A New Paradigm for Mortgage Lending

Posted By Laird Nossuli on Jan 03, 2024
iEmergent Blog - New Lending Paradigm

The housing market is changing. We’re well past the boom years where mortgages were easy to close and work as an MLO was watching business come your way. There was a lot wrong with how things worked during those easy years, and things are—slowly but surely—changing.

We present a new paradigm for mortgage lending. One that moves from reactive decisions made from historic data to proactive decisions made with forward-looking data. One that puts diversity and collaboration at the center of everything we do. One that puts opportunity at the forefront instead of making decisions out of fear of risk.

The Mortgage Lending Industry is Changing

Let’s look at some data-backed facts that show us just how much the lending landscape is changing.

FACT: Opportunity in lending seems to be shrinking, constrained by increased rates and reduced inventory.

The size of the US mortgage market dropped nearly 57% from 2021 to 2022, a drop that will continue through 2024.

FACT: Rapidly changing demographics are changing the make-up of the US homebuyer pool.

More than 77% of all net household growth over the next 10 years will be from people of color.

12.2 M new households are projected over the next decade – only 455,000 of those are white.

FACT: Housing equity is a primary focus for government regulators and consumers.

Promotion of programs designed to help minorities are front and center, and policies like CRA modernization will increase regulations for all lenders.

FACT: The racial homeownership gap is widening.

In the 1960s, the gap was around -26 ppts; now it is -29 ppts with some markets showing a gap of more than -50%. 

The housing finance industry is unprepared for the market challenges that lie ahead—many lenders will not be able to capture the industry’s biggest growth opportunity. Risk will increase as lenders struggle to adhere to fair lending and CRA requirements.

Why is this the case and what can lenders do about it?

Lenders are Unprepared Because They’re Stuck in the Status Quo

For decades, the mortgage lending industry has been driven by transactional thinking—taking a reactive approach to market, operational, and societal change.

Diverse lending strategies, in particular, are often focused on minimizing regulatory risk and were weighed down by the fear that lending in underserved and minority markets could not coexist with profitable business.

But we’re here to show that a shift in thinking is imperative to each lender’s bottom line. Lenders must transform their lending strategies to grow and succeed in a changing environment. 

A New Paradigm for Mortgage Lending

Data show that mortgage markets are unique, complex, and ever-changing. Given that the racial homeownership gap continues to widen in nearly every market, despite many efforts to reduce it, we must acknowledge the reality that status-quo lending strategies aren’t working to solve this problem. 

Like new technology, a new strategic framework will help lenders better anticipate and adapt to change. iEmergent presents a different way of looking at mortgage lending: The New Paradigm.

mortgage lending framework 

Within this new framework, strategies, priorities, and objectives are driven by opportunity instead of risk, and they’re focused on the future.

Diversity is central to sustainable success and is at the core of new opportunities. 

In order to capture this opportunity effectively, lenders must collaborate with internal and external stakeholders to develop and execute targeted, market-based strategies.

These targeted strategies must be informed by comprehensive, dynamic data instead of using static data that reflects only the past.

Let’s look at each piece of the framework. 

From Risk-driven to Opportunity-based Lending

Instead of lending from the perspective of “what will happen if we____,” we encourage lenders to think about what will happen if you don’t. For example, instead of looking at the risks of a special purpose credit program (SPCP) and letting that stop you from implementing one, what if you looked at the possibilities? Or even at the risks of not implementing an SPCP? 

The opportunities of change right now in mortgage lending far outweigh the risks—especially when you make those changes with strategic, data-driven approaches. 

From Reactive to Proactive Lending Strategies

There were days in mortgage lending where MLOs could sit back and wait for the loans to come to them. Those days are gone. Lenders can’t rely solely on reactive strategies to find business. They need to look at what’s next in their markets and go out to find the opportunity. 

Proactive lending strategies include:

  • Building relationships with community partners
  • Geotargeting neighborhoods with lending opportunity
  • Community events in high-opportunity areas
  • Connecting with places of worship, veterans organizations, schools, hospitals, libraries, and other community centers of influence
  • Working with local housing nonprofits
  • Using data to inform targeted marketing and sales approaches

Homeowners have a choice in where they get their mortgage, so relationships and proactive approaches are more important than ever. 

Putting Diversity in the Center Instead of the Periphery

Underserved borrowers have been an afterthought for most lenders, and that needs to change. They need to be the priority. 

Historically, lenders have said that targeting underserved populations is too risky because it doesn’t benefit the bottom line or it may look like favoritism. Those excuses are no longer valid. The business case is clear: most growth over the next decade will be households of color. The opportunity in low- to moderate-income and majority-minority census tracts is where the growth opportunity is in many markets. 

As for risk, let’s circle back to the first pillar of the new paradigm. Instead of thinking about the risk of targeting underserved markets, let’s look at the opportunity. And the data is clear on the opportunity.

iEmergent lending paradigm shift 

The risk is truly in NOT making diversity a focus. Government agencies have been clear that SPCPs and other programs to serve the underserved do not go against Fair Lending regulations. On the contrary, without a focus on diversity, lenders can find themselves in CRA and Fair Lending trouble.

Our mission is helping lenders get more households into homeownership. That only happens with purposeful, focused effort. 

Using Targeted, Data-driven Lending Strategies Instead of Generic Ones

Generic one-size-fits-all strategies used to work. Now, however, sales and marketing strategies need to be targeted to each branch—even each lender and neighborhood. And the data exists to make that possible. 

Questions that can be answered with data:

  • How do opportunities differ between borrower segments?
  • Do we have the right products for our markets?
  • Do we have the right number of salespeople in the right neighborhoods?
  • Are sales goals reasonable based on market growth or contraction? 
  • Is there a gap in the minority population and our penetration rate?

Using forward-looking data beats the “this is what we’ve always done” approach every time. 

Using Dynamic, Real-time Information Instead of Static Reports

With technology, we now always have the latest information at our fingertips. There’s no reason to be using outdated data to make decisions. The MLS updates constantly as new listings are added; lender market share shifts over time on a weekly, monthly, and quarterly basis; and new market factors (e.g., interest rates) impact forecasted opportunity. 

Using static data and visualizations when dynamic is available is sticking to the old way of doing things.
Mortgage Business Insights

Moving to Collaborative Communication Instead of One-way

Even with the best data and strategies, top-down, one-way communication doesn’t behoove lenders. MLOs are out in the community, on the ground, talking with potential homebuyers and referral partners. Communication has to flow multiple directions—top to bottom and bottom to top within the organization as well as to and from external partners. 

Closing the Homeownership Gap Requires Change

The old way of doing things got us here—a large and unchanging homeownership gap with minority households at a clear disadvantage for gaining access to credit. 

Changing the way we, as an industry, work is the only way to rectify decades of unfair lending practices and gatekeeping certain groups from generational wealth. 

The shift is underway, but there’s still a long way to go until homeownership for all. 

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