Fintech In Housing Finance Request For Information

Summary

FINTECH IN HOUSING FINANCE
FINTECH IN MORTGAGE FINANCE
REQUEST FOR INFORMATION
July 2022
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F i ntech i n Ho using F i nance: Request fo r Info r mati o n
Table of Contents
Introduction ........................................................................................... 2
Background ............................................................................................ 5
The Primary Mortgage Market Ecosystem 7
The Secondary Mortgage Market 10
Fintech Risks 10
Regtech 12
Public Input Instructions and Questions .................................................... 12
A. Fintech and Innovation 13
B. Identifying Fintech Opportunities in the Housing Finance Ecosystem 13
C. Equitable Access to Mortgage Credit 14
D. Identifying and Mitigating Fintech Risks 16
E. Regtech 17
F. Office of Financial Technology Activities and Stakeholder Engagement 17
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Introduction
The Federal Housing Finance Agency (FHFA), as conservator and regulator of Fannie Mae and
Freddie Mac (together, “the Enterprises”), and regulator of the Federal Home Loan Banks
(FHLBanks) (collectively, “FHFA-regulated entities”), has a keen interest in facilitating
responsible innovation and the use of financial technology (fintech) that furthers the purposes
enumerated in their congressional charters. FHFA has acted as conservator of Fannie Mae and
Freddie Mac since the financial crisis of 2008. Acting as conservator, FHFA has worked to
facilitate a number of innovations that have benefited housing finance markets as well as
consumers and taxpayers. These include the standardization of mortgage-related forms and data,
the digitization of this data, and the increased use of e-mortgages and e-closings. As both
regulator and conservator, FHFA is concerned about possible risks associated with rapid
technological change and monitors those risks through its supervisory programs

To further FHFA’s ability to understand technology-driven developments and the concomitant
risks and to facilitate responsible innovation in housing finance, FHFA has established an Office
of Financial Technology. In establishing this office, FHFA joins other financial regulators that
have established similar offices, including the Office of the Comptroller of the Currency, Federal
Deposit Insurance Corporation, Securities and Exchange Commission, Commodity Futures
Trading Commission, and Consumer Financial Protection Bureau. The other financial regulators
launched their offices to better understand fintech and its implications for the financial markets
and entities they regulate, and to support responsible innovation, fair competition, and consumer
access to financial products and services. In addition, in March 2022, President Biden issued an
executive order focused on digital assets that broadly affirms the government’s interest in
responsible financial innovation that promotes greater and more cost-efficient access to financial
products and services. 1
In conjunction with the establishment of the Office of Financial Technology, FHFA is soliciting
public input on the role of technology in housing finance, broadly seeking to understand the
current landscape of potential innovations throughout the mortgage lifecycle and related
processes, risks, and opportunities. 2 FHFA also seeks input on how the Agency can most
constructively interact with other stakeholders to facilitate responsible innovation, including the
1
See Executive Order on Ensuring Responsible Development of Digital Assets available at
https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-
responsible-development-of-digital-assets/

2
This Request for Information is not a solicitation for products or services. FHFA is prohibited by law from implied
or overt endorsement of specific entities or products

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F i ntech i n Ho using F i nance: Request fo r Info r mati o n
identification of any barriers to or challenges in implementing fintech in the housing finance
ecosystem, while also focusing on supporting equity in the housing finance landscape for both
homeowners and renters

Two key terms underlie this request: responsible innovation and fintech. FHFA views
responsible innovation as balancing the value of new ideas, products, and operational approaches
with the need for effective risk management and corporate governance. Further, FHFA
understands responsible financial innovation to include consideration and mitigation of possible
adverse effects of innovation on housing finance system stability, equitable access of consumers
to affordable and sustainable mortgage credit, and the competitive environment of the primary or
secondary mortgage markets. 3
Fintech is derived from “financial technology” and refers to the application of new technologies
to the production or provision of financial products and services. FHFA interprets fintech in the
mortgage space to include, among others, the application of new technologies and digital
processes to
• mortgage origination, underwriting, servicing, investment, and other associated business
activities, also known as “mortgage tech;”
• researching, transacting, and managing real estate, also known as “proptech;” and
• regulation and compliance, also known as “regtech.”
Technological change has long enabled innovation in housing finance, often leading to lower
costs, faster and more consumer-friendly experiences, and enhanced risk management processes

