September 26, 2016

The big-bank mortgage thrill is gone…

Key takeaways:

  • Post recession inversion of the Mortgage Lending industry.
  • Big banks are leaving residential mortgages, vacuum filled by non-bank lenders.
  • New landscape is dominated by technology that creates great consumer experience and transaction efficiency.

Just prior to the Great Recession of 2008/9, four big banks dominated the mortgage market. But not anymore. In just eight years, NON-bank lenders have moved from 25% to 75% of total market share. One of the biggest reasons for this is the 2010 federal legislation known as Dodd-Frank. The new regulations imposed by this legislation have given the “bigs” lots of reasons to significantly reduce their mortgage lending exposure.

There are half as many new mortgages per year now than at the previous high point prior to 2008 (not that the high was, by any means, “healthy”). Dodd-Frank effectively limits the amount of “qualified” borrowers in the market and making it less profitable to do business with riskier ones. If you’re a big bank who has built a large, fixed infrastructure to handle massive volume, and that volume nose-dives, guess what… you have a cost per transaction problem. Lower volume and lower profit per transaction = how to get the hell out of this business problem.

“You may be done with history but history is not done with you…”. The feds have also been settling a number of mortgage crisis lawsuits with the bigs. These banks have been paying, in some cases, billion dollar settlements for past mortgage lending transgressions in order to save their reputation, and their other lines of business.

Last but not least, Dodd-Frank created the “Consumer Financial Protection Bureau”. Basically it was a consolidation of a lot of distributed regulatory power to avoid the left-hand-right-hand communications problem of government. Aspirationally, it’s a techtonic shift in optics from hard-to-understand market regulation to an easy-to-digest consumer orientation. Check out their website at (yes, it really is a usable government website. crazy huh?)

Who are these NON-banks anyway? They are mortgage lenders who take “investor” dollars and loan it out to borrowers. This is in contrast to banks who take deposits from their banking customers and then loan that money out to mortgage customers. There are thousands of non-bank lenders. And, they’re struggling to just keep up with the demand created by big banks exiting the space. They’re also challenged with scaling their businesses with all of the new regulations.

Unlike the big bank era of mortgage lending where only four banks dominated, the NON-bank era is wide open. Of all the players, the largest is Quicken Loans, with just 5% of the market. They have a technology-driven approach to capitalizing on the green field opportunity in front of them: a customer-centric mortgage experience. They know the “loan process” sucks and that customers have been complaining about it for decades. Great customer experiences lead to great marketing potential too.

This is an $11T market and the battle for consumer hearts has just begun. Although Quicken has taken the early lead, they have also galvanized a field of well-heeled competitors to make big, long-term investments in the space. The good news for consumers is that a big chunk of these investments are aimed at creating a great experience and long term customer relationships. Quite the departure from the impersonal and protracted big bank “transaction” experience. But there’s a long way to go for a business that hasn’t seen innovation for 50 years.

“We’re in the customer service business — we just happen to fly airplanes.” said someone at Southwest Airlines. It could be argued that the big banks sat on their butts when it came to innovation over the last 20 years. What real motivation did they have for creating great customer experiences? They had oligopoly powers and a fiduciary duty to increase value for their investors. They did get creative though. Just look at all the ingenious fees and service charges they invented.

I don’t need to list off all of the companies that are redefining the corporate landscape for achieving superior profits through great customer experience (I’ll name a few though! SouthwestZapposAppleStarbucks). Think about how those brands leverage technology to deliver that service. Who knows, maybe these NON-banks will reinvent the mortgage experience and have us all recommending our new lender to our friends.

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