Fannie Mae and Freddie Mac‘s regulator envisions a future where, perhaps through artificial intelligence and machine learning, errors in mortgages are identified in real time before a loan is closed.
Compliance automation could make eligibility, as well as pricing and pooling decisions, and verify and validate this information.
But this scenario is still a long way off. Although investors have poured more and more money into fintechs – $1.7 billion in 2021, up from $0.4 billion five years ago, according to the Federal Housing Finance Agency – taking out a mortgage has since become more expensive, not less.
The FHFA launched a new fintech office this week, which it says will be the primary point of contact for fintech matters.
At the same time, the agency is seeking input on how to integrate technological advancements into the mortgage lifecycle. Through a information requestthe FHFA said it would like to better understand “potential innovations throughout the mortgage lifecycle and the associated processes, risks and opportunities.”
The FHFA asked the public to help identify “barriers” to implementing fintech in the housing finance ecosystem. He also highlighted the importance of balancing housing equity with technological innovation.
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The FHFA said it was following in the footsteps of other financial regulators by creating its own fintech office. Agencies with existing fintech offices include the Federal Deposit Insurance Corporationthe Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau.
The widely used term “fintech” encompasses digital innovation in many parts of the mortgage finance ecosystem, the FHFA wrote. The agency proposed three narrower categories for fintech with respect to mortgage finance: “mortgage technology”, which includes the digital processes applied to the origination, underwriting, servicing and investing of mortgages ; real estate research, transaction and management, or “prop tech”, and regulation and compliance, also known as “regtech”.
The agency expressed interest in fintech’s role in the residential mortgage “ecosystem”, its role in the secondary mortgage market, the risks of using fintech and its application to compliance activities and regulation.
In terms of risk, the FHFA has highlighted a number of examples that it is considering. These include inadequate regulation of the fintech sector, cybersecurity vulnerabilities due to “complex, misunderstood, or mismanaged innovations,” threats to consumer privacy, fair lending breaches, and risk. Legal, Compliance and Reputation.
The agency also raised the possibility that algorithms could have differential and negative impacts on minorities or underserved markets, and that fintech platforms could “erode the accumulated wealth of individuals and businesses” who participate in them.
There are many things in the mortgage process that fintechs could improve, but so far, writes the FHFA, it hasn’t made mortgage origination less expensive. Full production costs per loan totaled nearly $9,500 in the fourth quarter of 2021, up from just over $7,500 five years earlier.
The time it takes to close a mortgage is still long — on average, 46 days from application to closing. During this period, the average potential borrower has 30 interactions with sales representatives, the regulator wrote.
These costs and the time to close a loan are not evenly distributed, according to the FHFA.
“Underserved populations are often the most cost and time constrained due to historical and current structural and systemic barriers,” the agency wrote.
But the agency is optimistic that fintech innovation can eventually make mortgage processes fairer and more efficient.
Although the efficiencies and cost savings have yet to materialize, the FHFA cited research from McKinsey and company claiming that a “redesigned and digitized mortgage origination process could reduce costs by 10%, reduce lead times by 15-40% and reduce interactions with borrowers by 15%-40%”.