With inherent disruption across the value chain, how can we begin to think about the impact of the current pandemic on mortgage markets and where the mortgage industry might go next?
A -€400B impact?
First, we can analyse the current situation by reviewing the impacts of the last large interruption to financial markets – the 2008 financial crisis (GFC). In 2008, mortgage volumes saw a 25% decrease in sales in Europe. Mortgage markets within the European Union took almost 10 years to recover to peak volumes, where they were stable until the current pandemic. If we can expect a similar decrease compared to the GFC in the European zone, this would mean that the annual gross mortgage volumes could fall from current €1.7 Trillion in volume and shrink by €450 B.
However, because countries in lockdown account for over 50% of world GDP, the collapse in commercial activity is far more severe than in previous recessions. This means that using the GFC as a benchmark might give a false projection.
In the case that the comparison by proxy is not meaningful, it is possible to simulate impacts. Consider a total stop of transactions. With average transaction volume of around €140 B per month in Europe and a potential 3-month stagnation, this impact could total over €400 B in lost sales. This reality seems likely and the simulation demonstrates the magnitude of a hiatus in the market.
In parallel, the impacts felt by deferred payment schemes being requested by governments and implemented across regions might be a stronger indicator. If expected mortgage payment revenue is deferred for up to 3 months, as is now standard for many European banks, then lenders must be ready to combat a decrease in expected income over the next few months. Even if this decrease in income is not substantial, it will likely have downstream impacts on the residential mortgage security market, borrowers’ credit ratings and more.
Some preliminary impacts
- Lenders are likely to exhibit decreased risk tolerance, which will lead to smaller supply of loans for home buying, effectively contracting the market even more.
- In order to compensate for lost income, mortgage brokers and lenders must push to look for efficient solutions to be operative, encouraging investment in digital solutions to drive down transaction costs.
While these scenarios represent extremes, they are indicative of the burning platform for mortgage brokers and lenders to quickly adopt new ways of working and supporting their clients in order to maintain some semblance of progress in the market. How can mortgage brokers and lenders react today to manage these impacts while laying a strong foundation to build upon for market longevity?
Never leave a good crisis wasted, the opportunities
With an ambiguous future ahead of us, what opportunities lie ahead of the immediate need to digitally enable the end-to-end mortgage life cycle?
Digitizing assets for the remote worker
The current pandemic has presented a litmus test for “en masse” remote working. This week I heard numerous stories from clients and investors of banks that aren’t able to give remote access to their Loan Officers. This means that mortgage applications have no digital file representation and cannot continue to be processed. This directly hampers revenues while adding new frictions to client engagement. What is stopping brokers and lenders from digitizing their application assets? Thus far, the industry has been slow to adopt cloud solutions in both front and back-office capacities, leaving room for optimization. This gap has been widened even further by firms hesitancy to digitize processes and move away from traditional ways of working.
Easing customer needs with self-service
Additionally, changing client circumstances means changing client needs and behaviors. Apart from new mortgages, clients will likely have difficulties repaying their current engagements. Banks have built-in flexibility in their contracts to defer mortgage payments for certain periods and governments are asking lenders to increase this flexibility. But how ready are banks for clients to take them up on such flexibility, when so many of their current processes are embedded in manual tasks and in-person engagement? When I tried to defer my mortgage payments last week at my bank, it resulted in 2 phone calls and a puzzled bank clerk – they required that I physically sign papers, but had no way for me to do so. These changing needs aren’t complex things. Simple, self-servicing solutions for financial products, including mortgages, with which clients can request such flexibility are due.
Migrating to online purchasing experiences
Workflow isn’t the only part of the process that will need to be pushed digitally. Property buying has been slowly moving to digital and this move should and will accelerate. Offr, a fellow startup in our London Barclays Accelerator, powered by TechStars, has been the only auction house that was able to sell this week. Why? Offr is a fully online auction house. As they keep on running, any Lender that can integrate directly into their platform will continue to issue mortgages digitally. There has been no more immediate of a need for lenders to make the investment in such a partnership, which will benefit them long after the current crisis subsides.
So what does this mean?
Firstly, the pandemic will necessitate a more digital way of working in order to keep the business running for the next 9 months. This will mean a shift from on-premise tools and software to cloud-based applications that can easily migrate human communication to fully digitally-enabled flows. Given the urgency in the coming days and weeks, Financial Institutions will be able to speed up their digital transformations drastically by jumping forward in the next month to a place they may have originally planned to reach in the next 3 years.
Secondly, as consumers remain in lockdown, they are being pushed to adopt digital ways of doing things. In countries where payment holidays were available, 50% of consumers requested such options through online or digital workflows. For example, the market in Austria was able to defer 40,000 mortgage payments last week through a completely online process. The pandemic is drastically changing customer behavior even for high-trust transactions.
Lastly, this shift cannot happen in a vacuum. Important stakeholders that influence the mortgage journey are shifting to digital, too. For example, Belgium is planning to pass a law that will allow for digital signing of mortgage deeds at the notary. This will finally enable a fully, end-to-end, digital mortgage process. Additionally, innovative new companies are enabling digital property purchases, which will likely have a more profound impact for the mortgage industry as a whole.
COVID-19 has the potential to accelerate the digitalization of the mortgage industry. Financial Institutions will be pushed to operate more efficiently and more dynamically by embracing digital self-servicing as a channel and cloud computing as a necessity. Meanwhile, customer behaviour is adapting to complete high-value transactions over the internet. As crucial steps in the mortgage process move online, such as property buying and contract signatures, so can the full mortgage journey. Because the ecosystem is changing rapidly, it will be crucial for lenders and brokers to digitize their foundations and embrace this change.