Silicon Valley Vies for a Piece of the U.S. Mortgage Market

Key Speakers At The 2015 Milken Conference

Mike Cagney, co-founder and chief executive of Social Finance Inc.

Photographer: Patrick T. Fallon/Bloomberg
  • Startups offer applicants faster processing with technology
  • Borrowers can sign and send documents on their phones

Jeff Patmont got his home loan on his phone.

The 30-year-old marketing manager for a medical-device company said he did almost everything electronically for the mortgage on his $980,000 home in the San Francisco suburb of Lafayette, California.

“I didn’t want to deal with a bank,” Patmont said. “I signed my offer sheets and loan documents on my phone while I was sitting in a bar.”

Social Finance Inc., a San Francisco-based online lender that refinances government-backed student loans, is originating about $50 million a month of loans like the one it made to Patmont, according to Chief Executive Officer Mike Cagney. Next year, SoFi plans to issue as much as $3 billion of mortgages, including interest-only loans and others that can be sold to Fannie Mae and Freddie Mac, he said.

While that amount is but a flyspeck in the $1.45 trillion market for U.S. home loans, SoFi and other tech-focused upstarts such as Lenda, Sindeo Inc. and Roostify are shaking up the industry. They’re pushing lenders to innovate and betting they can win market share with automated processes that might nauseate big banks hesitant to ramp up their lending after paying billions of dollars to settle mortgage-related lawsuits.

The Silicon Valley firms are seeking to benefit from a shift away from banks to lenders like Quicken Loans Inc. and PennyMac Financial Services Inc. Nonbanks were responsible for 37.5 percent of U.S. home loans made last year, up from 26.7 percent in 2013, according to data compiled by Inside Mortgage Finance.

“The mortgage industry is like the Henry Ford assembly line,” said Stanley Middleman, CEO of Mount Laurel, New Jersey-based Freedom Mortgage Corp., which originated $23.6 billion in mortgages last year. “Our industry will be disrupted. It’s when, not if.”

Complex Process

Four-year-old SoFi underwrites mortgages based on a person’s free cash flow, rather than debt-to-income ratio, the industry standard. That broadens the customer pool and allows SoFi to draw from borrowers on the student-loan side of its business. Most borrowers don’t need to submit tax returns. They can also sign everything electronically until they get to the closing table.

“There isn’t a banker out there that doesn’t look at me and shake his head and say, ‘You don’t know what you’re doing,’” Cagney said. “But we’re doing it.”

SoFi is funding loans with the help of credit lines from banks. The firm plans to bundle some of its mortgages into bonds starting next year, according to Cagney.

Patmont said the amount SoFi was willing to lend him was “way more than we needed, way above what we would’ve felt comfortable from an income standpoint actually making payments.”

The process was simple, he said. He spoke to a SoFi representative, then took photos of his pay stubs and other financial documents and sent them in on his phone.

Cutting Costs

Two-year-old Lenda said it has funded more than $60 million in mortgage refinancings using technology to cut costs so it can offer loans at lower rates than traditional competitors, said Jason van den Brand, co-founder of the San Francisco-based firm. Lenda borrowers find out whether they qualify “milliseconds” after they answer a series of online questions, he said. If applicants answer any question in a way that disqualifies them, Lenda tells them right away.

Of Lenda’s 12 employees, seven work on technology. Borrower interactions are often limited to a five- or 10-minute conversation. Lenda even approved a loan for an Oregon software engineer who didn’t want to speak to anybody, van den Brand said. Lenda’s loans are eligible to be sold to Fannie Mae and Freddie Mac.

Sindeo, a San Francisco-based mortgage marketplace that started this year, plans to use technology to guide borrowers to one of 45 lenders and more than 1,000 loan programs, said Chief Industry Officer Ginger Wilcox. Rather than a commission, it pays loan officers based on customer satisfaction, she said.

Wilcox said the company is aware of regulatory challenges and hired a former Consumer Financial Protection Bureau enforcement attorney as its general counsel.

“We come from the mind-set that anything can be done,” Wilcox said. “Then we figure out how we can make it compliant.”

Approval Race

Roostify, which has raised $7.5 million from investors including Wells Fargo & Co., the biggest U.S. home lender, sells its software to credit unions and banks of all sizes, said co-founder Rajesh Bhat.

Lenders have originated $3.5 billion in mortgages using Roostify, which can gather information needed for the mortgage application from online tax returns, bank accounts and other Internet sources, as long as customers provide passwords. It offers a secure virtual dashboard where borrowers, Realtors, title companies and lenders can exchange messages, coordinate appointments and electronically sign documents.

The platform can feed directly into Fannie Mae’s automated underwriting system so approvals can be completed in as little as 20 minutes, Bhat said.

Quicken, the largest nonbank lender, announced last week that its borrowers will be able to get approved for a mortgage and lock in their interest rate online in as little as eight minutes.

While many lenders haven’t caught up due to antiquated computer infrastructure, startups seem too focused on the technology, said Terry Wakefield, a mortgage consultant who co-founded one of the first online direct lenders in 1998.

“They need to get the details right with the processing, underwriting and funding of the loans, and then get the technology right,” he said. The 2008 financial crisis “was the perfect example of people who did not understand process causing a global problem.”

Bank Lenders

In the years leading up to the housing collapse, the bigger lenders were focused on making loans as quickly as possible before selling them to investors, often failing to document the salaries of borrowers. After the crash, they had a tough time keeping track of who owned the mortgages. Shoddy practices led to billions of dollars in punishment.

Since the crisis, banks have been restricted by new regulations that force them to hold more capital for some assets. That’s given the advantage to mortgage lenders that don’t take federally insured deposits, like banks do, and aren’t subject to the same rules. They still have to answer to states in which they’re licensed and to the Consumer Financial Protection Bureau.

Patmont, the SoFi customer, recommended the lender to his parents, who were less skeptical than he thought they’d be. When they refinanced their house this year, they went with SoFi, he said.

“I like that SoFi didn’t inconvenience my life,” Patmont said. “Maybe somebody in an older generation would want someone to sit down with them, or be at closing, but I didn’t feel like I needed that. It would’ve been a pain in the butt.”

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