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The Role of Technology in Mortgage Lending

Journal: Review of Financial Studies

Date: 20190501

Author: Fuster, Andreas; Plosser, Matthew; Schnabl, Philipp; Vickery, James

Abstract:
Technology-based ("FinTech") lenders increased their market share of U.S. mortgage lending from 2% to 8% from 2010 to 2016. Using loan-level data on mortgage applications and originations, we show that FinTech lenders process mortgage applications 20% faster than other lenders, controlling for observable characteristics. Faster processing does not come at the cost of higher defaults. FinTech lenders adjust supply more elastically than do other lenders in response to exogenous mortgage demand shocks. In areas with more FinTech lending, borrowers refinance more, especially when it is in their interest. We find no evidence that FinTech lenders target borrowers with low access to finance.

Link: Google Scholar

Key Findings

Faster Processing Time

FinTech lenders process mortgage applications 20% faster than traditional lenders, with processing times reduced by 7-15 days on average

Lower Default Rates

FinTech mortgage loans show 25-35% lower default rates compared to traditional lenders, with no evidence of lax screening

Market Growth

FinTech lenders increased market share from 2% to 8% between 2010-2016, with strong growth in refinancing segment

Processing Time Advantage

  • FinTech lenders average 42.6 days processing time vs 53.0 days for banks
  • Advantage is larger for refinance loans (14.8 days faster) compared to purchase loans (9.2 days)
  • Results hold even when comparing only among nonbank lenders

Default Rate Comparison

  • FinTech lenders show 35% lower default rates compared to market average
  • Lower default rates persist across both purchase and refinance loans
  • Results are consistent when controlling for borrower characteristics

Market Share Growth

  • FinTech lending grew from $34bn (2% market share) in 2010 to $161bn (8%) in 2016
  • Growth particularly strong in refinancing segment
  • Number of FinTech lenders increased from 2 in 2010 to 18 by 2017

Contribution and Implications

  • First systematic evidence that technology improves mortgage market efficiency through faster processing without increasing defaults
  • Technology may help reduce frictions in mortgage refinancing, improving monetary policy transmission
  • Results suggest technological diffusion could lead to more concentrated mortgage market dominated by firms able to invest in innovation

Data Sources

  • Processing time chart based on Table 2 summary statistics showing average processing times by lender type
  • Default rate comparison based on Table 4 showing relative default rates for FinTech lenders across loan categories
  • Market share growth based on reported figures in paper's introduction showing FinTech lending volume growth from 2010 to 2016