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Another way of summarizing Alex Rampell's video: The mortgage industry is ripe for disruption. Yes, there are massive economic inefficiencies in the whole mor
by jasode 7y ago
Another way of summarizing Alex Rampell's video: The mortgage industry is ripe for disruption.
Yes, there are massive economic inefficiencies in the whole mortgage lending business and since a16z's motto is, "software is eating the world", there are opportunities for tech startups to disrupt all of that.
To spur discussion, I'd categorize "disrupting mortgage industry" into 2 general buckets:
(1) disrupting the procedural aspects of a mortgage : lowering the cost of moving the transaction from the "loan application" all the way to "closing". The worfklow aspects.
In terms of disrupting people, this means disrupting the loan officers at banks, appraisers, title searchers, surveyors, etc. In terms of disrupting "fees", this means reducing/eliminating "loan origination fee", "title insurance", and "survey costs". (A lot of these administrative overhead costs are basically a bunch of "checks & balances" to ensure the loan transaction is not fraudulent or has undocumented liabilities ... e.g. verify loan applicant's paychecks to make sure he/she really has a job with $x income, and the property's recent newly installed fence doesn't encroach on others' property lines creating a potential lawsuit.)
(2) disrupting the loan underwriting : This means lowering the cost of money. Today, we see that a 30-year mortgage in America is about 3.7%. Maybe there's a market inefficiency and a clever entrepreneur can lower it to 2.5%.
The vastly different problem-solving aspects of (1) and (2) will attract very different skill sets. E.g. entrepreneurs interested in (1) might think of reducing costs of surveys with robots/drones/satellites while startups interested in (2) might try to lower the "cost of money" by creating financial packages such as "500 co-signers on a mortgage that also receive a portion of the profits from the house's sale."
In the video, he mentions FNMA and FHMLC are the ones that buy home loans. Basically, it means that banks like Wells Fargo and JP Morgan Chase are glorified order takers. They charge a $1000 "loan origination fee" to sell your loan to the the government sponsored agencies. If the loan ultimately ends up at FNMA anyway, maybe there's a much cheaper way to accomplish that. (Although I doubt the FNMA website will ever have a landing page that says "Skip the banks and apply for a loan directly with us!")
- PretzelFisch 7y agoThe disruption everyone talks about in this industry is much like self driving cars so far off into the future. Can the process be streamlined yes, can you get rid of some of the players not really. You will always need a title check you will always have to handle servicing( some banks and lenders do it in house depends on the cost) you will always need someone to buy a pool of loans and sell it to other investors.
- nugget 7y agoYou don’t always need a title check - you just need a party willing to bear the risk of problems with title, which are rare. There is plenty of margin to play with there.
- celestialcheese 7y agoTitle companies or title insurance is one piece I've never fully understood. Are title companies basically just insurance companies that do a lookup in public / private records on that property to make sure the person selling the property is actually owned by them. And if they did poor research or the records were wrong, they'll pay for fees. Is that accurate or am I missing something?
- cullenking 7y agoYou got it. They sell a couple different depths of products, the more guaranteed it is the more cost. They do the research to make sure there arent any valid competing claims or partial claims to any property. They bundle that all up with an insurance package for if they are wrong.
- bradleyjg 7y agoAs to number one and the last paragraph you write as if it is a one sided market—-as if anyone can come along and offer to fill out the paperwork cheaper than JPM. But it’s a two sided market. And the second side is a government monopsony. Companies in that space will need to compete to become a dominant government contractor. That’s a very different business than signing up the masses. Regarding number two, you’d be competing against a currently near monopoly lender that has zero cost of capital, sets the rules of the game, and has no compunction about manipulating the underlying asset class. Good luck.
- tonetheman 7y agoAs a recent consumer of a mortgage. I read your comment and really the fact that this comes from a VC... I am filled with skepticism. I think it would be better to say that mortgage industry is another place where a VC can insert itself to make more money. I am not sure as a consumer I will ever see anything from this "disruption" ... I am certain though I see a VC sucking more money out of the system. Or even worse some sort of subscription based horror of a startup that will let me monitor mortgage something or others.