The history and opportunity of the modern mortgage [video]
a16z.com
a16z.com
Links to video at those times:
It shows how complex building a Fintech in US actually is , often due to how many different partners you will actually need to depend on.
In this specific case , you would need to have each partners offer an API that you could call to automate the mortgage workflow.
Obviously , due to the nature of the financial sector it's very likely those partners don't have those APIs and don't want to build them because they are sitting on a very profitable business and have no plan to change that anytime soon.
I can draw a comparison to Airbnb , where most of their jobs wasn't so much to build "disruptive tech" but to lobby local administration to let people rent their appartement to individuals , while hotel industry was lobbying the other way around.
It becomes even more complex when you realize you'll have to do this at global scale to build a unicorn.
Fractional ownership of residential property is already possible in the UK, without cryptocurrency:
- Set up a Declaration of Trust which defines the fraction of ownership of each of the Tenants in Common, along with other details such as what to do if one wants to sell. This is typically used by owner-occupiers.
- Purchase via a Public Limited Company, and issue shares in that company. This is typically used by investors.
- There are also fractional property ownership schemes run by housing associations.
There was even a startup attempting to streamline this process, without cryptocurrency, although it has folded already[0]. Adding cryptocurrency is only going to add new risks such as key management, exchange failure, etc. and doesn't provide any clear benefit(s) to those who don't already have a vested interest in the chosen cryptocurrency platform. Unless the idea is to use cryptocurrency to bypass the existing legal system, but that is going to expose you to the legal (not to mention moral) ramifications of it being used for tax evasion, money laundering, theft, etc.
Conversely, if we try to alleviate that, maybe a lender ends up on the hook for a call for their 10% of my $500K addition to maintain their pro-rata. That ends up subsidizing remodels which tend to pay back less than $1 for $1.
Yes, there are massive economic inefficiencies in the whole mortgage lending business and since a16z's motto is, "software is eating the world", there are opportunities for tech startups to disrupt all of that.
To spur discussion, I'd categorize "disrupting mortgage industry" into 2 general buckets:
(1) disrupting the procedural aspects of a mortgage : lowering the cost of moving the transaction from the "loan application" all the way to "closing". The worfklow aspects.
In terms of disrupting people, this means disrupting the loan officers at banks, appraisers, title searchers, surveyors, etc. In terms of disrupting "fees", this means reducing/eliminating "loan origination fee", "title insurance", and "survey costs". (A lot of these administrative overhead costs are basically a bunch of "checks & balances" to ensure the loan transaction is not fraudulent or has undocumented liabilities ... e.g. verify loan applicant's paychecks to make sure he/she really has a job with $x income, and the property's recent newly installed fence doesn't encroach on others' property lines creating a potential lawsuit.)
(2) disrupting the loan underwriting : This means lowering the cost of money. Today, we see that a 30-year mortgage in America is about 3.7%. Maybe there's a market inefficiency and a clever entrepreneur can lower it to 2.5%.
The vastly different problem-solving aspects of (1) and (2) will attract very different skill sets. E.g. entrepreneurs interested in (1) might think of reducing costs of surveys with robots/drones/satellites while startups interested in (2) might try to lower the "cost of money" by creating financial packages such as "500 co-signers on a mortgage that also receive a portion of the profits from the house's sale."
In the video, he mentions FNMA and FHMLC are the ones that buy home loans. Basically, it means that banks like Wells Fargo and JP Morgan Chase are glorified order takers. They charge a $1000 "loan origination fee" to sell your loan to the the government sponsored agencies. If the loan ultimately ends up at FNMA anyway, maybe there's a much cheaper way to accomplish that. (Although I doubt the FNMA website will ever have a landing page that says "Skip the banks and apply for a loan directly with us!")
I think it would be better to say that mortgage industry is another place where a VC can insert itself to make more money.
I am not sure as a consumer I will ever see anything from this "disruption" ... I am certain though I see a VC sucking more money out of the system.
Or even worse some sort of subscription based horror of a startup that will let me monitor mortgage something or others.
Regarding number two, you’d be competing against a currently near monopoly lender that has zero cost of capital, sets the rules of the game, and has no compunction about manipulating the underlying asset class. Good luck.
Are title companies basically just insurance companies that do a lookup in public / private records on that property to make sure the person selling the property is actually owned by them. And if they did poor research or the records were wrong, they'll pay for fees. Is that accurate or am I missing something?
