Worldbuilding In Mortgage Land

Ten years ago, mortgage bankers emerged from the Great Financial Crisis (GFC) into a regulatory regime the likes of which the industry had never seen. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), plus updates to myriad existing financial and consumer regulations, escalated compliance costs for lenders. 

Into that world have stepped mortgage fintechs like Figure Technology Solutions (“Figure”), parent of Figure Lending. Founded in a post-Dodd-Frank world, Figure and other fintechs have reimagined mortgage lending and operate ahead of the technological and regulatory curves impeding some traditional lenders’ paths to profitability. These companies have embraced the challenge of drawing cumbersome financial markets into the future, using tech like blockchain to overcome outdated regulations, technologies, and business models. 

“If you started a company in ‘08 or ‘09, you might not have started it on the cloud,” says Michael Tannenbaum, who succeeded SoFi and Figure co-founder Mike Cagney as Figure’s CEO in April. “The reason cloud started getting adoption was because it actually added value. It wasn’t that people were excited about the fact that they were on the cloud.”

Figure, with its home-equity lending technology embedded within half of the U.S.’s top-20 independent mortgage banks (IMBs), many regional banks and credit unions, and verticals in solar, home improvement, and wealth management, is now evolving to be competitive throughout the broader mortgage space.

Yet, all those commas fail to convey the enormity of the infrastructure project that Figure has undertaken.

A historical parallel for what Figure is trying to do: though the transition from horses to cars as the primary means of transportation in the U.S. was complete by the 1920s, not until President Eisenhower’s signing of the Federal-Aid Highway Act of 1956 did the modern Interstate Highway System exist to allow for the safe and efficient mass transit of goods and people across the country — as critical to national defense as it was to economic prosperity.

The U.S. mortgage market, one of the largest and most robust financial markets in the world, is “held together by relatively old pipes that move money,” says Tannenbaum, describing a veritable septic system choked by “slow money movement.” At roughly $12.5 trillion, outstanding U.S. mortgage debt exceeds the gross domestic product (GDP) of all but two countries — the U.S. and China.

Instead of Eisenhower’s vision for mass transportation, Figure’s transformative agenda addresses mortgage lending’s ‘third-party problem,’ which not only gums up the system, but drives up costs for all.

“The number of different third parties that have to inspect a mortgage as it goes from originator to warehouse line to buyer to investor and securitization,” he insists, “that whole process is something that could be done better with modern technology, and that really hits to the core of what we’re focused on.”

With artificial intelligence (AI) poised to supercharge the pace at which digital finance replaces traditional banking services, to include mortgage lending, the fragility of America’s financial plumbing has never been more evident. As plans formalize for the removal of Fannie Mae and Freddie Mac from federal conservatorship, modernization of mortgage lending’s secondary market has never been more necessary.

“There is a big world outside of the GSEs,” Tannenbaum says, “where people have unique income types, residency types and loan needs. So yes, we have been preparing for this new world. We admire what the GSEs have done to bring liquidity into the housing market, and we aim to expand those benefits beyond their mandate and enhance them with modern blockchain rails.”

Beyond The GSEs

Imagine the cost savings of eliminating bespoke capital markets execution for non-agency loans — that’s what’s at stake for mortgage lenders and loan originators wielding rate tables streamlined by blockchain, Figure’s key to the future of finance.

The ongoing evolution of globalized financial markets, with ever-increasing speed and efficiency, have elevated investors’ expectations that the infrastructure of lending will evolve as well. Early in his tenure with Figure, that’s what Tannenbaum was hired to ensure. However, while “move fast and break things” was Mark Zuckerberg’s famous mantra for Facebook in its growth phase, Figure takes a different tack — move carefully and build things.

“The legacy infrastructure used by the GSEs, in particular around money movement and collateral settlement, makes the GSEs less competitive relative to a more modern solution on blockchain rails, like Figure,” Tannenbaum says, describing the GSEs’ conventional loan market as “generally middle class and upper middle class, U.S. Citizen homeowners.”

As previously reported by NMP, Figure cut its technological teeth on home equity lending because the nascent second lien market had languished in the aftermath of the Great Financial Crisis. Without GSE guarantees, non-qualifying (Non-QM) mortgage borrowers receive costlier financing across fewer loan options. Non-QM lenders face higher origination costs, clunky underwriting, and worst of all, illiquidity.

“The original insight for Figure,” Tannenbaum explains, “actually came from SoFi, where there was this realization that on the personal loan side of SoFi's customer base, 50% of the people were homeowners. And so, historically, people have not gotten HELOCs. Instead they've gotten personal loans, even though HELOCs might be a lower cost form of financing, because the HELOC process was so arduous.”

In June 2024, Tannenbaum oversaw the launch of Figure Connect, a first-of-its-kind, blockchain-based marketplace for the buying and selling of private credit loans. Backed by the Provenance Blockchain — where all loan transaction and performance data is registered — the platform is the first iteration of a to-be-announced (TBA) marketplace, replete with a cash window, for non-agency loans akin to that of Fannie Mae and Freddie Mac.

“A lot of people say they have a flywheel, but I think the flywheel here is actually quite obvious and robust. Every marginal partner that we add adds to the liquidity that we can offer, which then drives down the cost of financing, which then adds more marginal partners,” says Tannenbaum. “It kind of works itself.”

