{"id":19483,"date":"2016-11-18T16:57:08","date_gmt":"2016-11-18T21:57:08","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/need-a-mortgage-theres-an-app-for-that-too\/"},"modified":"2016-11-18T16:57:08","modified_gmt":"2016-11-18T21:57:08","slug":"need-a-mortgage-theres-an-app-for-that-too","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/need-a-mortgage-theres-an-app-for-that-too\/","title":{"rendered":"Need a mortgage? There\u2019s an app for that too"},"content":{"rendered":"

Quicken Loans made a splash at the 2016 Super Bowl with\u00a0its ad for Rocket Mortgage<\/a>, a new mobile app that allows customers to be approved for a mortgage in minutes. The ad generated buzz, driving 14,000 visits to Rocket Mortgage\u2019s website the first minute after it aired.[1] But for many, including the regulator and Dave Weigel of the Washington Post, the ad triggered flashbacks to the destructive lending practices that caused the 2008-2009 financial crisis.<\/p>\n

\"Dave<\/a>\"CFBP<\/a><\/p>\n

 <\/p>\n

\"Quicken<\/a>
Quicken Loans grew its loan volume from $12 billion in 2008 to $79 billion in 2015[4]<\/em><\/figcaption><\/figure>Founded in 1985 by Dan Gilbert<\/a>, Quicken Loans has stayed one step ahead of its peers in innovation, while avoiding costly mistakes during the financial crisis by not sacrificing the credit quality of its loans in order to grow.[2] The company was a branch-based lender, but after Gilbert bought a couch online in 1998, he decided that this channel would be best for mortgages, and sold off its 28 branches and launched the website.[3] Quicken has since become the largest online lender and the second largest mortgage lender overall (after Wells Fargo), growing loan volume from $12 billion in 2008 to $79 billion in 2015.[4] This 31% annual growth is incredible compared to the industry as a whole, where growth has remained muted over the same period.[5]<\/p>\n

Quicken originates residential mortgages, incurring the costs of acquiring the customer and underwriting the loan (i.e. determines if they qualify for a loan and at what rate). Unlike a bank, it does not have deposits, but instead uses warehouse loans from banks to fund its loans, before selling them to government-backed Fannie Mae, Freddie Mac, and Ginnie Mae to sell to investors in the form of mortgage-backed securities. Post-sale, Quicken services the loans (i.e. collects interest and principal payments from customers). The company earns two principal streams of revenue: the initial gain on sale and a small servicing fee.<\/p>\n

\"Quicken<\/a>
Quicken is able to charge a premium interest rate vs. most peers[8]<\/em><\/figcaption><\/figure>Quicken\u2019s digital operating model helped it thrive: its market share grew from <1% to 5%, at the expense of banks whose share shrank from 74% to 52%.[6] Quicken targets customers with online and conventional advertising, meaningfully reducing its customer acquisition cost compared to the cost of operating branches. In branches, customers make in-person appointments and then submit paper or electronic documents, which are then sent to an underwriting department for review. This process is error prone and often takes weeks, which can delay the home-buying process. In contrast, Quicken\u2019s interface is online. While customers lose the face-to-face interaction, Quicken\u2019s simplicity and speed (documents can be automatically pulled or submitted electronically), combined with its exceptional online and phone-based customer service (Quicken has been rated highest in customer satisfaction by J.D. Power for seven straight years; 95% of clients would recommend it[7]) create value for its customers, who are often willing to pay a premium as a result.[8]<\/p>\n

Once an application is made, Quicken uses computer algorithms to assess loans against its stringent underwriting criteria, then processes the loans through a people-intensive compliance and verification process, made easier by the use of electronic documents. The result is Quicken\u2019s average application-to-approval time of 17.8 days, 8.5 days shorter than the industry average.[9]<\/p>\n

Rocket Mortgage takes this convenience further, adding in instant verification capabilities, facilitated by new technology developments. With a few swipes on a smartphone authorizing it to access the borrower\u2019s data, the company can automatically verify credit reports, employment and income for 60% of Americans.[10] Instantly applying the same high quality underwriting criteria it always uses, Quicken is able to tell the borrower if they are approved in minutes, cutting the application-to-approval time dramatically.[11]<\/p>\n

