Billy Beane was famous in baseball for taking a collection of undervalued players into the playoffs. His secret was data-driven decisions at a time when “trust your guts” was the preferred management style in professional sports. Beane’s story would be captured in the book and movie, “Moneyball.”
So, it’s not entirely surprising to hear competition theories would be appealing to Lee Smith, mortgage president for Troy, Mich.-based Flagstar Bank. Much like Beane, Smith has to fight better-funded competitors for a share of the mortgage business.
“This is our ‘Moneyball’ concept,” Smith said, describing the bank’s “MortgageTech Accelerator” program, which it employs to discover new and up-and-coming fintechs. “It’s how we stay competitive because we don’t have $12 billion sitting around like JPMorgan Chase.”
In other words, despite being one of the country’s top lenders, no one would mistake Flagstar for being the industry’s version of the New York Yankees, a dominating team with a history of dropping big bucks to pick up star players.
“Moneyball,” said Smith, Flagstar’s president of mortgage, showed “how we can think outside the box and more creatively differentiate ourselves.” With the fintech industry growing sizably, there’s advice suggesting lenders and fintechs are better off teaming up – than working against each other.
Flagstar’s MortgageTech Accelerator program follows that wisdom and brings something precious to the table, say some of the fintech executives who completed the program: The opportunity to work with a long-established brick and mortar bank, which turns itself into a laboratory for the fintechs to test their assumptions and see if their business stands a chance of succeeding.
Not only does Flagstar make its executives available to provide sales and marketing advice, but it also gives the participating fintechs access to its finance department so each one can get a sense of its business’s ROI.
“It’s an opportunity to meet young, up-and-coming fintechs focused on the mortgage origination and servicing space,” Smith said, adding that many of those participating in the program are early-stage companies financed by friends’ and family money.
“It allows them to bring their energy and technical expertise, and we can bring our knowledge of compliance and risk, our customer base, and gives them a testing environment and help from a business point of view,” he said. “We bring the best of both organizations together to help each other and, ultimately, it becomes a win-win for everyone.”
Started in 2019, the accelerator program has Flagstar and the fintechs working together for about 90 days, Smith says.
The ones selected are working on breakthroughs in all facets of the mortgage business, including origination, servicing and compliance as well as activities performed under the Community Reinvestment Act (CRA), Flagstar spokesperson Susan Bergensen says.
To be selected, she said, Flagstar considers each fintech’s “progress in product development, prospects for growth and potential for CRA impact.”
“Because Flagstar is a bank, I think (the fintechs’ work has) given us an edge in helping the fintechs better understand CRA rules, and their technology has added quality to our processes,” said Smith, adding that while they don’t own an equity stake in any of the fintechs that completed the program, they’ve entered into vender agreements with “several” of them. He declined to say which ones they were.
Be A Solution
A recent graduate of the program, Todd Mobraten, CEO of Dallas-based Orangegrid, which consolidates software applications and information for mortgage servicers, described it as invaluable because Flagstar is also a top mortgage servicer, managing over $340 billion in home loans.
“When Flagstar put up the mortgage accelerator program, the idea is not just to see if they want to use you as a solution to their problems,” he said. “The key is to prove you can be a solution.
“They partner with you to help show you how to penetrate the (banking and servicing) market deeper and quicker and size it up, too. It’s not typical that a bank that size is going to partner with you and help you with a product like this. So, when an opportunity like that knocks on your door, you don’t want to let it go,” he added.
Catalina Kaiyoorawongs, founder and CEO of Ann Arbor, Mich.-based LoanSense, which helps consumers reduce their monthly college loan bills so they can qualify for a mortgage, echoed Mobraten’s sentiments, saying the program gave her team “insight into the way leaders thought about our product and pricing but also how they made technology purchase decisions. Plus, we were able to work closely with an executive sponsor who championed our success.”
As Smith sees it, the fintechs in the program show the bank new marketing opportunities and ways to work with low- to moderate-income consumers, which is critical under CRA rules.
“When Flagstar put up the mortgage accelerator program, the idea is not just to see if they want to use you as a solution to their problems. The key is to prove you can be a solution.”
“They typically have solutions that can help certain borrower demographics,” he said. “They create opportunities for increased lending to low- to moderate-income borrowers, and we welcome this.”
One of them is Naples, Fla.-based CredEvolv, a credit repair platform, which recently completed Flagstar’s MortgageTech program. Jeff Walker, its CEO, says his company helps consumers who could very well be forgotten: Those turned down for a mortgage.
His company, which was started in February 2021, is a “tech platform that sits between mortgage lenders and U.S. Housing and Urban Development-approved counselors that help lenders’ mortgage loan applicants that are not credit-qualified turn into qualified applicants,” he said.
From information he’s seen, these consumers number more than 8 million annually and banks can fulfill their obligations to CRA by assisting them.
“They had their credit pulled for mortgage inquiries but did not secure a mortgage in the 12 months following, the inquiry,” he said.
The CredEvolv platform is unique, Walker says, because once a lender knows their prospective borrower won’t be approved for a mortgage, they’re able to connect them with a HUD-approved credit counselor. Currently, 40-HUD approved counselors are working with the CredEvolv platform and, he says, they have the capacity to serve 12,000 consumers each month.
And how big is this financial opportunity across the domestic banking industry to the solve the credit problems of these consumers?
