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February 12, 2016

Why Rocket Mortgage won’t start another housing crisis

February 12, 2016

"What if we did for mortgages what the Internet did for buying music and plane tickets and shoes?" That provocative opener to Quicken’s Super Bowl ad for Rocket Mortgage sparked controversy over whether another housing crisis is now just a click away. But the ad simply markets a new technology that allows consumers to originate mortgages more efficiently. In fact, a few components of the app could reduce the risks in lending and make it easier for people with less than perfect credit to get a mortgage.

Borrowers can give lenders easier access to bank information. Despite the snazzy name, the Rocket Mortgage is not a new mortgage instrument; it’s just a tool to more efficiently collect information for applications. With Rocket Mortgage, the borrower authorizes Quicken to directly access bank statements and tax returns. That obviates the need for the borrower to collect and send in pay stubs, bank statements, and fill out the form giving lenders access to tax returns. In other words, it entirely automates a previously labor intensive process. The lender no longer has to check that they have correctly typed the pay stub information into the automated underwriting system. They no longer have to check that they used the right income to calculate the debt-to-income ratio. It is neither a vehicle to expand the credit box nor a new product that signals the revival of the risky practices of the mid-2000s.

Approvals might be less prone to human error. Leading up to the financial crisis, lenders competed on how little information they could collect from a borrower. “No income, no assets, no problem” was the mantra. New products, which allowed for lower monthly payments proliferated. By contrast, this tool automatically collects every shred of information that is needed to assess a borrower’s ability to repay, for the purpose of making a traditional mortgage—most likely a 30-year fixed rate mortgage. What is significant about the Rocket Mortgage is not that one can get approval in eight minutes, but that automating the process can help ensure compliance and reduce risks. In this way, it’s really the anti-crisis tool.

Automation may ease tight credit. We have made the point numerous times that the credit box should be wider. Moreover, we have shown that product risk, not borrower risk, fueled the housing crisis, and the market is now taking less than half the total risk it was taking in 2001, a period of rational lending standards. That means credit is too tight today for borrowers with less than perfect credit. Why? Partly because lenders fear that if they make even the smallest non-substantive error in the loan documents, they’ll be forced to buy back a loan after it’s sold to an investor. Retail loan originators today originate only 35 loans each month compared with 185 in 2001, according to the Mortgage Bankers Association.

A more automated process that allows lenders to easily ensure compliance with a variety of regulations will reduce lender anxiety and could reduce the overlays that are keeping credit so tight. If automated tools like Rocket Mortgage help lenders lend to the full extent of the credit box, it would be a hugely positive outcome.   

Digital lending is here to stay. Rocket Mortgage isn’t the only technology innovator in the mortgage application space: Technology is moving at such a rapid pace that Housing Wire recently began identifying the 100 most innovative technologies each year. It will unveil its 2016 winners on March 1. But more than 250 nominations were submitted for the 2015 competition. Past winners have included Blend, a “technology powering the new wave of mortgage lending” and Roostify described as “accelerating and streamlining the home loan and closing experience.” Guaranteedrate.com bills itself as “the world’s first digital mortgage.”

The automated, less error-prone process is clearly the wave of the future. Originating a mortgage has become too costly as lenders double and triple check every entry to make sure they have not introduced human error that would force the lender to repurchase the loan. It is only because home ownership is so important to so many people, that we have all tolerated this excruciatingly archaic process for so long. If it was as cumbersome to travel or shop for shoes as it has become to get a mortgage, we would be sitting at home, with holes in our soles.

As the housing finance market continues to recover and reinvent itself in this era of rapid technological transformation, innovations like the Rocket Mortgage have the potential to reduce risk and safely expand access to credit at the same time.

The views expressed in this blog are those of the author and should not be attributed to the Urban Institute, its trustees, or its funders. Ongoing support for HFPC is provided in part by the Housing Finance Council, a group of firms and individuals supporting high-quality independent research that informs evidence-based policy development. Quicken Loans is a member of the HFC. As with all of our HFC members and all of our HFPC research, Quicken has had no knowledge of or involvement in writing this opinion piece and has not been given any opportunity to comment on it.

As an organization, the Urban Institute does not take positions on issues. Scholars are independent and empowered to share their evidence-based views and recommendations shaped by research.

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