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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 52 May 2023 F E A T U R E can significantly increase productivity improve efficiencies and save lenders significant time as they can automate workflows that have typically been manual, ultimately reducing costs. 2. Generating new revenue opportuni- ties: Proptech companies are innovating in areas where they can engage with new customers in different ways and provide integrations with third-party vendors to bring additional revenue- generating opportunities to existing customer portfolios and platforms. 3. Facilitating compliance in a highly regulated industry: Mortgage technol- ogy companies are helping lenders navigate the complex regulatory environment by providing the data, systems, and analysis necessary to bet- ter manage compliance and monitor the regulatory environment. 4. Delivering self-service models through disintermediation: Proptech technology companies and fintechs have continued to build self-serve products for borrowers and customers, disintermediating various steps within the real estate process. At the same time, these technology businesses have enabled legacy mortgage and real estate companies to gain a better understanding of their customers and provide a better user experience. 5. Providing greater access to and an enhanced consumer experience for new generations of homebuyers: As millennials increasingly engage in the home purchase journey with ~43% of homeowners being millennials according to National Association of Realtors (NAR), technology companies continue to develop digital capabilities to accommodate the demands of this new generation of homebuyers. Tools are also being introduced that inject more fairness into the mortgage un- derwriting process and which utilize alternative data sets to help increase homeownership access. Why Now Is the Time for Digital Adop- tion in the Mortgage Industry E ven as the mortgage sector experiences one of the most difficult origination environments of the past decade, several significant themes are emerging that support the growth of digital adoption. First, over the past decade, there has been a distinct shift from bank to nonbank mortgage lending. Independent mortgage banks (IMBs) originated approximately 66% of loan volume in 2021, up from 27% in 2011 as banks reduced their mortgage footprint. However, unlike larger banks, IMBs often are not in the position to build out the technol- ogy they need themselves and are reliant on third-party software vendors to support their innovation. They are also able to move more quickly and are more entrepreneurial as a sector yet are still seeking economies of scale with industry platforms versus customized platforms. Ultimately, IMBs are uncovering opportunities to be more efficient and are more open to adopting technology. Second, recent layoffs in the mortgage industry will continue to drive the need for technology to solve internal gaps. The Mortgage Bankers Association's (MBA) analysts are predicting jobs will decrease by 25-30% from their peak and thus far through January 2023, mortgage companies have only eliminated approximately 12% of their work- force. IMBs are doing what they can to retain loan officer, processor, and underwriter talent, but more than likely they will need to continue to cut. Technology will be needed to solve gaps in these organizations to ensure they are compliant and produce a positive customer experience. Third, the all-in cost to produce a mort- gage has risen fairly dramatically over the past few quarters. According to the MBA, net pro- duction income for a mortgage turned negative again in Q3 2022 for the second consecutive quarter. Total production costs have increased to approximately $11,000, up from approxi- mately $8,000 in 2020-2021 as loan officers and nonproducing direct employees have become less efficient as loan volume has fallen. For mid-sized IMBs, production costs are ap- proximately $10,000 per loan with 55% of those costs in sales, 23% in fulfillment (processing, underwriting, and closing), 5% in production support, 11% in corporate admin, and only 7% in technology. This means there is a significant opportunity to address efficiencies in the sales and fulfillment areas with technology. Look for automation to occur "behind-the-scenes" to replace manual processes like the "stare- and-compare" and guideline processing, and exception management. Why Being an "Insider" Is Key for New Incremental Innovation I n the beginning, proptechs had some suc- cess in direct-to-consumer and marketplace models by creating major consumer demand for new categories in real estate (think Airbnb, Zillow, OpenDoor, Angi, and WeWork). They were providing innovation as outsiders and significantly disrupting the status quo and other traditional business models. More recently, new venture-backed prop- techs have been providing "incremental" in- novation by taking on industry incumbents with new and better technology. Instead of solving specific gaps, they have been going head-to-head with other players to build easier-to-use, more intuitive, and cheaper alternatives. However, they have struggled to secure market share because they are unable to successfully navigate the complex real estate ecosystem. While the Total Addressable Market (TAM) is very large, having inside knowledge and a thorough understanding of the inner workings of the existing tech stack is incred- ibly important. Additionally, as referenced before, only about 7% of mortgage origina- tion production costs are for technology, so developing solutions that can build-on to the existing infrastructure is key. Venture Capital Funding Innovation O ften, innovation needs to be fueled by capital. Venture capital can provide capital and expertise to early-stage and start-up companies emerging in proptech. Innovation and capital are needed to solve the specific needs in the market that incum- bent and legacy real estate businesses are not solving—driving efficiencies through AI and machine learning, providing new revenue generating opportunities, better managing compliance, disintermediating legacy systems, and providing access to new homeowners. However, to invest in this space, specific and insider market knowl- edge is required, and this is when venture capital can play an important role, assuming that investor is also an insider. Tech companies that are run and advised by insiders who understand the market, key players, real estate process, mortgage origina- tion, incumbent landscape, and regulatory environment have a much higher likelihood