Capital markets are “only just waking up to technological ways of driving credit creation,” Figure’s chief capital officer, Todd Stevens, told NMP when Figure Connect was launched in June. Last March, the company filed paperwork with the Securities and Exchange Commission (SEC) in pursuit of a rumored skinny-dip with shareholders. As that endeavor percolates, Figure is adapting its home-equity lending technology to additional non-agency products with a strong emphasis on Non-QM.

Figure launched its DART System in March, a combined lien and eNote registry service that puts Figure’s ecosystem in direct competition with the ubiquitous Mortgage Electronic Registration System (MERS), owned by ICE Mortgage Technology, a subsidiary of Intercontinental Exchange, Inc., owner of the New York Stock Exchange (NYSE).

“The blockchain displaces trust, which has been a 200-year-old tradition in financial services,” Stevens explained. “‘I’m JPMorgan, trust me.’ With truth, I can prove that. We’re not saying trust is not worth anything. We’re saying that we think truth is just provable when people value that.”

In financial services, trust is forged like a steel cable, but broken like a paper chain. Figure’s multi-pronged disruption of private-label capital markets responds to “huge trends” of assets shifting “out of the banking system and into the private credit market” as nonbank financial institutions like Apollo Global Management and BlackRock “are growing and becoming huge buyers of private credit,” Stevens says.

Apollo has partnered with Figure on a number of its blockchain initiatives. The fact is, most mortgage origination today is not done by banks.

“We are providing the new marketplace through which these nonbank originators can sell to these nonbank buyers, and we are standardizing and setting the terms of trade for all that,” says Tannenbaum. 

That process began in 2018 when Figure and the Provenance Blockchain were launched, while Tannenbaum was CFO and Chief Business Officer at Brex. Every process Figure has followed since 2018 can be cryptographically verified through the blockchain’s digital notary.

“It’s not just cutting corners for the sake of user experience,” he explains. “It’s cutting things out of the system that are archaic or don’t make sense given technology that’s changed, like appraisal, like title, like using a bank account to underwrite rather than to hire underwriters. All of those things are leveraging the technology status quo, or the emerging technology status quo, to change what was the previous regime.”

Truth Over Trust

Operating at the intersection of housing, technology, and finance requires an understanding of all three. Tannenbaum points to Figure’s hiring of Ron Chillemi in September as evidence Figure takes its tripartite pioneering seriously. “You can’t AI your way to AAA,” he says. “You need the reps.”

Though Tannenbaum acknowledges Figure’s use of blockchain as preemptive, “we’re bringing the market there without forcing them to care about the blockchain for the blockchain’s sake,” he explains. 

Where “trust” is built over time, the “truth” blockchain purportedly delivers is purportedly immediate and immutable — be it 2025 or 2035 — underscoring the company’s guiding principle of ‘truth over trust.’ Most people don’t need to understand the intricacies of how blockchain works, just that it does.

“Trust,” he quips, “you add it in little drips, but then it vanishes by the bucket-full.”

“The beauty of blockchain is it brings a lot of the things that should guide good policy transparency,” says Ron Chillemi, Figure’s chief legal officer (CLO), who was a federal prosecutor for nine years before rotating in-house with various companies, including as CLO at Better, also a mortgage fintech.

For companies innovating in financial technologies, counsel is as close to product design as anyone after the programmers. How markets think about “cost of capital” is not confined to dollar-cost, Chillemi says, because time and hassle have operational costs, too. That’s the revolution Figure is driving, he believes.

“Maybe not down to the individual level, but certainly at the transactional level it brings scalability, it brings programmability,” Chillemi says. “We need to get over the threshold of educating regulators, make sure they know what’s going on with blockchain. Show them how it’s secure. Show them how it’s auditable.” They hope regulators are receptive to these lessons.

Tannenbaum calls Figure Connect a lower cost, more efficient, blockchain-native alternative to Fannie Mae and Freddie Mac’s TBA market. The government has taken notes; regulators are part of Figure’s market. Government markets have many constituencies, however, driving Tannenbaum “to focus on our market and continue to grow that, and in some ways take market share from the Agency space.”

“We can serve as a reference to what the Agencies can do or be,” he continues, “and we’ve actually had conversations with the Agencies at various times about our marketplace and our opportunity. Different aspects of what we do have been interesting to them, in particular Ginnie Mae.”

Of course, late-breaking Dodd-Frank-and-related reforms taking effect in recent years have not been written with blockchain or AI adoption at their core. Still, using the technologies of tomorrow to operate compliantly today is as much about good faith and clear communication as ever.

“Regulators recognize that it is our job to pull the market to where it’s going to be. It is our job to keep them informed to the degree we can without compromising anything confidential, proprietary, or privileged, to keep them informed on what we’re doing,” Chillemi says. 

“But,” he adds, “I’m saying something a little bit more proactive. It’s not simultaneous. We iterate on products; they iterate on regulations.” Instead of a dialogue with regulators, it’s more of a call and answer. “You go to new conferences, you hear things, you see what comes out.”

Business likes predictability, yet worldbuilding in Mortgage Land is accelerating at the same time that the ground is shifting under global financial markets. A long leash for innovation is necessary to create an environment for more rapid modernization.

“We’re not in this to be revolutionary regarding technology,” says Chillemi. “While we use tech, tech itself is not the mission. The mission is consumer- and market-driven.”