Disrupting the mortgage industry

Note: a day after publishing this post, New York Times published How Housing’s New Players Spiraled Into Banks’ Old Mistakes . It documents the thoughts from this blog
I did recently some research about financial services. Here is a refreshing example of the good way to disrupt a bank business. As always, it is the way we treat the customers. And customers are people. Better said, it is the way we treat people

What is Fintech

It's a segment of the technology startup scene that is disrupting sectors such as mobile payments, money transfers, loans, fundraising and even asset management.

Fintech was added to Oxford Dictionary on line only in 2016  Many – including tech savvy and clued up entrepreneurs – don’t quite have a handle on.

The modern name was coined after 2010. Previously, it applied to the back office of banks or trading firms  These technologies emphasize machine learning, predictive behavioral analytics, data-driven marketing. It appears  by far the machine learning (ML) has the biggest impact

Fintech is a modern business disruptor, impossible to ignore. Mortgages will change because the people changes and have different expectations

Affirm startup

Quoting Max Levchin the founder of the startup Affirm and a leading member of the PayPal Mafia
The millennial demographic that we are trying to serve is growing. We are on the track to become really, really big. It isn’t hard to convince people in this country that financial institutions are really, really broken and there is an opportunity to build something that could revolutionize the entire system.

MSN Money reports the net worth of millennial ranging from $20K at the age of 35, zero at the age 30, to negative (34K ) at the age of 22. This why the latest generation avoids banking and prefers to use whatever application from fintech disruption

When asked why he had to start with consumer lending, Max replied
I see building any bank as an exercise in building trust. To get there, you have to go through a lot of trust building. This is not easy at all. In the universe, there are some things people are willing to trust. 
Today, people don’t like their bank — they make money when you screw up or make a mistake. 

How Affirm structures a loan 

The millennial customer (or any customer)  selects a budget and the payments are spread accordingly to  his needs. There are no hidden charges, no arrears and interests for past due, no penalties. You may be a month or two out of a job, you may have a child, you may move apartments. Life is not steady, is event driven. Missing a payment does not mean people are dishonest

Disrupting the financial companies business

It is virtually impossible today  to start a new bank or insurance company. How To Start Your Own Bank claims you can start a community bank, which to me is an exception. Or you must be another Max Levchin.

People must feel pleasure, not fear when dealing with banks.

Using legacy tools like FICO, with no "Machine Learning",  the traditional (not community) banks place us in inflexible silos.

FICO is 60 years old. They started in 1956, when 80% of the US population was not born yet, never mind millennials. Actually millennials are uncomfortable with institutions like FICO, which rate people and decide their fate based on the past, using actuarial static calculations.  Machine Learning has yet to be adopted

Bloomberg says
Of the 7 million Americans who experienced foreclosure from 2004 to 2015, only 7.3 percent obtained a mortgage again.
That means, under the current system of big banks running the mortgage business for the nation, FICO-like thinking made an invisible tattoo on the foreheads of seven million American families, saying "Thou shall never own a home again"

The Mortgage Industry: Ripe For Disruption

The existing mortgage industry in US is "too challenged, too inefficient, too costly and too unresponsive to the needs of business and consumer alike". See  Collingwood Group White Paper: The Mortgage Industry is Ripe for Disruption, which can be downloaded from http://info.collingwoodllc.com/mortgage-industry-ripe-for-disruption 

The disruptive business models exploit advanced technology. It  takes the guess out via machine learning. predictive behavioral analytics and data-driven marketing.
2015  National Association of Realtors Home Buyer and Seller Generational Trends reported for the second consecutive year that millennials represented the largest share or 32 percent of recent home buyers.
Dealing with millennials, we know it means change.

The Big Short

 But before change is possible, we must clear the mess from the past.

Dr. Michael Burry, {Played by Christian Bale)  a California physician suffering from Asperger’s Syndrome and Bipolar Disorder who became fascinated with the bond market coupled to mortgage-making with falling lending standards in 2004. He made the move from medicine to mortgage funds with the help of a sizeable inheritance.

There is a book (2010) and a movie: The Big Short  is "a dramatic retelling of the 2007-8 financial crisis It  focuses on the lives of several American financial experts who predicted and profited from the build-up and subsequent collapse of the housing market and credit bubble in 2007 and 2008.