In the housing finance system, fintech is changing the way households buy and sell homes,
obtain and manage mortgage debt, and monetize housing wealth. Examples of housing finance
fintech firms (fintechs) include both well-established firms and startups, which may or may not
fall within the purview of a financial regulator. Fintechs have applied changes in computing,
communications, data availability, and data processing to create such advances as data
verification for income, assets, and employment; e-closings/e-mortgages; and workflow
management, allowing for a more seamless consumer experience. Fintechs may leverage, for
example, big data, data science, artificial intelligence, machine learning, intelligent capture,
blockchain, smart contracts, or combinations of such technologies. These technologies are also
being incorporated into credit risk modeling, with the potential for expanding access to credit for
3
The OCC defines responsible innovation to mean “The use of new or improved financial products, services, and
processes to meet the evolving needs of consumers, businesses, and communities in a manner that is consistent with
sound risk management and is aligned with the bank’s overall business strategy.” See Supporting Responsible
Innovation in the Federal Banking System: An OCC Perspective at https://www.occ.gov/publications-and-
resources/publications/banker-education/files/supporting-responsible-innovation-fed-banking-system.html

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some prospective borrowers. The Enterprises are partnering with fintechs in a variety of ways to
improve their existing suites of tools and to address equitable access to housing finance. The
FHLBanks may also seek to partner with fintechs to develop technology solutions for business
and risk management activities

FHFA also has an interest in understanding how technology can be applied to automate and
increase the efficiency and effectiveness of compliance and regulatory processes, which is
referred to broadly as regtech. Regtech provides an opportunity to enhance transparency,
consistency, and standardization of those processes, while reducing compliance costs

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Technologies That Are Changing Housing Finance
• Big Data refers to large or complex data sets, typically including
structured and unstructured data, that are difficult to manage and
analyze with traditional data-processing application software

• Data Science uses scientific methods, processes, algorithms, and systems
to extract and apply knowledge and insights from large and complex
datasets

• Artificial Intelligence and Machine Learning are computational tools and
algorithms that optimize automatically through experience, with limited
to no human intervention, and can be used to analyze large and changing
data sets by identifying and adjusting to patterns they discover

• Intelligent Capture refers to an automated process of identifying and
extracting critical information from paper and electronic documents
without manual intervention

• Distributed Ledger Technology refers to databases that maintain
information across a network of computers in a decentralized manner
that is designed to ensure data integrity and data congruity

• Blockchain is a data storage technology typically used in distributed
ledgers

• Smart Contracts are computer programs or transaction protocols that
automatically execute, control, or document legally relevant events and
actions according to the terms of a contract or agreement

Background
The dramatic growth of fintech in recent years has led to rapid changes in financial markets,
including in both the primary and secondary mortgage markets. Relative to other consumer
finance markets, many mortgage market processes remain largely complicated, manual, and
confusing, making them ripe for further innovation. Fintechs are changing how housing finance
firms originate, underwrite, process, close, service mortgages, and perform loan quality control

Fintech can affect every phase of these mortgage processes, including how firms identify
potential borrowers, verify data, appraise properties, and verify title, as well as how firms
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F i ntech i n Ho using F i nance: Request fo r Info r mati o n
interact with each other, with customers, and with regulators. 4 Fintech innovations may also
affect how credit risk is assessed, the loan terms borrowers are offered, and how credit risk is
managed after a mortgage is closed. The use of advances in fintech presents the possibilities of
making these processes both more efficient, by reducing time and resource requirements, and
more equitable. These potential benefits must be understood in the context of potential costs,
including the possibilities of increased or unrecognized risk that may accompany rapid change
and of adverse consequences for consumers, investors, and underserved markets and populations

FHFA is interested in learning about the role of fintech in both the primary and secondary
mortgage markets. The primary mortgage market links mortgage originators to borrowers and
creates the single-family and multifamily residential mortgages that are the primary input for the
secondary mortgage market, where FHFA-regulated entities acquire mortgages for investment or
securitization, sell mortgage-backed securities (MBS), or accept MBS as collateral. While
FHFA-regulated entities act in the secondary market, practices in the primary mortgage market
help determine both the credit and prepayment characteristics of mortgages in the secondary
market. There is considerable interplay between the primary and secondary mortgage markets

Primary mortgage market practices are often designed to meet standards set by the Enterprises,
while mortgage characteristics or servicer practices may affect risk management at, and the
financial strength of, FHFA-regulated entities. Primary mortgage market practices also affect the
conduct of Enterprise and FHLBank activities to promote access to mortgage credit in
underserved markets and by underserved populations

The subsections below focus on areas of particular interest to FHFA:
• the role of fintech in the ecosystem in which residential mortgages are originated; 5
• the role of fintech in the secondary mortgage market;
• the associated risks with the use of fintech; and
• the application of fintech to compliance and regulatory activities

Throughout each of these focus areas, fintech has the potential to increase opportunities, reduce
unnecessary barriers and obstacles, and make the mortgage finance system fairer

4
See, for example, Choi et al (2019), Fintech Innovation in the Home Purchase and Financing Market available at
https://www.urban.org/research/publication/fintech-innovation-home-purchase-and-financing-market

5
While the discussion here focuses on single-family mortgage ecosystem, FHFA has a similar interest in the
multifamily ecosystem, and the Office of Financial Technology will be pursuing similar activities in both areas

