This article was written by Omri Dotan, founder and CEO of Wisor.
There are many different ideas about how technology can reshape mortgage lending. Today, innovation in the lending sector is almost entirely about customer experience, the process of getting a loan. This revolutionizes the mortgage industry to some degree, but not completely. In order to fully optimize digital tools, we need complete disruption.
Disrupting the mortgage industry means changing the product itself. How are mortgages built and managed? Almost 85% of borrowers in the United States choose long-term, fixed-rate mortgages, according to The Housing Finance Policy Center.
We live in a tech-savvy world where everything is personalized, except for the biggest financial decision most people make in their lives. Mortgages are still offered as static products. Instead they should be reshaped into adaptive and personalized services, just like wealth management and investment portfolios.
In the United Kingdom, Barclays Bank conducted a survey in 2015 and found 75% of mortgage borrowers could be in danger of failing to pay back their loans if interest rates spike. In the US, almost $100 billion of mortgages face the same risk. That’s a lot of unnecessary risk for both parties.
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In today’s marketplace, static loans are painfully inefficient. A customer looking to take a loan, whether it’s from Wells Fargo or CitiBank, will still be offered just one product out of a pool of predetermined options based on his credit score. But the customer himself keeps changing, just like the economic environment as a whole. Modern loans need to constantly adapt to the borrower’s lifestyle, not the other way around. Lenders are offering snapshots when they could be streaming live video.
The innovation we’ve seen so far in mortgage lending is only the beginning. Until the financial crisis in 2008, traditional banks offered standardized lending with a long and tedious process. The credit score functioned as a shallow borrower profile.
After 2008, non-bank lenders stole market share from traditional banks by offering alternative solutions and a better customer experience. This still hasn’t resolved the underlying issue of an outdated product.
In countries like Australia, Switzerland and Israel, mortgage lenders already offer mortgage portfolios built from more than just one product. Borrowers can combine a fixed-rate product with a floating rate product, given as one entity. These services yield higher profits for the lender and customized options for each borrower.
For example, Israeli banks increased profits by over $1.5 billion by offering structured loans, financial newspaper Calcalist reported. The Bank of Israel estimates outstanding Israeli mortgage debt at $85 billion, which is just 0.85% of the American market. Imagine if these principles were applied worldwide.
As more players around the world innovate with mortgage products themselves, a new win-win scenario emerges. Product innovation is the only way to truly revolutionize the mortgage industry. By personalizing individual loan portfolios, both borrowers and lenders can profit from the new economic reality.