactions for a whole range of products, including mortgage loans. Online-only lenders and even traditional lenders with a more robust online presence or dedicated app for fully electronic applications have been drawing an increasing market share for a few years, but with consumers reluctant to meet in person with mortgage brokers or go into banks, these options have become more appealing. Fintech has made it easier for consumers to compare quotes across multiple lenders (and for smaller or regional lenders to reach a broader swath of borrowers), with an easier application process once the lenders and borrowers are connected. Fintech platforms also offer accelerated speed to preapproval and to closing loans, allowing the timeline from finding a house to closing to be condensed, which may help buyers using financing compete with cash offers when it comes to avoiding or minimizing delays.
Fintech has not only led the charge in process-oriented lending changes, but also in helping lenders underwrite loans and develop products. Fintech companies have been using data mining to develop alternative underwriting models that use different inputs than those traditionally used by banks to provide a more accurate credit analysis. This could lead some consumers to be offered more affordable loans, or to qualify for more loans than might otherwise have been possible through traditional underwriting. In fact, a study by the Consumer Financial Protection Bureau found that “[an alternative underwriting] model approves 27% more applicants than the traditional model, and yields 16% lower average [annual percentage rates] for approved loans.”1 In the height of the first wave of the pandemic, many banks tightened their underwriting standards or even stopped offering certain products all together. For example, J.P.Morgan raised lending standards for conventional mortgages from a minimum 620 FICO score and a minimum of a 5% down payment to a minimum 700 FICO score and 20% down, and it stopped offering HELOCs indefinitely in April, due to uncertainty in the economy. Uncertainty in the economy will continue to play a role in setting underwriting standards, but even once the economy is fully stabilized, these tools will retain an appeal for both lenders and consumers. If fintech can offer some additional certainty for lenders, it makes it easier to find a path forward to serving a broader range of customers, including those who may traditionally have been underserved or underbanked. Some banks are looking to partner with fintech companies to compete on this front, rather than developing their own technology. Fintech will remain highly utilized by lenders so long as it enables them to achieve better underwriting results and access a larger share of potential customers.
In addition to the rise of the digital application process and changes to underwriting, no discussion of changes to the lending process from fintech would be complete without discussing blockchain technology. Blockchain presents opportunities for lenders and servicers to reduce costs at a number of different points in the lifecycle of a loan. First, costs may be reduced upfront at origination due to streamlined underwriting and simplification of paperwork and closing processes. Costs may be further reduced on an ongoing basis during servicing due to the automation of many traditional servicing processes and the transformation of the role of a document custodian. Lenders may also save on costs when loans are transferred in the secondary market due to reduced due diligence costs from higher data integrity and automated due diligence processes, which could also lead to fewer repurchased loans. These cost reductions will create savings and different incentives for lenders. Some of these benefits will be passed on to consumers. We foresee increasing numbers of lenders and servicers looking to migrate their records to blockchain, and even more promising, to originate increasing numbers of loans as native digital assets in the coming years.
While traditional closings still occurred in person in many states even at peak pandemic (or were suspended all together in other states) in response to COVID, many states passed laws to facilitate remote closings, including the expanded acceptance of electronic signatures, the authorization of enotaries, and, most dramatically, the announcement that electronic signatures on documents may be recorded. In many states, those measures were expressly temporary, but as people have gotten used to this new normal and become accustomed to streamlined processes without having to gather in an office for hours with strangers, there is a demand for this flexibility to continue. We have already seen lobbying efforts underway in several states to enact these changes on a permanent basis. If these changes are adopted on a widespread and permanent basis, we would expect to see “closing apps” pop up that will gather all the appropriate signatures, be used to verify identification, compile and distribute copies of all relevant executed closing documents and generally streamline the process. These apps could realistically also be used for in-person closings, if anyone remains interested in the ceremony of the “closing” and walking away with the keys to your new house in hand. This would permit greater flexibility for scheduling (including more closings in a day), as well as allowing people in remote locations to participate directly, whether as an out of state homebuyer, or as the loan officer who initiates the wire.
Mandatory remote working has been a boon to fintech companies offering remote solutions, and employers and employees have become more comfortable using them. Numerous companies have announced an ever-extending list of “back to the office” dates that now stretch to the end of 2021 for some, and others have made remote working a permanent option. Working from home is likely to continue at higher rates than pre-COVID even once offices are fully back up and running for people who need to or choose to be there. People have expressed reluctance about using public transit to commute to their offices. These factors have led some homebuilders to reevaluate their strategies. The trend in recent years toward denser communities planned around public transit may be paused or reversed, as some consumers seek a return to space of their own in less dense communities after facing quarantine and outbreaks in cities. We have also observed a return to the “bigger is better” trend that dominated the 1990s and early 2000s, as well as increasing interest in private or separated spaces for office work and remote schooling. It remains to be seen if these trends will persist post-COVID or if there will be a rebound into the cities. If companies become willing to adopt permanent remote working on a part- or full-time basis, that could further drive this shift, as if employees no longer have a daily commute, their incentives to live in large job centers or transportation hubs are diminished. This will need to be incorporated into appraisals, forecasting, homebuilding projects, sales targets, trend maps and many other areas of the residential economy where fintech companies will have the opportunity to take a leading role.
A prolonged economic downturn will make it more difficult for consumers to come up with down payments and may push them towards alternative buying arrangements. In recent years, we have seen a number of offerings from fintech companies aimed at this problem, such as offering consumers the chance to rent with an option to buy, or partnering with consumers so that the consumer picks a home, company buys it and leases it to consumer. The consumer then has a period of time to exercise a purchase option and a portion of rent is dedicated towards building up a down payment. Given that some consumers, and particularly first-time homebuyers with student loan or other debt, have struggled to enter the real estate market in recent years, we expect many more creative purchase arrangements to pop up as well, regardless of the post-COVID performance of the economy as a whole.
Fintech will continue to serve as a catalyst in changing how consumers find, finance and buy homes. While COVID-19 may have accelerated these and brought about additional changes, it is likely that consumers will continue to find attractive the convenience and efficiency of the innovations that fintech has brought to the marketplace, long after COVID-19 is a distant memory.