“We’ve vetted this a couple of different ways working with the GSEs to kind of help us think through the declination rates that are out there,” Walker said. “We think it’s a $1 trillion annual opportunity in terms of mortgage UPB.” (Unpaid Principal Balance, money that hasn’t been remitted to the lender).
In other words, a trillion dollars is left on the table if these consumers don’t turn into mortgage borrowers, he says.
What was the inspiration for CredEvolv?
While working at Fannie Mae, Walker saw an organization that was determined to serve underserved communities (by turning them into homeowners), but he also witnessed its “inability to take those very aspirational objectives and drive them to execution with a lender.”
CredEvolv, started two years ago, was created “with a very specific purpose to accomplish what I think of as a triple bottom line for the (banking) industry,” Walker said. “We wanted to support all of the efforts on affordable housing and minority homeownership, which tie in very much to what lenders are looking for and what regulators want and investors expect.
Millennials & LoanSense
If necessity is the mother of invention, then LoanSense CEO Catalina Kaiyoorawongs, 36, might very well be an example of the kind of consumer her fintech seeks to serve.
In a promotional video about her fintech, she issues a clarion call to her fellow millennials, especially the 17 million who, she says, are in their prime homebuying years, for building wealth, saying, “Too many people in our generation are overwhelmed by student loan debt and feel like there’s no light at the end of the tunnel.
“No different than you, I invested in my education, and that was the script we were told, right? To get a good education and you’ll be set forever. I paid my bill. But I didn’t know the impact of that student loan burden when it came to buying a home,” she added. “One day my mom showed me a foreclosed house that was for short-sale, just a short five minutes from my apartment. The mortgage would have been less than my rent.
“It sounds like a no-brainer, right? Despite my income level, which wasn’t so high – it was average – but I had a stellar credit score. I didn’t think I was going to be turned down for a mortgage. But guess what? I was turned down by multiple lenders.”
She’s addressing a large audience: There are more than 72 million millennials, making them the largest generation alive since 2019. But they’re also one of the most indebted ones.
Nearly 3.5 million millennials (born between 1981 and 1996) carry, on average, more than $38,000 in college student loan debt. In comparison, there are nearly 1.7 million in Gen X carrying, on average, $45,000 in college student loan debt while, on average, nearly 2 million members of Generation Z carry just over $17,000 in college student loan debt.
“Our generation is the first generation to be really hammered by student loan debt,” Kaiyoorawongs said. “The cost of college has risen so much in the last 10 to 15 years and states are funding education less and, as a result, putting it on the back of the student to take out more and more loans and, of course, that impacts your DTI.
“If we want to enable homeownership for people in their 20s and early 30s, then we need to solve this problem,” she added.
Loan Forgiveness Help
Her platform, around since 2019, helps qualify prospective homebuyers for student loan forgiveness programs throughout the federal government, she says.
“They connect their student loan accounts, and we basically act as a ‘Turbo Tax’ for student loans and roll all the paperwork through the U.S. Department of Education.
“Let’s say (a prospective borrower’s monthly college payment) was $700 and the government says, based on their income, you can actually afford $300,” Kaiyoorawongs said. “We get that change in payment and now they’ve changed their DTI.
“That additional $400 can go to improved purchase power,” she added.
LoanSense is testing their system with Flagstar, Kaiyoorawongs says, adding that they plan to sell subscriptions to their platform to other mortgage lenders.
They’ve assisted more than 4,000 potential mortgage applicants with reducing their monthly payments on their college loans, she says, and they’re working with more than 100 loan officers.
Mortgage Servicing with Orangegrid.com
A bank’s day-to-day business of fulfilling customer requests isn’t that difficult, says Todd Mobraten, CEO of Orangegrid. But that changes once it enters into mortgage servicing, especially if there’s a problem.
“It becomes complex once the loan becomes delinquent, and the borrower can no longer make a payment,” he said.
The heavy regulation around servicing mortgages, he says, is cumbersome.
“Most banks have these systems of record, where they fold in all the loan data,” he said. “And these systems of record are very large data systems but they’re very flat, meaning they don’t have a lot of automation.
“They’re secure and, thus, they have to depend on people to understand the business rules of regulation, how to action them, how to pass something from one department to the next, like from collections to loss mitigation, and that makes it very difficult,” he added.
If the bank doesn’t handle a loan’s problems by following the regulations, Mobraten says, there could be serious consequences: A bank outside of compliance is, potentially, a very costly situation for the financial institution.
“Things typically get very lost and ugly when you don’t have good efficiencies around these complex processes that are riddled with rules,” he said.
This is where Orangegrid comes in, he says. Their platform specializes in workflow process improvement and more automation of these processes in the mortgage servicing industry.
“We’ve created an architecture that allows us to bring in data from the system of record and start to apply what we call tracks, like specific process layers,” Mobraten said. “So, we will bring all this loan data, property data and borrower data and the system will create a track based off of that data and that track might be loss mitigation, which is what Flagstar is focused on right now.”
A platform like Orangegrid’s, he says, makes for a system that’s more efficient because it’s less reliant on people.
Orangegrid, around since 2014, works with 14 mortgage lenders in the country, says Mobraten. They include two of the country’s top five banks and two of the country’s top five mortgage servicers. He declined to identify them.
“What we’re doing is helping banks retain the borrower. They do not want the borrower to be lost due to a foreclosure,” he said. “Nobody wins when that happens. The consumer doesn’t win. The bank doesn’t win. The American economy doesn’t win.”
This article was originally published in the Mortgage Banker Magazine November 2022 issue.