By Piers Maughan, Chief Commercial Officer of M:QUBE
Coronavirus has brought the UK property and mortgage markets to near standstill. Since ‘lockdown’ was introduced in March, banks and non-bank lenders have made great efforts to keep the show on the road. In spite of this, most have struggled against a tide (or tidal wave!) of unprecedented circumstances, compounded by reliance on systems and technology which lack the flexibility needed to ensure supply of capital continues to meet demand.
With many underwriters struggling to work remotely, and few having access to the data and systems required to make robust valuations, sales of almost 400,000 homes have stalled according to Zoopla. The total number of mortgage applications in April alone dropped by 40%, with a 75% fall in loans for new purchases.
Recent insights from Knowledge Bank show the challenges faced by mortgage brokers, operating on the lending front line, in sourcing loans for their clients. The most frequent searches across residential property criteria databases have all been Covid-19 related, including Automated Valuation Models (AVM), ‘desktop valuations’ and ‘temporary maximum LTV restrictions’.
It is all but inevitable that the mortgage market should come under considerable strain during a global pandemic. To blame lenders would be harsh. However, all lending institutions must now be prepared to function normally – or as close to normally as feasibly possible – in case of a second wave. The good news is that technology and data can make this possible. The better news is that many of the same innovations now needed for adequate preparedness can also be used to reduce operational costs, enhance customer propositions and capture market share.
Innovation across the mortgage market
One of the most striking and practical challenges lenders have faced has been the process of conducting robust valuations without the ability to get ‘boots on the ground’ – a particular challenge for new purchases, remortgage and buy-to-let (BTL).
As a result, desktop valuations have seen a huge spike and the idea of insurance backed AVM’s has returned to the fore. Other workarounds include a new solution launched by SimplyBiz in conjunction with Mansfield Building Society which enables RICS surveyors to robustly value properties without ever entering, using a combination of desktop data and video’s taken by homeowners.
Just one of many examples of innovation which would struggle to gain traction in a normal market, due largely to inertia, but could prove a valuable tool in reducing survey costs and keeping markets functional in the event of lockdown 2.0.
Beyond physical valuations, deeper customer data sets provide an opportunity for lenders to better assess affordability in times of uncertainty. While traditional metrics, such as salary, bonus and time in role have become harder to rely upon, data points excluded from traditional credit scoring models can be harnessed to fill the gaps. One such example is the reliability with which applicants have paid their rent in the past. A simple measure which enhances mortgage repayment propensity modelling, but thus far rarely used.
Automation and remote lending: The future of mortgage origination
The tragedy of Covid-19 will not alter the course of technology-led innovation in the mortgage market; rather it will serve to rapidly increase the rate of adoption. What might have taken five-years will now happen in less than one as businesses are forced to adapt or die. Or, at very least, lose market share.
Amongst the forthcoming changes, automation and remote lending present the greatest opportunity for lenders to both enhance operational efficiency and mitigate the risk associated with further lockdowns.
When compared with other areas of financial services, mortgage origination is slow, inefficient and delivers a poor customer experience. The worst of all worlds. Process automation, achieved through data-driven technology and re-designed workflows, solves this problem.
Lending decisions which have historically taken weeks or months can now be made in as little as 15 minutes. Through a single origination platform, applicant documents can be processed in real time, with neural networks used to extract and verify data against third party sources before structuring it into a trusted, machine readable view of the customer.
Powered by an AI-based rules engine, additional information or clarifications can be sought from customers as they progress through the application process. The meandering back and forth between broker, underwriter and applicant – leading to prolonged operational queues – need no longer occur.
Whilst the speed of the process is a bonus, certainty and control are what borrowers crave, unburdening families from the prospect of losing their dream home due to a lack of timely finance.
For lenders and brokers, the benefits of automation are equally appealing. The cost associated with processing an application is reduced by over 50% and lending products can be distinguished based on service levels and customer experience, rather than purely on price and criteria – a zero-sum game and a race to the bottom.
One of the most acute practical challenges presented by ‘lending under lockdown’ has been the capacity for underwriting teams to work remotely. Lenders have done their best to hack together solutions under difficult circumstances, but productivity has inevitably fallen at a time when borrowers most need support.
As a result, ensuring appropriate systems are in place to facilitate remote underwriting has become a strategic priority across the sector, rising to the top of the agenda in lender board meetings across the country.
This is another example of where necessity will drive innovation. Using cloud-based systems, built upon modern, flexible architecture, underwriting can be conducted more effectively and securely than ever before.
Technology partnerships: Staying ahead of the game
In a world where large incumbents so often fall to more agile competitors, now is the time when lenders must look to technology as a means of future-proofing their businesses. Covid-19 will act as a catalyst for change across the industry and those who are slow to react will be left behind.
Consumer expectations are quickly changing.
Recall Blockbusters? Walking to the video store rapidly turned from a problem we didn’t’ know we had to an inconvenience so severe it turned the world’s leading rental chain to nothing more than a cautionary tale.
Mortgages will follow suit. Supported by data-driven origination technology, consumers will become accustomed to receiving a legally binding offer in minutes and hours, rather than weeks and months. Lenders must position themselves to match expectations or risk losing market share – potentially even joining Blockbusters on the scrapheap of ‘creative destruction’.
Modern day lending businesses are largely tech-enabled, not tech-led. The distinction matters. To deliver a seamless customer journey whilst reducing operational costs requires expertise in fields ranging from AI, neural networks, cloud technology and much more. For lenders, building such a platform internally is fraught with risk. Beyond the significant up-front cost, success is far from guaranteed and would take years (under a best-case scenario).
As lenders prepare to secure their businesses, both against the risks of the future and in preparation for evolving customer expectations, partnering with best-in-class tech providers offers the most effective path to sustainability and growth.
What comes next?
The Covid-19 pandemic and subsequent lockdown will accelerate the adoption of new technologies across the industry, ensuring it is better prepared for future crises.
At a Governmental level, it is encouraging that the housing market has been prioritised, underlining the essential role it plays in a properly functioning economy. With estate agents now reopened, viewings taking place, and removal firms and conveyancers able to restart operations, the market will inevitably pick-up from its recent state of suspended animation. But to better cope with crises in the future, the sector must embrace innovation, and that has to involve not just digitisation, but automated lending and financing to both speed up processes and minimise risk.
Consumer expectations are driving change – lending businesses must lead the way or risk being left behind.