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3 Key Trends for Real Estate Tech in the Mortgage Broker Industry

  • Three prominent dynamics currently in the real estate industry
  • What these dynamics could mean for growth in this sector

For SaaS founders in real estate tech who operate in the mortgage brokerage space, they will want to keep an eye on three key dynamics that could create growth in this sector:

  1. The maturing of the millennial market
  2. The increasing popularity of non-qualified mortgages
  3. Lay-offs of loan officers at banks and non-banks over the past six months

1. Older millennials are creating new customers for mortgage brokers

The Millennial Generation (now ages 27 to 42), the largest generation in history, fueled an epic boom in first-time homeownership.

In 2022, millennials represented 54 percent of all home purchase applications in the US. Additionally, thousands are becoming move-up buyers as their families grow or their careers cause them to relocate—the share of millennial repeat buyer home-purchase applications was 43 percent.

But the days of super-low mortgage rates are over and many millennials are "rate locked," forcing them to pay higher mortgages should they move. Consequently, young families that must move are ideal customers for mortgage brokers, given that mortgage brokers can find them good deals with less work by borrowers.

2. Non-QM loans may be a new market for mortgage brokers

Recently, Fannie Mae and Freddie Mac created a new category called "qualified mortgages" to speed the settlement of most mortgages. To be considered “qualified,” a mortgage must meet basic requirements, including size, documentation, and debt-to-income ratio. Most mortgages qualify to be purchased by Fannie Mae and Freddie Mac, saving time and effort for borrowers and lenders.

Non-QM mortgages are more difficult to document and riskier to own. They include:

  • Jumbo loans
  • Loans for borrowers with low credit or high debt-to-income ratios
  • Mortgages with terms longer than 30 years
  • Mortgages for borrowers whose income is difficult to document such as newly self-employed, part-time, seasonal, and "gig" workers

Non-QM loans are either retained by lenders or converted into high-risk mortgage-backed securities. Homeowners seeking non-QM loans often need mortgage brokers to help document their applications and connect them with a correspondent lender specializing in non-QM loans.

Only about 4 percent of the market for first mortgages today are non-QM, but that’s twice as much as in 2021, as demand recovered from the pandemic.

"Despite the high DTI ratios, non-QMs are performing very well today…lenders are attracted to borrowers with higher credit scores and low loan-to-value ratios to help offset the added risk from a high DTI, limited documentation, and interest-only on non-QM loans," reports CoreLogic, a leading global property analytics firm.

Non-QM loans promise to become an important new market for mortgage brokers and wholesale lenders specializing in them.

3. Retail lenders are hurting, and brokers are filling the void

Under pressure from soaring interest rates, a large segment of the banking industry reported a huge decline in fourth-quarter earnings from their mortgage banking operations, with several firms taking aggressive steps to stop the bleeding. Up to 30 percent of the 1,000 largest independent mortgage banks are projected to disappear by the end of 2023 via sales or failures.

By the first half of 2022, some 45,806 loan officers lost their jobs, nearly a 20 percent drop from 2021 and the loan officer headcount declined by about 45 percent in 2022.

While mortgage brokers are suffering as well (losing about 800 jobs), the CEO of United Wholesale Mortgage (UWM), the nation’s largest mortgage lender and a wholesaler that works closely with brokers, estimates that more than 17,000 loan officers joined the mortgage broker channel in 2022.

If these trends play out in favor of the mortgage broker market, then demand for related tech should also grow, especially given that many brokerages are still fairly unsophisticated when it comes to tech-enabled origination.

A recent McKinsey study found that third-party technology and data providers are streamlining more parts of the mortgage process, but digitization of the industry is far from complete:

"Many mortgage originators still engage in labor-intensive and repetitive fulfillment and servicing, even though there is potential to automate more than half of the tasks across front-to-back processes. Failure to update legacy processes can trickle down into elevated origination costs and delayed cycle times. Moreover, when demand rises, many originators cannot take full advantage, because they lack the ability to scale operations quickly enough."

Given these trends and the overall lack of tech integration, here some key areas to think about if you’re a SaaS founder in the space:

  1. It’s not unrealistic for a broker to use five or more different programs to process a loan, indicating the industry is fragmented. Fragmentation in a market creates pressure for consolidation for M&A, so for founders who provide a point solution as part of the origination workflow for brokers, they can expect significant interest from acquirers looking to consolidate.
  2. Lending is a big data problem, making it a business naturally suited for artificial intelligence (AI). As real estate SaaS providers find creative ways to apply AI as part of the origination process for brokers, they could potentially compound their growth.

While these are some of the micro trends occurring in the brokerage space, SaaS founders in real estate looking forward to a liquidity event need to keep in mind macro trends:

  1. Given where interest rates are right now, we’re not at the height of the real estate market. For companies who can, getting to a cash flow even/positive position and riding out the next year or so is a sound path to exit. The real estate market is highly cyclical and always comes back, but it’s not the top of the market right now. Unless liquidity is a necessity in the short term, founders can wait it out.
  2. While refinancing loans are worth about 25% the value of new loan origination, these loans are comparatively easy to originate. Once the interest rate falls again, people will refinance, so building toward the next refinancing boom could be a great opportunity.

Depending on how the macro housing markets play out in the next couple years, the micro trends and the associated implications could bode well for tech founders that serve the brokerage space.

Modified on Mar 27, 2023