Though I mostly know of Habito because I have had friends work for them as they have at least some of their systems have been written in Haskell [2].
[2] https://www.infoq.com/presentations/habito-mortgage-broker
In the end found a cheaper deal through my own research. A broker is only as good as the percentage of market they cover.
“Don't go through mortgage hell.”
The opportunity would be to develop the software that can replace the unnecessary entities, driving down costs and profiting the innovators.
We can take this idea to its extreme and possibly learn something. Imagine a world in which home buyer and seller transact directly using software. In a world eaten by software, we might expect this to be the norm.
Impossible? Find the one player who can't be removed under any circumstances. Add them back in, and try again.
Continue until only the minimum roster of players remain. Assume all laws remain in their current form.
I suspect a16z, along with many other fintech startups have run this analysis already and have come to a depressing conclusion: the players in place now are essential given the current regulatory framework. They may not have automated as much as they could have, but they're reluctant to go further given their regulatory burden.
That's where an organization such as a16z can come in. With software startups increasingly requiring nothing from venture capital, the last bastion of relevance will lie in the twilight zone between technology and regulation. Companies who need to get laws changed for their business models to work will need deep pockets.
"[In Australia] there are bundle and package fees, and related 'discounts', to complicate matters.", "And 80% of all Aussie home loans are wrapped up around these opaque bundle arrangements."
https://www.interest.co.nz/news/99862/shifting-competitive-f...
Honestly I'm very happy this video was "American Centric" mortgage are by definition very complex and specific to each country but America has one the most complex financial and legal system on earth.
(An interesting aside, is that during the run up to the crisis, banks reinvented balloons in the form of the teaser adjustable rate. These had a low fixed rate for 2,3 or 5 years, and then would turn into 28,27 or 25 year adjustable rate loans, with they rate much, much higher. The thing is, no one was ever supposed to pay that rate. When the teaser period ran out, the borrower was expected to refi. And of course we know what happened next....)
https://www.calculatedriskblog.com/2008/12/compendium-of-tan...
I looked at turning these into an ebook (with permission from the family) but never got it published.
I've been thinking recently about just building businesses on reducing information asymmetry. Feels like you can't really go wrong there if all you want to do is make a few bucks. (Who wouldn't want to buy that?)
What about group ownership? There's a building in the new york city area that is mainly owned by the tenants. So that by paying the mortgage, they are really buying more shares in the corporate entity that owns the building. Then they never lose that equity in the property.
They also could’ve played with the idea that he did draw or drew afterwards and edited in the animations instead. Might make more sense since he’s holding the marker.
Debt has it's problems, don't throw the baby out with the bath water though.
Artificially low interest rates may well benefit you to some tiny extent, but imagine just how much more benefit is given to a bank. You still take an enormous risk, staking all your livelihood, and the bank get a near free way to make money. That's not equitable.
The prime majority of people have no genuine need to own a home, yet the 100+ years of state+banks instilling the mortgage culture managed to make it look so. It hurts me to see that even intellectuals on HN don't seem to see through that.
Every time I raise that, somebody jumps with a calculator to show me "how much I miss out." I am not missing out anything of that, unlike near 2 millions of once well off, middle class Americans who got screwed by "a low risk mortgage"
Many people, including me, value being able to do anything they want to the property, live in it as long as they want, know how much it will be costing them years into the future, and never have someone enter without their permission even (landlords can legally do this if there's an urgent maintenance problem). In my last rental I could not even paint the living room. They may also appreciate the opportunity to participate in any appreciation.
Much bigger are things like stability vs. mobility, being able to change aspects of the property to your liking, and whether you can even rent the sort of property you would like for an extended period.
Also "need" is an odd word in this context. I own and do a lot of things that I don't "genuinely need." But I'm happy for them anyway.
Have you heard of the police? Maintenance problem, signs of forced entry, sounds of a struggle. Here's hoping none of us get pulled up as the incorrect address next time someone is mad at someone on a video game.
How are you staking your livelihood? Mortgages have no recourse apart from your home. Even then the foreclosure process takes anywhere between 1 and 3 years depending on the state and the bank is likely to offer you deferment or a modification so it doesn't have to go through the trouble and expense of foreclosing. The worst that can happen is your credit could be hit, but even that resets after 7 years. And since you seem so anti-debt I don't think you'd miss out on much.
The bank treats agency mortgages as quasi risk free paper, so the yields get bid down, so they don't make too much money holding this stuff
Only in some states.