Maxwell News Digest: Could Blockchain Technology Change the Way Lenders Conduct Business?
We’re mid-way through the shortest month of the year, and the market remains hot. The conventional 30-year mortgage fixed-rate is currently 2.934%, while 15-year rates sit at 2.486%. Rates are slightly higher than they were two weeks ago, but not enough to cause any serious concerns.
February’s news has been dominated by FormFree’s new blockchain technology that could alter the lending landscape in the years to come, loanDepot’s emergence in the stock market after years of anticipation, problems arising in the rental market and how a new stimulus package could make or break the industry, Deephaven Mortgage’s newest non-qualified mortgage-backed securities market deal, and the latest trends shaping the future of the housing market.
Is blockchain the new black?
You would think that issuing loans and mortgages couldn’t be done too differently. But with the development of blockchain-based financial technology from FormFree, the way we conduct business in our industry could change forever.
FormFree Chain is a new platform that makes the lending process consumer centric. Instead of lenders having exclusive access to the financial DNA of a borrower, the borrower will now have complete access to their ability-to-pay (ATP) information at all times. The platform claims to improve the speed of transactions and make it easier to pair the right borrowers with the best-fitting lenders. Lenders will also gain faster access to financial information, allowing for quick qualifications. In other words, the underwriting process is mostly eliminated since the full stack of an applicant’s financial data is always on display without the need for further investigation.
So, is this a threat?
For underwriters, it could be. If this technology circumvents the need for a full underwriting process, what becomes of the thousands of underwriters working in our industry?
FormFree’s leader, Brent Chandler, confirms this himself: “When you are evaluating a borrower based on an ATP determination generated from direct-source data, the human element is no longer a part of the equation, and lending truly becomes a financial exchange.”
Side note: From our perspective at Maxwell, borrowers are best served when machines and automation augment, not replace, humans in the lending process. That’s why our technology and features focus on supporting lending professionals to achieve maximum productivity and optimal experiences for both lending teams and their borrowers.
Over 3,000 lenders have already signed on with the new platform, and the Consumer Finance Protection Bureau (CFPB) seems to like it, considering it’s built for consumers. But for lenders, it’s a real-world example of AI threatening human job security.
loanDepot debuts their IPO… six years later.
The first announcement of loanDepot’s IPO intentions came in September 2015 but was cancelled. In 2017, going public was reconsidered, but ultimately shot down. Finally, after six years in the making, loanDepot raised $54 million across 3.9 million shares priced at $14/share in its first week of public trading.
But like most nonbank mortgage originators that went public over the past year, expectations were downsized prior to meeting the market. Originally, loanDepot priced shares $19-$21, attempting to raise as much as $362.5 million across 17 million shares. The actual $54 million raised is an 82% deduction, but we’re just happy to see the fifth-largest retail mortgage lender—responsible for $100.7 billion in originations through 2020—finally go public.
Rental market anxiety grows about the next stimulus bill.
The nation’s most prominent housing groups sent a letter to the House Committee on Financial Services in Congress, warning of dire consequences if the newest round of stimulus doesn’t include rental assistance. To this point, deliberations about the package have been calling for more of the same, but the letter sent to Congress warns that if the “one size fits all” approach isn’t exchanged for more direct relief, serious consequences will besiege the rental market.
“We strongly support the inclusion of additional rental assistance in the Americans Rescue Plan,” the letter says. “Without additional robust, direct rental assistance—beyond the newly proposed $25 billion—housing providers may never fully recover outstanding debt—whether through the eviction process or otherwise—and the housing affordability crisis will be exacerbated in the long- and short-term. This could devastate the industry and hurt America’s most vulnerable renters.”
A recent study by the Urban Institute and authored by Moody’s Analytics Chief Economist Mark Zandi and Falling Creek Advisors Owner Jim Parrott found that the apartment sector alone lost $60 billion in unpaid rent during 2020. The continuation of moratoriums is good for consumers, but the length of time they’ve been in place has taken its toll on landlords and property management firms that can’t afford to keep missing out on monthly rent.
There’s hope, though, as Biden’s Administration proposed $30 billion towards rental assistance, something lawmakers are expected to agree on.
How does this affect lenders?
Renters tend to be more afflicted by the economic effects of COVID-19 than homeowners. They’re more likely to work in service-industry jobs, making them more likely to be laid off or face reduced hours, resulting in compressed wages. The snowball effect can move through the rental industry and into the greater housing market, causing serious problems. If Federal stimulus doesn’t do enough to support the rental market, we could begin to see more foreclosures from unoccupied rental units trickle into the housing market, creating larger rifts.
Deephaven Mortgage steps back into the MBS market.
Deephaven Mortgage is issuing a $146.2 million security backed by non-qualified (non-QM) mortgages for the first time since June last year. From 2019-2020, Deephaven issued six deals with an average balance of $400 million per security.
This new deal comes with a collateral pool supplied by 48 different lenders, such as Acra Lending (19.2%) and Lima One Capital (16.3%). Selene Finance and Wells Fargo will be the primary servicers in the deal, with Wells taking the master servicer spot.
The mortgage market remains strong, but are there signs of waning?
2020 was a record-breaking year for lenders. Originations were through the roof and still are. But this year, you might not make as much per origination as you did last year.
According to investment banking firm Piper Sandler, median gain-on-sale margins dropped for lenders and banks during the fourth quarter compared to the third. Furthermore, preliminary data for the current quarter finds that the trend is continuing. Median gain-on-sale margins are down from an average of 1.6% in Q4 to 1.4%.
This isn’t an atypical trend, however. Competitive mortgage markets tend to contract in profits due to tightened prices to compete with other firms. It doesn’t necessarily mean that volume is declining. In fact, we still expect this year to have a massive purchasing boom by the end of the second quarter, driven by young people making use of their savings and credit fears subsiding. Not to mention, vaccinations will only continue to progress, bringing the end of the pandemic within striking distance.
Should you prepare for a downturn?
You should always have a plan for a downturn, but as of now there’s no reason to be concerned about a dramatic slowdown in origination volume. If the rental market begins to spill out, then maybe, but until then, continue to prepare your team for an adjustment away from refinancing and towards purchasing. While you may not make the same profits as you did last year, there’s still a huge year ahead.
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