It wasn’t that many years ago that if a consumer wanted access to credit to buy a home, they would submit to whatever process a mortgage lender required in order to secure it. There was no choice available to the borrower and no particular focus on the borrower’s experience. In hindsight, that seems archaic, medieval even. If only the Inquisitors had such elegant methods of torture available in their day.
It wasn’t really that bad, of course. We just didn’t care about it. Today, we are part of a more enlightened industry, where a good borrower experience is not just a compliance mandate, but also an important competitive differentiator. How the borrower feels about the loan origination process matters and it matters from the very first moment of contact with the lender.
Which brings us to the Point of Sale (POS).
These technologies promise to deliver a fully-digital and automated loan origination service that will allow prospective borrowers to self-serve their way to new home financing. It’s a big promise, but it comes in response to a serious industry problem. Fannie Mae research shows that recent homebuyers believe gathering all of the necessary financial information is the most difficult part of getting a mortgage. More than a quarter say that paperwork reduction is critical to making the process easier.
Even a cursory look at this part of the mortgage business will reveal dozens of competing technologies, all jostling for position in what has become the fastest growing segment of the industry. Fintech firms have jumped in with both feet. As Garth Graham, Senior Partner at STRATMOR Group
, points out, “anyone who could get a couple of Loan Officers to use their software could demonstrate a viable product.”
That, in and of itself, is no reason to discount those players. Thirty years ago, many of the loan origination systems in use today were getting their start in the very same way. So, with those that how then can a lender determine which companies will succeed and avoid forming partnerships can’t?
To find out, I called upon a man who makes his living evaluating mortgage technology business models and helping the strongest competitors find acquirers.
Clues that a technology will succeed
John Guzzo (pictured right) is Managing Director at Berkery, Noyes & Company LLC
in New York. His company has been instrumental in many of the M&A deals that have occurred in our industry over the past two decades. Guzzo is currently tracking about 34 different companies in the emerging POS space. But he adds that many of the LOS developers also compete for mindshare here.
He says he’s currently fielding frequent calls from companies that claim to be developing the new breed of POS. While he’s not ready to divulge his list of winners or losers, he was willing to share the six attributes that tell him when a company will make a good acquisition target. Knowing which firms are likely to be attractive to acquirers will provide useful clues to lenders seeking POS technology.
Here are John Guzzo’s six key attributes for evaluating a mortgage technology firm:
1. Revenue growth: The company should be demonstrating year-over-year revenue growth. Guzzo said he likes to see 20 percent to 25 percent year-over-year growth for a number of years. In the POS space, where companies are typically generating under $15 million a year in revenue, that may not be a lot by some standards, but it is a good sign.
2. Proprietary technology: A strong company will have developed its own technology and be the owner of the associated intellectual property. Many companies that resell technology will position themselves as technology firms, but Guzzo says that’s not technically true. This is critical, he says, because it can be challenging to build upon someone else’s technology, making it very difficult to meet changing customer needs and expectations.
3. Scalable technology: Everyone knows a technology that cannot scale is a non-starter, but Guzzo points out that there are actually two dimensions to scalability. First is technological, which is what we normally think of here. It means you can add new products and customers without having to change out the platform. If a tool can scale technologically, a larger firm may find it attractive to apply to its larger client base. The second dimension is operational scalability. Some companies, such as Appraisal Management Companies (AMCs) may develop their own technologies, but they do so to enable a service provided by staff. Knowing what it would take to scale operationally may also be important to an acquirer of a technology firm.
4. Low customer concentration: No single customer should generate 25 percent or more of the company’s overall revenue. If they do, growth numbers may not mean what an acquirer thinks they mean and the loss of a single customer could significantly reduce the value of the company.
5. A motivated management team: When everyone on the management team is passionate, motivated, and hungry for success the firm is much more attractive to acquirers. This makes sense as few would choose to partner with a firm when the management is simply looking for an exit strategy. While Guzzo admits this can be rather subjective, he has learned over the years to see the signs.
6. EBITDA margins: Guzzo said he put Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) last, even though many acquirers may look here first, because he knows that growing a company may require management to reinvest earnings in order to capture more market share. Guzzo said a growing company that is winning market share is often valued on their revenue multiple and not an EBITDA multiple.
Most of the companies Guzzo and his team evaluate won’t score high marks in all six categories, but he says that if you find a company that does well in four or five you may have found a winner.
“If I find a company that has all six, that’s a real gem of a business,” Guzzo said.
Why lenders are driven to find a POS partner
Finding the right technology partner is a somewhat different exercise from finding a company to acquire. Even so, lenders competing for mortgage borrowers today are driven to find good digital mortgage partners. It’s a competitive necessity.
Or is it?
According to the J.D. Power U.S. Primary Mortgage Origination Satisfaction Study
, only three percent of mortgage customers rely exclusively on digital self-service channels in the origination process. As the company’s Financial Services Practice Lead John Cabell put it: “Technology alone is not a magic bullet in this market; the key is knowing where to leverage it and where to layer in more traditional forms of one-on-one support.”
So, is a fully digital POS really a requirement today or is this drive the result of clever marketing?
