Digital mortgages: the future of lending, here now
Sandstone Technology’s Chief Customer Officer, Ross Watts, explains why digital mortgages are no longer a desirable future state: they’re available now and becoming an essential tool in a bank's digital offering.
For years, banks and other lenders have been describing their home loans as digital. But often that’s wishful thinking. What sits behind the scenes may be far from a true digital solution.
As Ross Watts explains, a true digital mortgage solution allows customers to complete every stage of their home loan application all the way to approval - on their mobile phone or using internet banking. It’s anytime-anywhere functionality, from verifying their identity and providing their banking documents, right through to giving consent for data to be drawn from existing records or through open banking.
It’s paperless, fully automated, and fast - in some cases, giving approval in as little as 10 minutes. A digital mortgage is straight-through, real-time processing in action and a major step forward in home loans.
In principle, all loans could be processed through a digital mortgage, or a digital-only home loan (we use the two terms interchangeably). But in reality, digital mortgages are not a one-size-fits-all solution, Watt says. The risk profile of most banks prevents many deals from being digitally processed: approval requires some level of human oversight.
Today, most digital mortgages are offered to low-risk customers who have a lot of equity - LTV of 70 to 80 percent - or a high deposit.
“They’re often a PAYG employee with a high disposable income,” says Watts.
With this kind of lending - simple decisions based on easy-to-understand financial positions - banks are very comfortable leaving the decision making to technology. Of course, many customers, especially self-employed owners of small or medium businesses (SMBs), don’t fit the mould. Their financial scenarios are complex.
These SMBs and other customers who don’t fall with the ‘rules’ of the digital mortgage will be filtered out one of two ways. Either the lender warns the customer from the outset that there’s a hard credit score at the end of the application process, based on a list of parameters, or they don’t initially block the customer, but instead use technology to insert a barrier at an appropriate point before they get to the credit score stage. As soon as the technology detects that complexity issue, the loan won’t progress any further. Ideally, Watts says, the customer is then diverted to a contact centre or a home loan specialist who will capture additional information to ensure the deal meets the bank’s risk appetite.
Which of the two above-mentioned approaches a bank adopts will depend on whether they’re using the process to drive a higher volume of home loan applications across the board, or whether they’re only targeting a certain type of customer.
US-based Rocket Mortgage by Quicken Loans is an example of a lender using technology to identify and assess their customers. Rocket pioneered the bold approach of providing a hard credit check within the process to give conditional approval.
“Rocket is recognised globally as the pioneer of the digital mortgage,” Watts says. “It’s been the number one US primary mortgage originator for 11 years and is easily the most loved lender based on customer satisfaction.” Not surprising given the entire process is online and approval can arrive within eight minutes.
Always “streets ahead of the competition” according to Watts, the Rocket app has managed to solve the challenge of customers who don’t meet straight-through processing requirements by providing other channels of engagement. As an example, Rocket Mortgages provides customers with a 24/7 no wait self-service option. This utilises Interactive Voice Response (IVR) to help the caller gather further information or take certain actions over the phone.
Watts believes the biggest risk for banks offering digital mortgages is frustrating customers who are turned away, and freezing out existing customers in favour of driving new home loan customers. “This is where some of the biggest complexities of the digital mortgage arise,” he says.
Newer banks don’t have that back book to worry about. They’ve traditionally looked at digital mortgages as a way of accelerating their arrival into market and quickly capturing customers with the desired risk profile. Even for more traditional tier 1 and 2 banks with large back books, there is opportunity to create new digital-only mortgage channels focused on specific customer use cases - usually those simple home loans that are both low risk and high in equity.
Once the customer has been through an online scenario analysis or serviceability calculator, the technology needs to be able to identify if the customer can genuinely meet requirements at each checkpoint. And if they can’t, the bank would ideally use technology to skillfully triage them into a contact centre or similar – without asking them to rekey information or repeat themselves.
Customer satisfaction ultimately depends on how well the institution has integrated the digital mortgage channel into their overall strategy.
Today, AI and machine learning (ML) are doing the hard work of drawing out income and expenditure information and feeding it into an app, meaning the bank doesn’t have to manually calculate if a customer can service the loan. And the customer doesn’t need to rekey personal data or get their calculators out and manually work out their income and expenditure.
“It’s all done with the press of a button,” Watts says.
