Mortgage lenders that exclusively use online applications approve loans quicker, experience fewer defaults, encourage refinancing and respond to demand shifts better than brick-and-mortar rivals, according to a New York Federal Reserve report released Thursday.
The Federal Reserve’s New York branch studied how mortgages from financial technology companies (fintechs) compared to those extended from banks in key categories. The study is part of the Fed’s broader efforts to understand how fintechs will reshape the financial world.
Fintech lenders seek to connect customers with outside sources of capital or holdings from investors and promise a quicker, easier process than going through a bank. The providers offer services through software, internet applications and even smartphone applications.
Fintech advocates have long insisted that the new lenders would fill gaps left by banks and widen the scope of who can apply and secure a mortgage.
While the New York Fed found that mortgages from fintechs were quicker and sturdier than those offered by banks, it didn’t find evidence of fintechs reaching previously unserved clients.
“FinTech lenders process mortgages quickly without increasing loan risk, respond elastically to demand shocks, and increase the propensity to refinance, especially among borrowers that are likely to benefit from it,” the report reads. “We find, however, little evidence that FinTech lending is effective at allocating credit to otherwise constrained borrowers.”
The New York Fed reviewed data on mortgages issued between 2010 and 2016. Fintech lending has grown annually by 30 percent from $34 billion to $161 billion, 8 percent of the market, in that time, it reported. Much of that growth is in refinances and loans for low-income Americans insured by the Federal Housing Administration (FHA).
“The emergence of several stand-alone FinTech firms as major lenders over the last few years is a strong indicator that fundamental change is underway,” the report reads. “These firms are at the technological frontier and focus exclusively on the new business model.”
Fintech lenders processed mortgage applications faster, but did not issue riskier loans because of it, the New York Fed found. Online platforms approved purchase mortgages 9.2 days quicker and refinancing applications 14.6 days quicker than the traditional process.
The New York Fed studied FHA-insured mortgages, the riskiest slice of the market, to gauge how fintechs and banks compare in default rates. It found that fintech mortgages defaulted at a 25 percent lower rate than those from traditional lenders, adjusted for unique aspects about the loans.
“The difference in default rates varies across specifications but is statistically significant in almost all of them and the magnitude is economically large,” the report reads.