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USA Real Estate Blog

Will Amazon create prime competition for mortgage lenders?

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For starters, the barriers to entry in mortgage lending are still relatively high, particularly when it comes to regulatory compliance.

Besides licensing, there are various forms of net worth requirements to be a mortgage banker, including state regulations, warehouse lenders and secondary market partners. Audited financials are usually required to show that lenders meet those requirements. While the costs may not be a burden for Amazon, going through the process is not a simple task.

On the compliance side, mortgage originators are subject to examinations by state regulators. There are also rules addressing quality control, appraisals, loan officer compensation and other forms of expenses that cut the net income from originating a loan.

Or it may just be that Amazon has simply been too busy to consider mortgages in between acquisitions like Whole Foods, its increasingly contentious development of a second headquarters on the East Coast and other ongoing efforts to branch out beyond online retail into entertainment, cloud computing, mobile technology and other categories.

But make no mistake, any industry where data and automation hold a unique advantage presents an attractive opportunity for large technology developers. And given Amazon’s uncanny ability to understand consumers and deliver an exceptional digital experience, it may be able to succeed where so many others have tried and failed.

There is a willing audience that would turn to Amazon and Google for a financial product instead of a traditional provider, according to a recent Fannie Mae study.

Approximately 16% of all respondents, including 20% of those aged between 18 and 34, trust their favorite financial technology company to handle their mortgage, according to Fannie’s third-quarter 2018 National Housing Survey. However, nearly two-thirds said they do not trust any of the big technology firms — Google, Amazon, Apple and Facebook — to provide any financial product out of concerns over data breaches and privacy.

Other surveys indicated similar interest by consumers in using nontraditional providers for a financial product. Nearly 20% of consumers would use Amazon or Google for their home insurance, according to a J.D. Power survey released in August 2018. For millennials, that increased to 33% willing to use Amazon to obtain a property/casualty policy and 23% for Google.

Meanwhile, a 2012 study from Carlisle & Gallagher found one in three consumers said they would consider getting a mortgage from Walmart, while just under half said they would contemplate getting one from PayPal. But it is no sure thing that positive consumer sentiment around these big name companies translates into a sustainable mortgage business model.

“Amazon is a good example of a tech firm that has the ability to scale its platform across industries, and the mortgage industry is mired in legacy platforms,” said John Cabell, director, financial services customer satisfaction at J.D. Power. “This combination makes it attractive for slick newcomers like Amazon and others.”

Amazon declined to comment for this story. Still, plenty of big names — technology firms, traditional retailers and providers of other financial services — have tried and failed to bring mortgage under the corporate umbrella.

In most cases, their demise was related to housing market cyclicality, especially during the Great Recession. But now, what might be keeping tech firms out are the regulatory and compliance burdens of the business.

“These structures are daunting for newcomers. More than half of the mortgage origination customer experience is influenced by regulations, so lenders have to start with that template when creating a customer journey,” Cabell said.

But some of that regulatory burden could shift because of the new fintech charter proposed by the Office of the Comptroller of the Currency. The charter allows holders to avoid state licensing while not letting them obtain federal deposit insurance. Some observers note this charter would work well for a nonbank digital lender.

Employees of chartered fintechs that originate mortgages would be included under the SAFE Act, which exempts mortgage loan officers who work at covered financial institutions such as OCC-regulated banks from state licensing requirements — but they would still have to be registered with the Nationwide Multistate Licensing System.

Should tech firms make a play in mortgage, they would likely seek to differentiate themselves by creating a user experience that meets the desires of the millennial generation, the largest pool of potential homebuyers.

“As we know, over the long term, distinctive value and customer experience are critical to success in any market,” Cabell said. “The mortgage industry, lagging in customer adoption of digital usage by comparison with other financial services products, is no exception. Continuous improvement and adaptation now in this area are clear priorities for lenders as they plan for their future competition. Whoever that might be.”

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