FHFA opens fintech office and seeks feedback on mortgage fintech

Fannie Mae and Freddie Macits regulator envisions a future where, perhaps through artificial intelligence and machine learning, mortgage errors are identified in real time before a loan is closed.

Compliance automation can make qualification decisions, as well as pricing and merging, and verify and validate this information.

But that scenario is a long way off. Although investors have injected an increasing amount of money into fintechs – $ 1.7 billion in 2021, up from $ 0.4 billion five years ago, per. Federal Housing Finance Agency – Closing a mortgage has since become more expensive, not less.

The FHFA this week launched a new office for financial technology, which it said will be the main point of contact for fintech cases.

At the same time, the agency seeks feedback on how to incorporate technological advances into the mortgage life cycle. Through a request for information, FHFA said they want to better understand “potential innovations throughout the mortgage life cycle and related processes, risks and opportunities.”

FHFA asked the public to help it identify “barriers” to implement fintech in the housing finance ecosystem. It also emphasized the importance of balancing housing quality with technological innovation.

FHFA said that they followed in the footsteps of other financial regulators by establishing their own fintech office. Agencies with existing fintech offices include Federal Deposit Insurance Corporationit The office of the controller of the currency and Bureau for financial protection of consumers.

The widely used term “fintech” includes digital innovation in many parts of the mortgage financing ecosystem, wrote FHFA. The agency offered three narrower categories for fintech in terms of mortgage financing: “mortgage technology”, which includes digital processes used for mortgage creation, underwriting, service and investment; research, trade and manage real estate, or “prop tech”, and regulation and compliance, also known as “regtech.”

The agency said it was interested in fintech’s role in the “ecosystem” of mortgages, its role in the secondary mortgage market, the risks of using fintech and its application to compliance and regulatory activities.

In terms of risk, FHFA highlighted a number of examples that it takes into account. These include inadequate regulation of the fintech sector, cybersecurity vulnerabilities due to “complex, poorly understood or poorly managed innovations”, threats to consumer privacy, breaches of fair lending and legal, compliance and reputational risks.

The agency also raised the possibility that algorithms could have differential and negative impacts on minorities or underserved markets, and that fintech platforms could “erode the accumulated wealth of individuals and firms” participating in them.

There is a lot in the mortgage process that fintechs can improve, but so far, wrote FHFA, it has not made it less expensive to produce mortgages. Full production costs per loan amounted to almost $ 9,500 in the fourth quarter of 2021, up from just over $ 7,500 five years earlier.

The time it takes to close a mortgage is still long – an average of 46 days from application to closing. During that time, the average potential borrower has 30 interactions with sales representatives, the regulator wrote.

These costs, and the timeline for closing a loan, are not fairly distributed, according to FHFA.

“Under-served populations are often the most costly and time-consuming due to historical and ongoing structural and systemic barriers,” the agency wrote.

But the agency is optimistic that fintech innovation in the long run can make mortgage processes more equitable, as well as more efficient.

Although the efficiency and savings have not yet materialized, FHFA cited research from McKinsey and Company argues that a “reconstructed, digitized mortgage origination process can reduce costs by 10%, reduce timelines by 15 to 40%, and reduce interactions with borrowers by 15% to 40%.”