American home buyers had a fantastic 2017, with the average 30-year fixed-rate mortgage falling from 4.32% to 3.95% (before rising back to around 4.5% by May 2018) and total home sales rising 1% to 5.51 million, the highest figure since 2006. Beyond that, there was plenty of other big news in the mortgage industry last year, which we recap in this article.
Digital Mortgages Took Off
More than anything else, 2017 will be remembered as the year banks and non-bank lenders fully embraced digital mortgages. What is a digital mortgage? It’s basically any home loan where the entire application process takes place online – from first quote all the way through to origination. By moving the process online, digital lenders enable borrowers to apply for a mortgage in a clear and transparent way, without having to spend countless days putting all their paperwork together. Many online lenders are even accepting e-signatures, eliminating any need for the borrower to go to a physical location during the mortgage process.
Quicken Loans, launched its fully digital Rocket Mortgage, platform during 2016, and by March 2017 it had become one of the top 30 national mortgage lenders out of a total of nearly 50,000 American banks, credit unions, brokers, and mortgage companies. According to Rocket Mortgage, the move to digital enables it to close mortgages 12 days faster than the industry average.
Home buyers are recognizing the advantages of digital mortgages. Better Mortgage, another 100% online lender, launched in January 2016, and by the start of 2018 it had surpassed $1 billion in originations. Two other online lenders reached $1 billion in even quicker time during 2017 – Goldman Sachs’ Marcus and SoFi. Many of the nation’s largest banks caught on to the digital transformation last year and early this year, including Bank of America, which launched an online and mobile mortgage application platform.
Non-bank Lenders Emerged
The share of mortgages originated by non-bank lenders is increasing (Source: Brookings Institution, based on Home Mortgage Disclosure Act (HMDA) data.
Non-bank lenders continued to grow in popularity in 2017, with non-bank Quicken Loans ($25 billion in origination) overtaking bank Wells Fargo ($23 billion) as the largest lender in the country in the final quarter of the year. Non-bank lenders have been on the up since the end of the great financial crisis, accounting for just 19% of all mortgages in 2007 and 49% of all mortgages by the end of 2016.
One of the reasons for this growth has been the emergence of online lenders. Quicken Loans has grown significantly on the back of its Rocket Mortgage brand, and many other startups from Silicon Valley and around the country have introduced their own online lending platforms. In contrast, the banks have been slower to react.
Another reason is trust. The public’s faith in the banking sector took a hit in the mid-2000s, and it’s going to take a while for that trust to return. Startups like Rocket Mortgage and Better Mortgage carry no baggage and have proven adept at marketing themselves to first-time buyers and millennials.
Credit Ratings Received a Boost
Home buyers received a big boost during 2017 when it was announced that the 3 major credit rating agencies – Equifax, Experian, and TransUnion – will drop all tax liens and civil judgments from borrowers’ profiles if the information isn’t complete. From now on, the liens and judgments must include the individual’s name, address, and either their date of birth or Social Security Number.
Around 7 percent of the 220 million Americans with a credit profile have a lien or civil judgment against them. A significant number of these liens and judgments don’t include the person’s, name, address, date of birth, or SSN. Thanks to the new rules, people who previously saw their credit score drop because of an incomplete lien or judgment enjoyed up to a 20-point increase in their credit score, according to a study by the credit rating company FICO.
Given how much emphasis lenders place on credit scores and the fine line between having a good credit score (670-739) or an average one (620-669), this change could make enough of a difference to help some borrowers go from securing a poor APR to a good one, or to go from failing their home loan applications to passing them.
Debt-to-Income Limits Rose
Fannie Mae and Freddie Mac, the government-sponsored enterprises that purchase and guarantee most mortgages via the secondary mortgage market, announced in mid-2017 that they were raising their debt-to-income ratio limit to 50 percent of pre-tax income from 45% - the highest since before the 2007-08 financial crisis.
The meaning for borrowers is that it’s now easier to get a mortgage. The meaning for lenders is that it’s now a little riskier to offer a mortgage. Doug Duncan, Fannie Mae’s chief economist, said the additional risk would be very small. 'Given how pristine credit has been post-crisis, we don't feel that is an unreasonable risk to take,' he argued.
Non-bank Lenders Became More Visible
The new breed of non-bank lenders has proven savvy in more ways than just their adoption of online platforms. Many of them have become more visible in the past few years, a trend that continued in 2017 with major ad campaigns and announcements of major sponsorships with sports teams.
Quicken Loans, has been at the forefront of the mortgage industry’s romance with sports, putting its name to the Cleveland Cavaliers’ Quicken Loans, arena, which is this year hosting NBA Finals matches for the fourth year in a row. It promoted its Rocket Mortgage, brand with a 60-second spot in Super Bowl LII in 2017 and backed it up again this year with a spot featuring comedian Keegan-Michael Key.
LendingTree, an online marketplace that connects borrowers with mortgages and other loan products from a network of leading lenders, also tapped into sports in 2017, announcing a long-term partnership with the Michael Jordan-owned Charlotte Hornets NBA team. LendingTree’s logo now appears on the team’s jerseys.
With sports and non-traditional lenders both getting bigger and bigger, there are sure to be more of these types of partnerships in future.