\"A<\/a>
A screenshot of Rocket Mortgage’s interface[10]<\/em><\/figcaption><\/figure>While it has successfully leveraged technology on the consumer-facing front and in its underwriting decisions, Quicken could do more on the back-end to reduce the verification time for 40% of borrowers who cannot be instantly approved. While post-crisis regulations<\/a> requiring strict verification and standardized compliance procedures limit the amount of pure automation allowed in these instances (a licensed human underwriter is required to sign off that they have reviewed key findings for approved loans), additional technology like machine-learning could be used to flag loans likely to be rejected earlier, so underwriters spend less of their valuable time on cases that do not ultimately result in an approval (and revenue!).<\/p>\n

Rocket Mortgage is still in its infancy and Quicken releases little financial data, so it is too early to judge if the product has been a success. However, with the wave of millennial home buyers just around the corner,<\/a> Quicken is positioned to continue gaining market share as it targets these customers who are digital natives and value the convenience of online and mobile over face-to-face interaction.[12]<\/p>\n

 <\/p>\n

(760 words)<\/p>\n

 <\/p>\n

 <\/p>\n

 <\/p>\n

References:<\/span><\/p>\n

[1] Anthony Mason, \u201cIs the Rocket Mortgage a fast ride to trouble?\u201d CBS News<\/em>, February 9, 2016. http:\/\/www.cbsnews.com\/news\/is-the-rocket-mortgage-a-fast-ride-to-trouble\/<\/a><\/p>\n

[2] \u201cFast Facts | Quicken Loans,\u201d Quicken Loans. http:\/\/www.quickenloans.com\/press-room\/fast-facts\/<\/a><\/p>\n

[3] The Economist, \u201cQuicken Loans: A New Foundation,\u201d May 26, 2016. http:\/\/www.economist.com\/news\/finance-and-economics\/21699457-one-americas-biggest-mortgage-lenders-not-others-new-foundation<\/a><\/p>\n

[4] Ibid<\/p>\n

[5] Freddie Mac, \u201cFreddie Mac Update,\u201d August 2016. http:\/\/www.freddiemac.com\/investors\/pdffiles\/investor-presentation.pdf<\/a><\/p>\n

[6] Andrea Riquier, \u201cBig banks are fleeing the mortgage market,\u201d Market Watch<\/em>, February 12, 2016. http:\/\/www.marketwatch.com\/story\/big-banks-are-fleeing-the-mortgage-market-2016-02-12<\/a><\/p>\n

[7] \u201cFast Facts | Quicken Loans,\u201d Quicken Loans. http:\/\/www.quickenloans.com\/press-room\/fast-facts\/<\/a><\/p>\n

[8] Hal M. Bundrick, \u201cDo Online Lenders Offer Lower Mortgage Rates? It Depends,\u201d Nerd Wallet, <\/em>October 28, 2016. https:\/\/www.nerdwallet.com\/blog\/mortgages\/online-lenders-consistently-offer-lowest-mortgage-rates\/<\/a><\/p>\n

[9] Scott Beyer, \u201cThe Future Of Mortgage Lending Could Be Online,\u201d Forbes,<\/em> January 15, 2016. http:\/\/www.forbes.com\/sites\/scottbeyer\/2016\/01\/15\/the-future-of-mortgage-lending-could-be-online\/#5e61e0ec4bea<\/a><\/p>\n

[10] Hal M. Bundrick, \u201cQuicken Loans and Rocket Mortgage Review 2016,\u201d Nerd Wallet,<\/em> May 19, 2016. https:\/\/www.nerdwallet.com\/blog\/mortgages\/quicken-loans-and-rocket-mortgage-review\/<\/a><\/p>\n

[11] Ibid<\/p>\n

[12] FICO, \u201cMillennial Banking Insights and Opportunities,\u201d 2014. http:\/\/www.fico.com\/millennial-quiz\/pdf\/fico-millennial-insight-report.pdf<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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