Opinion: How regulators can reduce costs and increase equity

Recently, new technologies have reduced costs associated with purchasing a home and provided more opportunities for first-time homebuyers to enter the market.

To continue fostering innovation across the industry and better serve these homebuyers, regulators must take aim at one of the largest impediments to innovation: monopolies. The formation of a monopoly in the mortgage industry would slow the introduction of new solutions that would improve access to credit and customer experience. This is where regulatory discipline is needed.

By their very nature, monopolies stifle competition and curtail innovation. They frequently wield a disproportionate market presence and operate using pricing power and market leverage that force others in the space to join in or fail outright. Many operate today using outdated models and systems. This results in an industry devoid of any pressure to innovate and unable to support the needs of new homebuyer profiles.

When consumers are limited to a single option, that company is not under any pressure to find state-of-the-art solutions to attract business or to find new and novel ways to provide better services. There is currently a lack of guardrails to prevent the formation of monopolies in the mortgage lending industry, and this is where regulators have a prominent role to play.

Innovative technologies and services present mortgage lenders with ample opportunity to cut costs and attract homebuyers, especially first-time homebuyers, through innovations in risk management and credit analysis. However, the benefits go beyond just cost savings.

Many first-time homebuyers can be barred from the entire lending process due to outdated and antiquated methodologies, including credit reporting. For decades, lenders would turn to credit scores as the “North Star” for a lender’s credit worthiness. However, today’s companies are finding alternative ways to determine an appropriate loan for a consumer.

As one example, VantageScore has been attempting to impact the lending landscape by deploying its new credit reporting model. Its entry into the industry has had two major effects. First, it has successfully challenged FICO, the primary provider of credit reporting. Secondly, it has been able to provide an alternative credit reporting model that may be able to expand access for tens of thousands of potential borrowers.

This new model, which has become quite popular for housing advocates, places a higher emphasis on on-time payments and provides those with nascent credit with the ability to still have a score to use when applying for cars, loans and most importantly, homes.

This innovative approach to credit monitoring has faced resistance from what has been a single source industry for credit scoring due to competition concerns from the dominant provider. To force the issue, VantageScore 4.0 was included in the updated 2022 credit score model used by FHFA. In 2023, VantageScore reported that approximately five million additional borrowers were able to secure a mortgage thanks to their new model.

While this is only a single example, companies that embrace new and novel tools and technology are better positioned to not only grow their business but achieve major strides in addressing some of the long-standing issues facing disadvantaged groups.

Innovation is not always guaranteed to succeed. Especially if there is a monopolistic entity in the market which can disproportionately drive business away from its competition.

When Intercontinental Exchange (ICE) acquired Black Knight for $11.9 billion, that merger ultimately cemented ICE as a market dominator of the mortgage technology sector. However, prior to the deal’s closing the Federal Trade Commission sued and was able to successfully extract some concessions from ICE to prevent its complete takeover of the industry.

Unfortunately, despite this intervention from the FTC, ICE remains an overbearing market dominant institution. However, this regulatory action prevented the formation of a complete monopoly that would have single-handedly controlled nearly the entire sector. It is actions like these that regulators need to prioritize.

When monopolies occur, the only opportunity for innovation comes from the largest banks and lenders as they have the capital to develop their own proprietary solutions. But in a fragmented industry increasingly dominated by thousands of small banks, credit unions and non-bank independent mortgage banks whose only options are to use the technology solutions provided by third-party firms, the innovations created by the largest will not be available to all consumers.

The only solution here is to ensure that there is healthy and vibrant competition from those who develop the systems and platforms used by all lenders to ensure that innovation gets to everyone in the market, and not just the few.

While many of the companies providing services to loan originators don’t directly interact with consumers, their impact is the same. Monopolies that raise the cost of services essential to the loan origination process raise the cost for lenders — and inevitably these essential costs are passed along to the borrower/consumer. 

Regulators should treat such practices as such and step in to protect consumers.  The CFPB and FTC appear to be reluctant to intervene with practices that on the surface appear to be only business to business.  But consumers are being hurt, so regulators — and Congress — should take an active approach to ensuring real competition in these essential mortgage loan origination services.

What this industry needs are regulators who value innovation, who will prioritize assessing new technology and adopting it themselves, who will not stand in the way of companies looking to bring new solutions to address major issues and who will stand up to monopolistic entities which threaten competition. Regulators and policymakers alike must work together with the industry to actively foster a culture of innovation. This is one of the most important ways for everyone in this sector to realize our mission of helping consumers find their home for the future.

David H. Stevens is the former president and CEO of the Mortgage Bankers Association and former commissioner of the Federal Housing Administration.

Scott Olson is executive director of the Community Home Lenders Association.

Rob Van Raaphorst is a public relations expert and senior vice president at Rational 360.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the editor responsible for this story:
Sarah Wheeler at [email protected]