Why You Can't Get a One-Click Mortgage Refi

23:40But I would say that very much all of the actual debt and recording and like all of the legally binding stuff, probably 90 % plus is still physical pieces of paper that are getting mailed around. There was a big trend, especially in 2020 around how do you digitize those notes, how to do e-closing. Then it's a matter of you've got to get 3 ,800 counties to accept it. All the title companies have to accept it, et cetera. So it's a big network problem. Again, you're probably hearing a theme of it's just like organizational inertia. Yeah. But you very much can say that home financing is still powered by FedEx because pretty much everyone, I mean, we have a field in our system where people are like, we need a FedEx tracking number field for the note.

24:17Like not even kidding. And that could be really cool if you could integrate that to FedEx to like automate, like looking at the tracking. And it's like, of course you can do that technology wise. But sometimes you ask yourself like, what problem are we really solving here guys? Like we should just move it to the cloud. So I think the last time I applied for a mortgage was late 2017. And I just remember like documents and documents and check boxes. And I didn't read any of those documents. I just signed the checkbox and I assumed it was all okay. What were all those checkboxes I was, or signature boxes that I was putting a digital signature into?

24:49A lot of those signature boxes are basically people disclosing your rights. So very similar to when you have a checking account, you want to disclose your... Yeah, it's like you sign something that gives them authorization to pull your credit in many cases. And then you find something that, you know, it's like, hey, here's your credit score and here's how it was calculated in the state of California. Or you might sign something which is like if you are getting an FHA loan with lead paint, which I hope you didn't. There's a disclosure that says, hey, like we determined that the house has some old lead paint, like sign here to acknowledge that we disclose that to you.

25:19And then the other thing that happens is because each of these disclosures are legally mandated and it's really hard to make sure that you signed all of them in the one go. they'll just say, hey, when you first apply for the loan and we disclose to you the terms, we're going to stick all of those disclosures in there. And then when you get to the closing table, we're going to put them in there again, just so we've built and suspended that you've signed it. You're at the closing table. You're not going to walk away now. Let's just make you sign it one more time. So probably if I had to guess, you got 50 or something disclosures, depending on the state you were in.

25:47There's a whole bunch of states. Some states are more owners than others. But you probably also signed each one an average of two and a half times. I did. Just real quickly, how different was that experience for me in 2017 than it would have been in 2007 before the mortgage crisis? Well, in 2007, you can imagine there were way fewer disclosures. Actually, in 2015, they passed what's called TRID, or TILA-RESPA Integrated Disclosures, which is actually the main reason you can't have a one-click mortgage today. So TRID puts a minimum timeline as well, where you have to give people, you know, within three days of getting what's called a full application, you have to provide them an estimate of all the fees that like really clearly in a very standardized format discloses all the fees.

26:25that comes with a bunch of disclosures. And then you have to give the borrower seven business days from giving them that loan estimate to close the loan. And so we actually talk in mortgage now a lot about the 10-day mortgage because you actually can't have a one-click mortgage purely by virtue of the fact you need that seven-day waiting period. There's some other timelines in there. Even if you got rid of that seven-day waiting period, you'd still have to remove a whole bunch of other regulatory timelines to really get it down to one day. But in 2015, they released this new regulation, which I would say made it a lot more onerous, a lot more documents to sign.

26:55And I mean, it's good, right? Like pre-2015, people were getting loans and they were getting bait and switched. And, you know, people were having new fees pop up that they didn't know about. And now all that stuff is really strictly regulated. But it definitely adds to the paperwork.

27:17work.

27:23For enterprise organizations, managing all your food needs is a tall order. But with EasyCater, you get a single workplace food vendor with the tools and resources to make it easy. Giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform, all while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. You're thoughtful about where your money goes. You've got your core holdings, some recurring crypto buys, maybe even a few strategic options plays on the side.

28:06The point is, you're engaged with your investments, and Public gets that. That's why they built an investing platform for those who take it seriously. On Public, you can put together a multi-asset portfolio for the long haul. Stocks, bonds, options, crypto, it's all there. Plus an industry-leading 3.8 % APY high-yield cash account. Switch to the platform built for those who take investing seriously. Go to public.com and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com. Paid for by public investing. All investing involves the risk of loss, including loss of principal.

