While the markets might be going through a phase of unprecedented turmoil, the pace of Venture Capital funding in January and February of this year continued at a steady pace. At least before, the country has been practically shut down in recent days.
The hope is that the slowdown will pass, and it might and that investment in early-stage companies will return to previous levels. This is especially true in the mortgage sector, where VCs have poured billions into mortgage tech.
Deals of note include the $225 million Ribbon raised from Bain Capital Ventures, Greylock, and others, the $130 million Blend has raised, and the $8.5 million raised by Boston-based Own Up in 2019.
Why is the mortgage industry getting so much interest from VCs? The answer might lie in the massive opportunity to apply technology to every step in the process, including how consumers shop for loans, origination, underwriting, funding, and syndication.
Another reason is that there is big money in real estate. So much so that Pitchbook noted that VC invested more than $10 billion since 2017. Two of the biggest rounds included the combined $800 million SoftBank pumped into Opendoor and Compass.
While the investments in mortgage tech companies are just a fraction of that amount, it is starting to gain pace. One often overlooked area is the reverse mortgage market. These are government-backed loans for older Americans, which help them to freeze their mortgage payments until they sell their home.
If you are aware of the opportunity in this market, consider that nearly 70 million Americans are retired or nearing retirement. This “Silver Tsunami” has the potential to change several markets – including mortgages.
From a customer perspective, a list of the top 10 best reverse mortgage lenders can give founders and VCs alike some more information on the market. Beyond this, there are industrial sites, and the government also publishes data on the market.
Back to investment in the traditional mortgage market, the business model of Ribbon is an example of what other startups are trying to do – bring the mortgage process into the digital age.
For example, SoFi has now entered the mortgage market, along with other forms of consumer finance, and in the process has garnered significant interest from VCs. Other companies that have gained attention from investors include LendingHome and Better Mortgage.
But these companies are primarily focused on the front-end of the mortgage industry. While there is a good reason for this, helping customers to shop for mortgages leaves many of the backend processes untouched.
These processes, including underwriting, funding, and syndication. Underwriting is how lenders review and approve mortgage applications while some of this is tied to the applicants’ creditworthiness, other factors such as licensure, and funding.
This leads to opportunities which help lenders to syndicate their loan books. In doing so, they can sell all or a portion of their loans and get money to issue new loans. Even with the problems tied to the subprime crisis, this remains the engine that helps the home mortgage market to run.
In these backend areas, several AI-enabled startups have entered the fray. These companies are hoping to assist in decision making and data analysis in backend functions. In doing so, lenders are hoping to reduce their loan processing costs.
While the potential of AI has yet to live up the promise, as the implementation of these technologies expand, the accuracy is expected to improve as well.
Over the long run, it makes sense that investment in the space has continued to grow. Coming out of the financial crisis, more than 60 percent of mortgages were originated at the top five national banks. However, that number fell to under 25 percent in 2016 and has continued to decline since then.
JD Power noted that in 2017 the most common way consumers applied for a mortgage was online. Given how we are reliant on our computers to run our lives these days, this shouldn’t come as a surprise. What is surprising that even while VCs are pouring billions into mortgage tech, most consumers are unaware of the transition that is happening beneath their feet.
As noted, investment in startups that are trying to disrupt the way you get the money you need to buy a home is gaining pace. While the recent economic uncertainties are expected to put a dent in second-quarter fundraising totals, it is clear that VCs believe there are returns to be had in the sector.
Who will the winners be? Only time will tell, but one thing is sure the way we get a mortgage is changing faster today than it has at any time in the past 100 years.
