Viewpoint: Housing's Digital Marketplace Still Excludes Many
For decades, the U.S. has had two de facto mortgage systems: one that supports relatively easy access to homeownership for more affluent homebuyers and one that undermines affordable homeownership for low- and moderate-income, or LMI, borrowers and often people of color. Now, advances in online lending -- considered by some to be a potential solution to this problem -- actually threaten to widen that gap further.
For years, mortgage originators have lagged behind other industries in moving consumer interactions online. That is beginning to change as large banks increasingly replace bricks and mortar with%VIRTUAL-pullquote-Reducing costs benefits any marketplace, and it is a good thing that technology is already starting to do that for affluent homebuyers. But cost reduction is even more critical for LMI borrowers.% technology. But for LMI borrowers, the change is far less pronounced than for the affluent.
According to a Fannie Mae study released earlier this year, more than twice as many high-income individuals looking for a mortgage attempted to use the Internet than low-income individuals. The result is that while higher-income homebuyers are increasingly benefiting from the move online -- lower application processing and other origination costs, increased transparency and competition, increased ease of use, and better matching with products that suit their needs -- LMI borrowers lag further and further behind. In addition, as a White House report earlier this year noted, new and complex technologies using algorithms and Big Data could be used to specifically target the most vulnerable classes of our society online with inferior and predatory financial products.
On one level, these developments aren't surprising. Consider the mortgage business as a whole.
For the affluent, the mortgage market has long worked well, encouraging savings and adding to retirement security. For low-income families, long periods of credit unavailability, punctuated by predatory loan schemes, have blocked wealth formulation and in many cases even eroded savings. While developments in technology have tremendous potential to increase efficiencies, increase transparency, and reduce costs, they also threaten to perpetuate this bifurcated system if the benefits flow only to higher-income segments of the market.
This is a national problem. Today, the median white household has 22 times more wealth than the median black household, and most of the difference is in home equity. The demographics are shifting, too. According to recent estimates by the Joint Center for Housing Studies at Harvard University, African American and Hispanic families will form about two-thirds of new households over the next 20 years. As LMI and minority borrowers become a greater and greater segment of the housing market, it will become even more critical to develop technology solutions that create efficiencies, lower costs, and improve matching for everyone – increasing access to affordable loans and reducing the propensity for fraud and predatory lending.
Leveling the digital playing field shouldn't even be that difficult. The same Fannie Mae study that uncovered the digital divide in mortgages also indicated that more than 40 percent of Americans with less than $50,000 in income and more than 50 percent of Americans with between $50,000 and $100,000 in income have not tried to obtain a mortgage online but would be interested in doing so. And according to a 2012 Pew report, almost half of all families currently have a smartphone and more than three-quarters use the Internet. LMI borrowers want to better incorporate the Internet into their homebuying journey -- and they already have access to the Internet and can do so if they are offered the right products and services.
There is real opportunity -- for businesses, for nonprofit housing organizations, and for government -- to build systems for moving LMI mortgage lending into the 21st century, reducing costs and making it easier for borrowers to compare loans and to identify the ones that are best for them -- not just for affluent borrowers, but all borrowers.
The opportunity is heightened because of regulatory changes. While there is much attention on the uncertainty and slowed lending caused by some reforms, other new rules offer the potential for transformative innovation. For example, new regulations that take effect next year strictly require banks to provide estimated rates and loan terms within three business days of receiving an application. This change calls for new business models that increase the efficiency of the loan application process. Why not have online tools that help LMI borrowers compile and submit a common mortgage application -- like the common college application -- to various lenders? That kind of automation and standardization can cut back on submission time, reduce application and lender costs, improve the information flow to borrowers, and ultimately increase access to affordable homeownership for low-income families.
Reducing costs benefits any marketplace, and it is a good thing that technology is already starting to do that for affluent homebuyers. But cost reduction is even more critical for LMI borrowers. After all, the average cost of originating a mortgage estimated by the Mortgage Bankers Association -- more than $8,000 -- may be economically feasible for larger mortgages, but is in fact prohibitive for many smaller ones.
In addition, while institutional investors are once again buying private label mortgage-backed securities loans made to affluent homebuyers, capital for LMI mortgages remains completely dependent on government backing in large part because of concerns about data integrity and risks. Better data, made possible by the move online, can also promote the return of private capital to LMI markets.
Technology is not a panacea for all the problems in the mortgage market generally, or for LMI borrowers specifically. But while differences in the use of technology can exacerbate the mortgage gap moving forward, technology breakthroughs can also erode it. That's worth figuring out – and the sooner the better.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or AOL.
Tim Duncan is the founder and CEO of FairMortgage.US and a recognized entrepreneur and leader in creating new business models and opportunities in financial services that are enabled by technology and driven by innovative and strategic thinking. From founding one of the first Internet-based companies focused on financial services to moving dozens of financial information products online as President of the Interactive Division at Thomson/Reuters to leading technology at the new Consumer Financial Protection Bureau, he has been involved in discovering and implementing new and innovative ways to move financial information and services online for over fifteen years.