28:44Brokerage services for U.S.-listed registered securities, options and bonds, and a self-directed account are offered by Public Investing, Inc., member FINRA and SIPC. Crypto trading provided by Backed Crypto Solutions, LLC. Complete disclosures available at public.com. slash disclosure. So how did Blend actually try to solve all of this? Because when I listen to you talk about all these sort of challenges in the mortgage market, it just sounds like an unsolvable kind of spider web of requirements. Yeah, it certainly is very challenging. I wouldn't call it, you know, nothing is really unsolvable except the regulatory timeline is going to be what it is.

29:16But for Blend, a lot of it was, hey, can you really get to a one click and tell the borrower that they're clear to close. And what that means is we fully underwritten everything. We know that you're going to close. The only thing we're really waiting on is the compliance clock. And so you kind of split it up into the various things that get underwritten in the loan. So in property, for example, the most clear thing you have to do in order to say, I can instantly underwrite your property is they have to be able to get no appraisal and get instant title. And today, title insurance is this whole other thing that I'm sure you could do 10 episodes on.

29:46Yeah. Some people have asked. Yes, I would say every two years, some Silicon Valley person tweets that title insurance is a racket and someone should go take it out. And I always get that tweet texted to me like 10 times. But there's this complexity around, well, the problem with title insurance is actually someone does have to go to the county office, still in a bunch of counties, and go downstairs into the basement of the courthouse and get the key and unlock it and go look up the records for that house or something like that. So you have to figure out how you're going to make title insurance instant, which there are a whole bunch of startups that have worked on, are working on, have had some success in digitizing that process in some counties.

30:20You've got to make the appraisal instant, which basically means you have to get a message from Fannie or Freddie that for this particular property, they've written a loan on it recently enough that you don't have to appraise it again. And so that's the property side. Those two things you can imagine combined are already like you're taking the 100 % of properties in the US and you're shrinking your hitbox to like 20 or 25 % or something like that. And then you've got to look at the borrower. And for Blend, a lot of the approach was, well, we partner with a lot of big banks. And so can you get the banking data directly from those banks and use that to either figure out the income or use something like the work number to instantly get income?

30:52You can verify assets, income, and the property. And then you can, of course, pulling credit is the easiest one because we've been able to pull credit digitally for decades and decades in this country. If you can kind of check all four of those boxes, then you're quite a bit further towards a instant clear to close. You're still not fully there. There's a bunch of stuff around the margins. You've got to go and sort out. But it really is a matter of blocking and tackling, executing detail by detail. And it's like there are 1 ,200 pages of rules. I've probably read those 1 ,200 pages of Fannie rules three or four times.

31:19And you've just got to systematically tick them off one by one. What are you doing now at Vesta that you weren't doing at Blend? Yeah, so a lot of the struggle that we had at Blend was you really, because you own the front end of the process, if you could get to fully automated, you could pull it all in and be done. The problem was, you know, you heard how I talked about appraisal title, you kind of shrink the hitbox for what you can do fully automated. And so what we found was that if you fully automated, like, let's say you really could fully automate 1 % of a lender's loans, that would be great.

31:51But they're still, you know, spending a ton of manual dollars, a ton of, you know, operational people on 99 % of their loans. And the big problem was all of the data that you got at the front, it was really hard to use that to drive efficiencies at the back of the process or for any of the loans that did have even one manual touch. Like I ticked through all these rules. You can imagine if only 10 rules had to be done by a human, well, now it's got to go through this manual process. And what it does today is it goes through this old manual process where they basically have to underwrite the whole loan manually because the system doesn't have an understanding of what's already been done.

32:22It's not task or workflow oriented. And people basically have muscle memory. So the underwriter is going to look at everything, order the appraisal, whatnot, even if they don't have to. And so a lot of what we realized was the back end of the process was making it really difficult to realize any efficiency from the good work you're doing at the front end. Because the change management and organizational inertia of, you know, you've got 3 ,000 people on your mortgage manufacturing line, so to speak, doing exactly what they've always done. And the software isn't really guiding them to do anything different.

