Nearly 30 years ago, I set off to begin my amazing career in homeownership and mortgage finance. I’d like to think that in that time, I’ve learned a thing or two about how we should emphasize the importance of smart, precise change into our industry, especially for the benefit to the homeowner. The sad truth is that, in those years, the process of homebuying has not seen a revolutionary change, like I once thought, and instead is on an evolutionary path. Like it or not, this is simply the way it goes, and the march toward the digital mortgage can be measured not in leaps and bounds, but in small steps forward.
Let me put some context around how tech gets introduced and then slowly realizes its potential. What has changed in the last 30 years? When people are thinking of buying, not as much when they are selling, but when they first set out to buy, they head to the Internet. We all know there are very dominate players who engage with that consumer first.
Prediction #1: The tech revolution is now more of an evolution
Did we all wake up on Jan. 1, 2020 and decide that tech advances will be huge in the mortgage finance space this year? Not quite, it’s been coming for some time, but several key factors have shifted on the journey up until this point.
When I was the chief executive officer of Realtor.com 18 years ago, I would march around with a sign saying, “The revolution is coming, you better get with it.” The rallying cry, logically, was that we were in for the ride of our lives and we buckled up. However, the high-speed race never really shot straight out the gate. The reality is the use of the Internet in mortgage finances took years to develop and to take hold.
Nearly two decades later, consumers now jump on the Internet before they even go look at a home physically. The appetite for gathering facts about the demographics of the neighborhood, as well as information on the property itself, is now widely available and transparent.
This access is very empowering to the consumer and they now expect to have that transparency throughout the entire transaction from start to finish. We tied “MyHome” to the escrow number, so the consumer, agent, whomever, can simply input their escrow number to see at what stage the title/closing process is in. The same goes for being able to select a real estate agent through a cloud-based “Realty,” or a real estate company that’s online and doesn’t use any agents at all. These companies certainly exist and it’s the consumer discretion to use them. The plethora of opportunities to connect will continue to grow into 2020 and beyond.
Prediction #2: The great shakeout is going to start
Deeper data availability will define this key trend, moving forward. None of the companies I described are going to collect less data this year. Because we are living in an ever-upward, rosy real estate trend with low rates, high prices, refinance opportunities and sustained volumes, what will happen is a shakeout will begin to start.
What do I mean by this? One way to collect more data and add more transparency is to acquire tech to do so or to even directly acquire companies that offer those services or retain that information itself. In other words, once enough time has passed for these many business models to evolve, companies using them will begin to fall into one of two buckets: Winners or Losers.
The losers will be those who get swallowed up or drop out altogether. Or, they will be the companies that get rolled into other companies, or employ business models that are unsustainable. The losers’ access to capital will begin to dry up in 2020, as investors mature in their approach to these business models. The “WeWork Phenomenon,” that this is an endless game where we can keep feeding the beast–is not going to work in our industry. We are going to see signs of this weakness in 2020, when this ever and overflowing capital that’s flooding our industry starts to slow down as investors evaluate which models have legs and which don’t.
This will be especially apparent in the iBuyer space. These new forms of business models are no different in that they need to be clear and transparent about what services they provide and the premiums they charge if they expect to be successful and have investors determine that they are a sound investment.
The single-family residential (SFR) space is also set for explosive growth as the demand for rental units continues to grow on the back of the housing supply crisis. The SFR space is now analogous to the iBuyer space and may see some significant crossover. The iBuyers are acquiring and flipping and when they are moving the properties, they carry those properties. They will look for opportunities to rent those units out. As the holding times go up, so does the risk profile.
There will need to be more of a delta between the purchase price and the value of the home.
At one point in my career, we had 20,000 homes on the books. In my experience, at that level, if those homes aren’t flying off the shelves, then either you change the game or the game changes you. The cost of carrying those home and the cost of capital will eat and erode margins in the buy/sell spread. And in a declining market, you can end up upside down, very quickly.
Prediction #3: The vendor landscape will change immensely
At a recent Innovate Housing Forum, hosted by Fannie Mae, several representatives from the startup community gathered to discuss their next steps. During those discussions, it can be interpreted that the discourse is moving from not just saving time, but saving costs. The best example of the need for this can be found in this quote:
“The average cost of a home transaction is 10.5 percent across the nation, which is insane,” said Chief Revenue Officer Tyler Baldwin of Reali, a tech-enabled real estate platform streamlining the process for home buyers and sellers. “Name any other industry where you’re charging 10.5 percent just to execute that transaction.”
Fannie Mae said that the cost to close is enormous and ultimately off-putting for the consumer and it’s no wonder as they estimate that there is an average of nine different service providers—title companies, escrow providers, appraisals and notaries—required for one real estate transaction. Efforts should be made to help reduce the complexity of the transaction.
While these startups are focused on improving the customer’s experience, who’s taking the lead on improving the lender’s experience? As the startup landscape shifts, so does the vendor landscape. Simplifying the mortgage process needs to beneficially link to advances on the real estate side.
Mortgage lenders need flexibility and speed from their partners. As mentioned above, the way people are buying homes is changing and so we must adapt the way in which we are selling to them. Superior tech must be leveraged through the entire system, from the moment a property search begins online, all the way to the final closing. Good services adapt to the customer and lender, not the other way around. For those services to find success in 2020, they’ll need to see this fact very clearly.
Steve Ozonian is president and chief executive officer with Williston Financial Group (WFG). Over the course of his career, he has engineered the dramatic growth of multiple real estate-related businesses. Prior to joining WFG, Steve was a senior executive at Chicago Title & Trust, where he headed the real estate services segment, which acquired and sold thousands of homes a year. He also served as an executive vice president with Coldwell Banker, where he helped build the company to 70,000 sales associates. Steve served as chairman and CEO of Prudential Real Estate and Relocation Services and expanded annual sales volume to more than $200 billion. Steve is perhaps best-known for building the world’s most successful real estate research portal during his time as CEO of REALTOR.com. Steve has also served Bank of America as its National Homeownership Executive.
This article originally appeared in the January 2020 print edition of National Mortgage Professional Magazine.