Just Google the question “How has Rocket Mortgage changed the mortgage world?” and you’ll get a taste of just how much what our clients call “e-trends” has impacted the industry. The “e” in e-trends represents both evolution and electronic. Rocket Mortgage has done over $225 billion in mortgage volume since its launch in 2013. To suggest that traditional mortgage service companies are a bit anxious as their well-entrenched business models are under pressure from innovation is putting it mildly. While paper mortgage, like paper money and paper checks, is not dead yet, the industry appears poised to rapidly catch up with the rest of the “internet of things” generation.
Following years of regulatory uncertainty in what is a heavily concentrated market among the largest banks, there are new signs of accelerating investment and innovation. In the past 18 months, we’ve seen out-of-character actions from incumbents and a small but building amount of new activity from venture capital and private equity firms. The opportunity to streamline inefficiencies inherent in the U.S. lending process is not a new one. However, after years of stormy regulatory upheaval, industry consortium wrangling and volatile economic backdrop, there appears to be a new sense of opportunity.
As with most trends, we begin by following the money:
The Money Trail
A number of brave investors and either innovative or anxious service providers alike are making bets that now is the inflection point of the e-trend in mortgage. CB Insights, a leading venture capital source, highlighted 20 new innovative companies attracting venture capitalists’ attention in mortgage tech and eMortgage services. For example, Roostify and Blend Labs are two rabblerousing young companies with missions to accelerate the mortgage process by making it less costly, more transparent, and secure. They are backed by industry titans including Peter Thiel and Andreessen Horowitz.
Perhaps in reaction to these upstarts, the established incumbents have taken notice and responded through acquisition. The timing of these deals coupled with the valuations and executive commentary suggests that something has changed. We’ve summarized a few examples in the table below:
For example, both IDS’ acquisition of Encomia and Black Knight’s acquisition of eLynx appear motivated by the digitization trend, with the Black Knight offering an aggressive 5-times revenue to lure eLynx into its fold. While First American’s acquisition of RedVision was focused on both the trends in title plant digitization and potentially disrupting the supply lines of smaller competitors. Solidifi raised $100 million to seek ways of extending its technology and network and through several acquisitions the company is re-engineering the mortgage closing process.
The recent investments in and around Mortgage Services – including SaaS based Loan origination systems, electronic marketplace for services, e-signatures and e-documents – may lead to an acceleration in the evolution towards eMortgages. What will be the pace of eMortgage adoption? We’ve seen surveys suggesting nearly half of all mortgages could go entirely electronic in the next decade. This seems conceivable, particularly when compared with other paper-to-electronic evolutions like the decline in paper-based checks or the increase in electronic payments vs cash.
Forces Accelerating the e-Trends in M&A
We see three forces at work in the coming year that will drive increased investment and mergers and acquisitions: Politics, Consumer Acceptance, and New New Technology.
The Political Landscape
Along with dismantling Dodd Frank regulations, the incoming administration has expressed its intentions on the future of government sponsored entities (GSEs) like Fannie Mae and Freddie Mac. They support releasing these entities from the government’s grip which some analysts believe would make for a more open and competitive lending marketplace. If Fannie Mae and Freddie Mac are privatized and coupled with a deregulatory regime, the playing field among eMortgage service companies could be further leveled and allow for innovative players to continue to rattle the industry. Although details remain to be seen, the shifting political landscape creates opportunities for e-trends to accelerate.
As the cadence of digital innovation increases in other aspects of consumers’ lives, so increases the expectation level. Borrowers, especially digital-savvy millennials, are coming to expect their mortgage experience to mirror traits of their Amazon online shopping experience. Convenience, transparency, and speed are aspects of the mortgage process that are reshaping the lender services ecosystem. LendingHome, a newly popular eMortgage lender that embraces the aforementioned characteristics, has exceeded $1 billion in mortgage originations in under 3 years of existence. Not to mention, LendingHome has raised over $350 million in venture funding to date and is currently raising additional financing to continue its trailblazing trajectory.
New New Technology: Blockchain
The threat of technology disruptor blockchain, a secure electronic transaction-processing and record-keeping system, may continue to attract investors and bring anxiety to incumbents in the financial services sector. Whether experimental or otherwise, early adoption of the faster, more transparent technology has been more dramatic than expected, particularly in consumer lending. According to CB Insights, over 50 financial services firms or their strategic investment arms have invested in a blockchain or bitcoin-specific startup since the start of 2014 including marquee names like Visa, JP Morgan and Citi. A recent IBM report predicts that 15% of banks worldwide will rollout blockchain technology in 2017 and 65% will do so by 2020. Don’t be surprised when eMortgage service companies incorporate blockchain technology into service models.
With looming political tailwinds, consumer preference shifts, and disruptive technologies like blockchain, the mortgage landscape will continue to be transformed in 2017 and beyond. Expect to see more innovation and consolidation as mortgage service companies place their bets for the coming “lift off” in eMortgage. Want to talk more about how we see this industry shifting, connect with me on LinkedIn.
This presentation is intended for information and discussion purposes only and does not constitute legal or professional investment advice. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of Harbor View Advisors, LLC (“HVA”). The information in this presentation was compiled from sources believed to be reliable for informational purposes only. HVA does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented.
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