32:51Like it's not a piece of software like you might be used to working in today, like Slack gives you notifications, for example. It's really almost like a spreadsheet with a different UI layer on top of it. And you've got to figure out exactly what you're going to do. So a lot of it was how do you change the way the operation works so that people are doing a lot less? And then the other big thing was with the existing loan origination systems being so difficult to integrate to, that was one of the biggest hindrances in actually getting all of the data and making that process one click was that you couldn't actually do all of the jobs that needed to be done by that old system.

33:23Like the old system that has all of the integrations I mentioned, and they have hundreds of integrations to all these data providers, like coordinating the appraisal. So you ended up having to build around the old system instead of through the old system to achieve a lot of this stuff. And that just seems like so clearly the wrong way to do it. Now, the downside is you have to go and modernize the old system, which is a really hard problem. But by kind of modernizing the old system, you unlock A, the operational efficiency that you actually get from all this data, and then B, a much easier platform for everyone who wants to build a front end to get that data through your integrations and through your processes that the lender already has that exists manually today, instead of having to recreate it on the side to try and automate it, if that makes sense.

34:04I have a slightly random question, which is, given that we're talking about technicalities, how easy is it to commit some sort of mortgage fraud nowadays? Totally random, not out of personal interest. Yeah, I did listen to your recent episode about government fraud, where Joe was the one I think was very interested. Yeah, I was the one entering to start doing fraud. Yeah, mortgage fraud, I think, is actually quite difficult these days, mostly because there are so many human eyeballs that look at the loan. And so let's take something really simple, like you wanted to like doctor a document, like probably the most straightforward thing, because it's not like mass scale fraud.

34:43It's like somebody is like, I want a mortgage on my primary residence. I can't afford it. And I'm just going to doctor the documents to make my income look bigger. Well, first, you have to hope the lender doesn't check some third party verified data source, or they don't reach out to the employer, which they often do. And then you have to hope that like your document makes it through the processor looking at it and the underwriter looking at it and the closer looking at it. And the underwriters, especially, they're looking for things that don't add up. And so I would say mortgage fraud is probably really pretty to very difficult to actually accomplish today.

35:09It sounds a lot harder to achieve than like, you know, figuring out how to get some Medicare dollars. So it's probably not worth the squeeze. Now we'll like generative AI make it way easier to make fake profiles and all that stuff. Maybe that's something that I think lots of people worry about. But today, I would say it's definitely the mortgage industry has done a pretty good job of of doing that. I'd say the regulators have done a good job of making it really hard, just given everything that happened two decades ago. Back to the question of refi. So you mentioned that theoretically, if you're a homeowner and you're in the money on your mortgage, that is to say where it would make economic sense for you to refi, you might get an email or something.

35:46It's like, hey, you should refi and you can save this much. But as we're talking about, it's going to be a lot of paperwork and all this stuff. After our episode came out several weeks ago, someone on Twitter, they said, why can't we have a mortgage product that you pay a higher premium up front, but it's a floating rate mortgage that only resets downward? In other words, basically, if rates drop lower, your mortgage mechanically drops with it. And again, obviously, if you're going to have that, theoretically, that's a more valuable option and you pay some premium up front. But then in theory, you save all of this effort and time and document checking and human hours that go into this.

36:28In your mind, does that seem like a plausible financial product that could exist? It seems like a totally reasonable financial product. I think that there may even be somebody doing it in the private label securities market. There is a small market of basically hedge funds that will underwrite non-QM, is what they're called, mortgage products, and offer those to lenders and lenders can originate them. One thing I will say is it It seems unlikely to come from the GSEs just because so much of the GSEs mission these days is affordability and democratizing homeownership. And I can't really think of a marginal person that that product would get into a home.

37:00Right. So even if it makes sense, that's just now what moves the dial. Yeah, I think it makes sense from a, you know, like single person financial instrument perspective. I would love to have one of those, for example. But I think that from the kind of stated policy goals of the biggest investors in the market, it's just not really something that aligns with their policy goals. And so I can't see that being a big area of where we're going to see a bunch of those in a decade. So a lot of mortgages get bundled together into mortgage backed securities. I'm curious, like how much of that granular detail about pay and, you know, lead paint in the house and things like that gets ported over to the securitization aspect of it?

37:42So it's really not a lot. I actually have capital markets people reaching out to me all the time being like, if you have a modern loan origination system, you can solve my problem. If I can't actually get any of the data or much of the data that underlines these instruments when I am going and securitizing them or trading them or whatnot. What generally comes out, as much banking technology still is today, is you export a big CSV of some of the data fields. You take a bunch of docs and you send them off. And then that CSV, which they fancily call it tape, but really it's a spreadsheet, just gets ingested.

