The mortgage software space can itself be broken down into three areas: (1) point of sale (POS) and lead generation or other technologies that sit at the top of the customer acquisition funnel; (2) back-end enabling infrastructure; and (3) capital markets and servicing.
In the POS category, the top of the customer acquisition funnel has been the lowest hanging fruit for innovation and, as a result, the space has largely been saturated by a number of early movers. We haven’t seen many new mortgage startups with truly innovative technology enter this space recently.
Back-end enabling infrastructure includes loan origination software (LOS), underwriting, appraisal, and eClosing. This is a more challenging space to build upon and innovate within because of the complex workflows, well-entrenched incumbents, high cost and difficulty of switching providers, and heavier regulatory and compliance requirements.
However, innovation is needed in these areas and the opportunity is significant. As venture capital dollars flowing into the mortgage software space have grown, we’ve seen that the most promising companies are those led by founders who have come from other mortgage technology companies and possess deep expertise in both mortgage and technology. That may explain why venture activity in back-end infrastructure has increased in the past couple of years, as more knowledgeable mortgage investors pair with strong founders who have the requisite experience. Parker89 has invested in Notarize, which offers remote online notarization and recently funded Vesta in this space. Vesta has built a new, open LOS, which functions as a system of record and workflow tool, saving significant time for processers, underwriters and closers.
At the so-called “end” of the mortgage value chain, Parker89 recently funded Polly, which has built modern capital markets software, including pricing, hedging and best execution analysis tools.
Servicing however, which is a $12 trillion market, may be the most challenging area in mortgage from an innovation perspective. We have yet to see a new venture-backed tech company in this space gain significant traction. However, we’re witnessing more and more innovation here and some novel go-to-market approaches (e.g., loss mitigation, interim servicing, full-stack servicing, etc.).
Although these new servicing technology players will likely continue to grow their adoption over the long term, they will be slower to scale given high switching costs, compliance requirements, and long sales cycles. ServiceMac, which is a sub-servicer that’s part of the First American family of companies, gives us strong insight into this market and its latest trends.
Ultimately, innovation in the mortgage software space is critical to improving the customer experience across the board, and it will help small- and medium-sized originators enjoy the efficiencies that larger originators realize from their scale and custom-built software.