Financial technology (fintech) firms have been pouring into the mortgage space over the past 20 years, bringing new ways to capture data, reach broader audiences, and expand access to credit. The convenience and efficiencies these innovations bring are good news for the mortgage industry, but their potential to tackle structural barriers and inequality in our economy are more exciting and important.
During the Urban Institute and CoreLogic’s Fifth Annual Housing Finance Symposium, Housing Finance Policy Center codirector Alanna McCargo led a panel of experts in a discussion about how new innovations can disrupt the current housing system to increase access to mortgages for underrepresented groups.
Homeownership can help address worsening wealth inequality
We live in an increasingly unequal society. Macroeconomic indicators have taken a positive turn, but families at the bottom of the income spectrum rarely share in these gains. Erin Currier, director of the Financial Security and Mobility Project at The Pew Charitable Trusts, pointed out that only 45 percent of families say they are financially secure, and one in three families say they have no savings.
In an environment with rising home prices, tight credit, and flat incomes, it is increasingly hard for families to achieve financial security. In addition, over 45 million Americans are credit invisible through traditional credit-scoring mechanisms, which makes it exponentially harder for these people to obtain liquidity in the face of financial shocks.
These problems intensify along racial lines. Many black and Hispanic families have little or no savings, and tight credit conditions have locked many minority families out of the mortgage market.
These problems have deep roots beyond the current economic climate. Nikitra Bailey, executive vice president at the Center for Responsible Lending, reminded the audience that homeownership has long been the primary wealth-building vehicle in the United States. The federal government’s housing policies offered white families economic opportunities that their black and Hispanic counterparts were denied—policies that created disparities that continue to this day.
Technological innovation is a key part of the solution
Technology can chip away at the legacy of discrimination and the current economic and credit conditions that impede families’ financial security by branching out from traditional data-collection strategies and using technology to educate populations that have been left out of the conventional financial system.
FS Card Inc. provides traditional mainstream credit cards to borrowers who are ineligible for standard credit cards and who would generally turn to alternative financial services, such as payday loans. The company’s chief executive officer, Marla Blow, believes consumers need to access liquidity at a price they can afford and that new approaches to how we collect and use consumer data can help us achieve this parity.
Traditional credit-scoring mechanisms are backward looking, using past information to predict future behavior. But new data and new algorithms allow us to use better indicators to determine creditworthiness. “We need to look for information beyond the consumer’s history,” Blow said. “We cannot train our systems on bias.”
Todd Baker, a research fellow at the Harvard Kennedy School, illuminated another strength of fintech. New tools can use behavioral economics to help consumers make financially sound decisions on saving. By setting up mobile structures that help people automate or “gamify” their savings, we can branch out from traditional methods of financial literacy education and reach more audiences.
Rob Chrane, chief executive officer of Down Payment Resource, a company that has created a database to match consumers with programs that offer down payment assistance, shared another way to increase education through technology.
Millions of borrowers are eligible for assistance but are unaware of programs that can help them. By aggregating this information, Down Payment Resource connects borrowers with useful tools.
Tech companies tend to focus on making the current system faster and more convenient for people who are already well served. But the most exciting and important advantage of these technological innovations in the mortgage market is the opportunity to expand financial services and education to underserved populations.