38:14And now you've taken a process that had 3 ,000 fields and hundreds of pages of docs, and you've boiled that down into 50 or 100 fields that describe the mortgage, which maybe is for the best. I'm not really sure that people buying MBS should be thinking about the specific credit profile of the 1 ,000 different mortgages that are chopped in there and put in. And so it's nice that there's some standardization, but it's definitely very lossy. And I will tell you it is something that mortgage traders complained to me about a lot. So what's realistic? It doesn't sound like you'd ever get like true one click because, you know, at a minimum, you're probably going to have to tell the front end who your payroll is and who your bank is and a few other things.

38:54What is a plausible version of if, you know, there's continual coordination among different banks, if Fannie and Freddie continue to update their technology so that, you know, it's a little easier? What could it look like if I were to say, let's say in 10 years, I'm applying for a mortgage again? I think it's very reasonable to strive for a world where it is, to your point, as close to one click as possible on the very front end. Maybe you're talking about like a 10-minute application max where you connect some accounts. Once that's done, I think that what you should get instantly is one of basically three decisions.

39:31Hey, you are definitely clear to close. you're going to get your disclosures and then we're just going to wait 10 days and we'll close you. Option two is, hey, you as a borrower are definitely clear to close, but we need some additional information on the property. So you're going to wait 10 to 14 days. You're going to pay for the appraisal and we're going to close you. Or three is basically, unfortunately, you know, we're not able to close you. Here are some things you can do to improve your stance. I think that property is probably going to be the thing that even if you ask me 10 years from now, it's like, it's really a question of there will always be those corner cases.

40:01It feels like where the GSEs are going to want to see an appraisal unless there's a big credit profile change or if they get privatized. There's all sorts of things that can happen in 10 years. But I think those three outcomes being 10 minutes away, fingertips wise from the bar when you close in 10 days is very much attainable. And it's really what everyone in the industry is and ought to be working towards. Does blockchain solve this? And I mean that somewhat seriously, because I've often thought like one of the few real world applications of blockchain technology could be in the mortgage assignation space where you have that sort of chain of title moving around constantly.

40:39But also I'm thinking like from a wallet perspective, if you could have like a personal profile that carried with it, you know, your pay and how much you're worth and et cetera, you could use that too. Yes. So those are two very interesting use cases. On the wallet perspective, the way that I think about blockchain helping here is it almost lets you build like a more encompassing decentralized credit bureau. And decentralized is actually really important because I don't think the banks are super excited about the idea of helping build like a fourth credit bureau. Like they built three and now they pay the three for their own data, which I think is a little bit difficult for them.

41:17And then, you know, the regulators are not super excited about decentralized credit bureaus, et cetera. And so I think the idea that each consumer could have their own key that unlocks, you know, access to all of their data on this decentralized Credit Bureau that all the payroll providers and financial institutions, et cetera, are writing to is very much an idea that has legs. It is really hard to implement for a lot of similar organizational inertial reasons. But I do think that is a real use case for blockchain because it solves the incentives problem where people are basically like, I don't want there to be one middleman with every consumer in America's financial data.

41:46And so blockchain lets you kind of like decentralize and split that up. So I think there's some really interesting avenues there that people can go down. And there are some companies I think actually looking at that. On the Tidal front, what I usually tell people on could Tidal be on blockchain? Absolutely. Is it an interesting use case? Absolutely. The hard part of digitizing Tidal is getting 3 ,800 counties to even move to like putting, you know, capturing the records digitally and not in the courthouse basement. Getting 3 ,800 counties to move to blockchain seems further away than that, not closer.

42:14I don't know if I've ever mentioned it on the show before. I once had a gig right after college in which there was some company out in California doing some asbestos lawsuits. And they needed names of all these people who had been party to some suit. I don't know. They were maybe putting together a database for lawyers. And part of my job was to go to various county courthouses all around rural Texas, in central Texas, and go to the basement and just literally pull out files and ask for names. I'm just going to ask one last question. Since Tracy hit one tech buzzword, which is blockchain, generative AI, whether it's in the field of scanning documents or understanding documents quickly.