To find out, I called upon Garth Graham (pictured left), a 30-year industry veteran and Senior Partner at STRATMOR Group.
“Adoption of digital mortgage software (which includes POS) has doubled in the past year,” Graham said. “It’s becoming table stakes now, so lenders can engage customers in a way that’s more in line with their expectations. The bottom line is these tools impact customer satisfaction.”
And that, says Garth, is why every lender is looking at them today. According to the 2018 STRATMOR Tech Insights Survey, the number one reason mortgage executives are spending money on digital mortgage capabilities is to drive higher levels of satisfaction.
And digital lending is getting results. Graham says recent ROI studies his consultancy has been hired to perform clearly show that digital mortgage technologies are resulting in a substantial increase in the net promoter score—a measure of borrower satisfaction that reveals how likely a customer is to refer a lender.
The problem, Graham says, is that only 50 percent of lenders have an effective way to measure the impacts of their actions to determine which ones are actually driving higher satisfaction. Even so, when it comes to these technologies, Graham says ROI studies show that it’s very hard for a lender to spend too much money on technology as long as the ROI is being realized.
Besides, there’s plenty of evidence to show that tech isn’t really all that expensive anymore, at least not in relation to the lender’s overall costs.
While large banks have significantly increased their technology spend of late, which now accounts for about 16 percent of overall costs, most other segments are still at 10 percent, with some as low as four percent of total costs.
Tech costs even less when you look at it from a cost-to-close perspective. The Mortgage Bankers Association (MBA) still has total cost to close hovering near $8,000, but even the largest banks are spending less than $1,500 of that on tech. For smaller institutions, it’s closer to $300-$500, according to MBA & STRATMOR peer group surveys.
And lenders are spending money. For its mid-year 2018 survey MBA partnered with Celent, a research, advisory and consulting firm focused on financial services technology. They focused on loan origination technology spending and usage. One key takeaway: Technology priorities and increases in tech spending are focused on the very front-end of the loan origination process and are consumer interfacing. Lenders said they were focused on opportunities for consumers to have more control over aspects of the process. That’s POS.
But as they move down this path, lenders are experiencing challenges. The most significant of these is connecting the digital POS to the backend LOS. Graham says that failure to create a tight interface can result in a stellar POS experience, followed up by a decidedly less satisfactory origination process. The end result is not what the lenders are looking for.
Another problem is that in order to show a viable product, these tools are created in a manner that is decidedly Loan Officer-centric. This allows them to get the adoption they need to become players in the space, but it often doesn’t sit well with executives working in larger enterprises.
For instance, Garth points to POS tools that allow borrowers to photograph documents for easy upload. A nice experience for the borrower, but what if a copy of that sensitive personal information remains on the borrower’s cellphone? Data security experts in larger lending enterprises begin to experience shortness of breath when they think of things like this.
“The fact is, the more LO-friendly the technology is, the harder it gets for enterprise lenders to approve it,” Graham said. “In some cases, lenders will just tell Loan Officers they can’t use it.”
That’s harder to do with Mortgage Brokers, of course. First, increasing competition in the market has once again made these sales professionals important to the industry. Second, they are fiercely independent and just as likely to find another wholesale lender to work with than to conform to any particular lender’s technology requirements. And third, they’re not likely to spend much money on technology.
This has created a gap that some competitors were happy to step into, including NAMB All-In, Arive and a number of other Broker-facing POS systems. It’s not yet clear which of these systems will be preferred by Brokers.
One thing we do know is creating software front line originators will love isn’t easy. Even so, that’s where the POS battle is currently the fiercest.
What mortgage brokers want in a POS
Anthony Gioia (pictured left), Senior Mortgage Loan Originator with Oceans Lending
, has been an active participant in the mortgage business for the past 24 years. Unlike many Brokers, he has also started, owned and sold technology firms in the appraisal and title businesses. He gets technology. But at this point in his career, he finds originating loans to be most satisfying.
Gioia currently originates loans using a collection of software from a number of vendors. He cobbled his own system together in search of increased efficiency. But he couldn’t point to any one tool available on the market today that he felt would meet all of his needs.
“They haven't developed what is really, truly needed yet,” Gioia said. “And that is an all-inclusive and all-encompassing system. Today, we need three or four systems working together to be as efficient and productive as we can be. But, the ultimate tool would keep a Loan Officer in a single system all day long.”
Gioia says the perfect system would be made up of at least three critical components:
►A good CRM
►A point of sale system, and
►The database of record (typically the LOS)
If all were bundled into one system and integrated with credit, AUS, pricing engines, eSign and other necessary technologies then, Gioia says, Brokers would have the means to be much more productive.
Until he finds the perfect system, Gioia says he’ll continue to use the best tools he can find, combined in a way that gives him the most efficient process. He knows something better will eventually come along. So far, it hasn’t.
“Nobody has figured out the ultimate system,” Gioia said. “Nobody.”
Rick Grant is Special Reports Editor for
National Mortgage Professional Magazine and Mortgage News Network. He may be reached by phone at (570) 497-1026 or e-mail [email protected].
This article originally appeared in the April 2019 print edition of National Mortgage Professional Magazine.