This is critical, in an era when increasing numbers of digitally-native Millennials are more knowledgeable about the options available to them, and accustomed to a frictionless experience online.
Customers are also demanding faster home loan approvals to keep up with a booming property market – nobody wants to factor weeks or months of waiting into what is already an anxious property journey. And not everyone can manage their mortgage application in business hours - they expect 24/7 availability.
The customer and bank benefits of digital mortgages are manifold.
For customers living in a pandemic-impacted world, a mobile-first experience driven by their expectations and enabled by technology, is tremendously appealing. Instant verification, having everything available online, fast turnaround of conditional approvals in minutes, are all big differentiators.
“Self-service and omnichannel capabilities are advantageous for bank customers, Watts says. “They can have as much or as little human contact as they want throughout the mortgage process. It’s about putting the control back in their hands.”
On the banking side, streamlining of critical processes and operational efficiencies are essential for organisational growth. Digital-only home loans help lenders better manage their cost to serve customers, improving cost/income ratios and relieving financial pressures.
Digital mortgages help achieve that bank-in-control ideal, using rules based on risk appetite - even more critical given the changing regulations around responsible lending. They give banks the power to meet the needs of their customers and establish the barriers they want to put in place according to their risk profile, to make sure they’re lending money appropriately.
Having an automated digital mortgage channel that manages straightforward home loan deals also frees up experienced home loan specialists to focus on complex cases that technology can’t yet manage. And it gives new power to smaller banks looking to accelerate their online home loans and start competing with Tier 1 and 2 players in a way they’ve never been able to before.
“With open banking and digital verification now in the mix, all of a sudden digital-only mortgages are available to all institutions,” Watts says.
Despite perceptions to the contrary, digital mortgages are not new. “They haven’t just magically appeared,” according to Watts.
Sandstone Technology’s offering has been oriented towards enabling digital mortgages for a long time, including the LARA suite of calculators, combined with the online application platform Apply, and Sandstone’s intelligent document processing solution DiVA.
“And in fact, DiVA’s AI and document verification capabilities, used traditionally post conditional approval, can be moved forward into the digital mortgage application process, to validate and verify documents,” Watts says. “That reduces workload to verify information submitted by the customer, enabling the bank to make conditional approval in a much faster time.”
Risk appetite has been the primary block for banks and lenders in this space. But what’s changed in the industry, is customers are now demanding a better experience and faster approval, and we have technology with the capability to meet that demand.
Beyond risk, there’s also the legacy technology issue. “That’s why, for most financial institutions who want to deliver a digital mortgage, it’s set up as a separate channel,” says Watts. Instead of disrupting their legacy technology, customers plug an app or a microservice into their core system.
“Mobile-first, digital-only lending is the only future for lending,” Watts says.
One day, our tech-driven mortgages will be produced, transferred, and stored without paper, without a loan officer or a closing agent. In genuine straight-through processing, the entire lifecycle of the loan is automated, from application to disbursement, with little to no manual intervention.
That doesn’t mean that every loan gets 100 percent processed using a mobile.
“There will always be a human element in home loans – because not every customer knows what product they want or need,” Watts says. “The home-buying process can be an emotional journey and often a personal moment of truth. For some people, their broker or home lender is a source of support, counsel and product advice.”
Even then, the first point of contact - the way you start the home loan application process - will quickly move to mobile says Watts, in the same way that simple banking is now almost always transacted online, harnessing digital banking technology.
“I see digital-only home loans very quickly moving in the same direction – and sooner than everybody thinks,” Watts says.
Digital mortgages are certainly a step forward, but in other ways, home loans still work in the same way as 50 or even 80 years ago. The next disruption will be in home lending itself, Watts says.
If regulators and banks cede more control to the customer, which is what they will demand, innovations like blockchain will reduce manual paperwork and verification processes, and revolutionise how banks accept payments or distribute funds post settlement.
“I’m quite excited to watch the emergence of Blockchain and other fintech innovation using things like data analytics, AI and ML,” Watts says. “It will revolutionise the customer experience even further, giving transparency all the way through to where their funds are located at any point.” Blockchain also potentially enables more accurate record keeping with the collection of traditional documents into digitised information making it easily accessible to loan processors. By eliminating the need for third parties during the settlement process, closing costs are also reduced, meaning lower cost to buyers.
As always, this innovation will need to strike a balance between the organisations’ readiness for change, and the expectations of its desired target audience.
Article published April, 2022
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