42:53In your work right now, is there a substantive use that you're getting out of this technology? Yes, it is definitely. To your point, it's scanning and understanding documents. And so you can think of mortgage the way that I think of it high level is it's a whole bunch of data and it's a bunch of rules. And the rules are well defined by investors, the government, etc. And the data is just data. And so data and rules to a lot of this conversation should be a one And a lot of the problems come about because the rules are written in this 1200 page PDF and there's a little gray and someone has to learn them.

43:26And the data comes in a bunch of documents and a bunch of, you know, disparate places from the borrower. And so it's not structured. And so if you can bring structure to the data and structure to the rules, both of which generative AI is really good at, right? It can read the Fannie Mae selling guide and turn that into code rules. It can read a document and turn that into data points. If you can use generative AI to structure those two things, then you still have structured data, structured rules, and they're, you know, whatever rules the GSEs set. So you don't have these compliance things with, oh, is AI underwriting the loan?

43:52But we're seeing a lot of really promising results, taking the most cutting edge large language models and applying them to these documents, both to write the rules for us and to lift the data off the documents. All right, Mike Yu, thank you so much for coming on Oddbots and explaining to us why we can't have a nice thing. Yeah, thanks for having me. That was fun. That was amazing, Mike. You were the perfect guest. Thank you so much for coming on. Yeah, that was fun. Thanks for having me.

44:29Joe, that was really fun. That was really fun. I thought Mike was exceptionally clear at explaining how all this works. And although it's still annoying, the process of getting a mortgage and lots of documents that I didn't read and attached my signature to, like, I guess I understand a little bit more why now. Do you remember after the financial crisis, there were all these problems with loan documentation? And I remember like there's a big thing about assigning mortgages in blank that all turned into like court cases. Yeah. I kind of wonder. We did a great episode on that with David. Oh, we did?

45:03Yeah. David Dian of the American Prospect like in 2015. What was the name of his book? David Chain of Title. Oh, I totally forgot about that. We did an episode with David Dye on Chain of Title and how crazy that was. It was just the state of disarray in documentation after the mortgage crisis. But you understand why it is when you still have, you know, so much at the county level. And the county level, I guess for obvious reasons, not feeling any particular pressure to update or digitize or modernize or coordinate all of their systems. Yeah, that's really it, isn't it? It's sort of like a hodgepodge of state and county law.

45:41I feel like we're going to be waiting a while for a solution to this. Yes. And I've sort of hinted at it before on the podcast, but for very arcane reasons that I'm not going to get into, I do have a loan that will need to be refinanced at some point in the next couple of years. You're very optimistic, Joe, about interest rates. No, I'm very pessimistic and I'm very anxious about it. But if I'm not optimistic about the path of interest rates, maybe I'll be optimistic that in a couple of years, the process is at least a little bit better than it was the last time I applied for a mortgage. We'll see.

46:17You'll have to tell me how many documents like get mailed out and stuff. Although I guess most of that is on the sort of like lender and servicer side. I'm not looking forward to it. Yeah. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our guest, Mike Yu. He's at Michael underscore Yu. Follow our producers, Carmen Rodriguez at Carmen Armand, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. Thank you to our producer, Moses Andam.

46:51For more Odd Lots content, go to Bloomberg.com slash Odd Lots, where we have transcripts, a blog, and a daily newsletter. And you can chat about all of these topics 24-7 in our Discord, discord.gg. And if you enjoy OddLots, if you like it when we dive deep into the reasons we can't have one-click mortgage refis, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions. Thanks for listening.

48:01How many vendors does it take to meet all your organization's food needs? Just one. EasyCater, the workplace food platform that lets teams order from a huge variety of restaurants, over 100 ,000 nationwide, all through a single vendor. In addition to all that variety, Easy Cater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform. Easy Cater, your business tool for food. To learn more, visit easycater.com slash podcast. Hiscock Small Business Insurance knows there is no business like your business.

48:41Across America, over 600 ,000 small businesses, from accountants and architects to photographers and yoga instructors, look to Hiscox Insurance for protection. Find flexible coverage that adapts to the needs of your small business with a fast, easy online quote at Hiscox.com. That's H-I-S-C-O-X dot com. There's no business like small business. Hiscox Small Business Insurance.