 Financial terminology and the chronology of the financial crisis is highly complex and difficult for a traditional audience to comprehend in a two-hour movie. From collateralized debt obligations (CDOs) and tranches to credit-default swaps and mortgage-backed securities, the production team employs a simple, yet stylistic approach to defining the tools that helped sink the global economy (for more, read The 2007-2008 Financial Crisis in Review.)
Words like  MBS (mortgage backed securities), CDO (collateralized debt obligations}, and many more.  mean nothing, except when, experiencing the results. The original mortgage from the builder is sold to Countrywide (for example), then to one of the big five banks and then is securitized by some Wall Street trust and sold to investors world wide. When the housing market collapses, and the homeowner discovers the value of her home is as low as one half the price she paid for it. In other words she is in default, by doing nothing and in spite for paying on time for five years.

Homeowners in distress do not deal with neighborhood bank, but with some remote shareholders spread around the world who want the highest profits generated

Are foreclosures necessary?

With top 5 Banks running the show their foreclosure activity is high.  and more painful in US  than other parts of the world

According to an expert familiar with the situation:
I think [foreclosure] a symptom of the current system and will continue to create problems in our banks'  way of  handling residential homes. We have now loans not directly related to the home owner, held in institutions that have no  direct relationships with the home owner. These are trusts that are acting on behalf of shareholders to make money from the homeowners. So the trust, uses a servicer to handle the customer service part of the mortgage. In the old day was a relationship based on solving problems and make home ownership sustainable, but now the servicer motivation is just to charge fees. The more fees they charge you, the better off they are. The generate fees by creating situations, such as default, that arises from the bank, when they mistakenly put an amount due there, which should not had have been there. The homeowners is faced to either have to pay that, or potentially face a foreclosure process. The homeowner can not start making payments because they did not pay the additional bill. Many feel as if they are victims of an extortion
Is the mortgage industry today supposed to be about foreclosures? Taking away homes from millions of Americans is ethical? Do we want our system to perpetuate for ever this model? Can't we find a system creating real wealth?

Defending against abusive foreclosures?

 They are  very few law firms specialized in foreclosure fraud, and very few options, for a a variety of reasons:
  1. The banks' tacit policy is "if you sue us, we are going to make it hard and tough for you". 
  2. You are dealing with a part of law that is constantly changing; it makes more difficult to keep up with the law, not only to be aware of it, but also to advance it. That takes a lot of extra work. 
  3. You are dealing with clients that are very stressed out because their home is part of their life. Many clients don't have any money to pay for the legal service.
We need a new type of startups, a consumer legal firm startup, to be a match for the banks' powerful legal machine and stop them.

Experts say they need to have at least 10 cases that went to trial that have hit big. This will change the industry, because the trusts' shareholders will be so upset, and there will be so much bad press that will give power to the individuals. That's why these cases are so much better than class actions.

Perhaps an individual homeowner may get ten million awarded if she has the right case, the right attorneys to convince the judiciary. Then this is significant. And if it can happen multiple times, 5 or 10 times,  we will have an industry that will stop operating for profits only.

Funding Law Firms as startups

What people want from a lawyer?  Millennials,  are seeking an attorney who is a specialist. The second thing, they want empathy, someone who cares, and who will do everything that can be done to fight for them. Third, they want communication on their case, and their calls returned. Venture Capital and large investors funding of law firms is new.

In my opinion,  a funded law firm will redefine what it means to be an attorney and clean the way for a renewed mortgage industry model.

Bottom line  

Should the mortgage industry be always in the shade of foreclosures? 


But how to change? Buckminster Fuller was an extraordinary American;
In 1927 Fuller, then aged 32, lost his job as president of Stockade. The Fuller family had no savings to fall back upon, and the birth of their daughter Allegra in 1927 added to the financial challenges. Fuller was drinking heavily and reflecting upon the solution to his family's struggles on long walks around Chicago. During the autumn of 1927, Fuller contemplated suicide, so that his family could benefit from a life insurance payment.
Then, a voice spoke directly to Fuller, and declared:
From now on you need never await temporal attestation to your thought. You think the truth. You do not have the right to eliminate yourself. You do not belong to you. You belong to Universe. Your significance will remain forever obscure to you, but you may assume that you are fulfilling your role if you apply yourself to converting your experiences to the highest advantage of others.

The motto from the Collingwood Group White Paper:
The Mortgage Industry is Ripe for Disruption


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