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The Primary Mortgage Market Ecosystem
Technology has facilitated or driven significant changes in the mortgage ecosystem in recent
years, with important contributions from FHFA-regulated entities. Examples of such changes
are listed in Table 1

Table 1: Examples of Fintech in the Primary Mortgage Market Ecosystem
2012: Point-of-Sale (PoS) software emerges to simplify and digitize the consumer-facing part
of the mortgage process
2015: Electronic closings (e-Closings) implemented at scale
2016: Introduction of Data Validation Services to confirm borrower’s employment, income,
and assets through third-party vendor data
2020: E-Notes accepted as collateral by Ginnie Mae
2021: Increased incorporation of alternative data such as rent payment history in
underwriting
Driven by consumer demand, investments in fintech startups in the digital mortgage space
increased from approximately $0.4 billion to $1.7 billion from 2017 to 2021. 6 A number of
trends have created an environment conducive to further fintech-led changes. Such trends
include the evolution of consumer preferences toward lower-cost, digital, and internet-based
options; mergers and acquisitions that change how technology is controlled and applied; and
venture capital investment in startups that intensify competition, especially for established firms
relying on older technologies. The broad array of fintechs active in various facets of housing and
housing finance includes both well-established firms adapting their existing processes and
business strategies to new technologies as well as an increasing number of startups. These firms
seek to gain market share through the introduction or acquisition of new technologies designed to
appeal to consumers or business partners and potentially disrupt markets

Despite the array of fintech activity to date, the process for a consumer to obtain a single-family
mortgage remains fertile ground for improvement. Overall timelines to originate and close
remain long for many borrowers. In addition, origination costs have increased. Full production
costs per loan totaled almost $9,500 in the fourth quarter of 2021, up from a little over $7,500
five years earlier. 7 For the average borrower, the process takes 46 days from application to
closing, with over 30 interactions between prospective borrowers and sales representatives, loan
6
CBInsights, “55+ Startups Transforming The Global Mortgage Industry,” Research Briefs, December 8, 2021,
available at https://www.cbinsights.com/research/mortgage-tech-startup-market-map/
7
Mortgage Bankers Association, 2022 Q1 Quarterly mortgage Bankers Performance Report available for a fee at
https://www.mba.org/home/product/2022-q1-quarterly-mortgage-bankers-performance-report-75734

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officers, loan processors, underwriters, and closing agents. 8 These costs and timelines are not
equitably distributed. Underserved populations are often most cost and time-burdened due to
historical and ongoing structural and systemic barriers. Some experts estimate that a
reengineered, digitalized mortgage origination process could reduce costs by 10 percent, reduce
timelines by 15 to 40 percent, and reduce interactions with borrowers by 15 to 40 percent. 9
Fintech innovations could address consumer pain points – specific problems current or
prospective customers face – in each step of the process, as discussed below

Loan Origination and Underwriting
Fintechs have been most active in the loan origination and underwriting space, as indicated by
the number of fintech entrants. 10 Lenders are increasingly partnering with fintechs to attract
borrowers who prefer a transparent, fast, and simple mortgage experience, which is offered
through online, point of sale (POS) software. Lenders are also adding online financial planning
tools to their websites to engage borrowers as early as the budget planning stage. Fintechs have
enabled, for example, direct collection of underwriting data through POS software, the use of
data validation services and enhanced data analytics, and early assessment by lenders of the
eligibility of a loan for sale to an Enterprise

In addition to potential efficiency gains, the application of fintech to mortgage underwriting may
improve access to credit for underserved markets or populations through, for example,
incorporation of cash flow insights and rental payment data to better predict an applicant’s credit
behavior. In addition, new techniques can be applied to fair lending testing to identify less
discriminatory alternatives and ensure that proxies for protected class status are not included
within a model. However, the complex and opaque nature of artificial intelligence and machine
learning models has raised concerns that they may perpetuate or worsen access to mortgage
credit. Recently, the Consumer Financial Protection Bureau (CFPB) published a circular
affirming that creditors must provide statements of specific reasons for denying credit or taking
8
McKinsey & Company, “How digital collaboration helps banks serve customers better,” available at
https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/how-digital-collaboration-
helps-banks-serve-customers-better

9
McKinsey & Company, Op. cit

10
Jung Choi, Karan Kaul, and Laurie Goodman, “FinTech Innovation in the Home Purchase and Financing
Market,” Urban Institute, July 2019 available at https://www.urban.org/research/publication/fintech-innovation-
home-purchase-and-financing-market

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other adverse actions to applicants even when those decisions are based on complex algorithms
that make it difficult to accurately identify the specific reasons for a decision. 11
Loan Processing and Closing
Loan processing has also seen meaningful fintech innovation that leverages automation and
seamlessly accesses a variety of data. For example, fintechs have helped automate income, asset,
and employment verification, improving speed and accuracy and eliminating the need for
borrowers to provide documentation. Paperless platforms that provide e-closing, e-signature,
and e-delivery services allow borrowers to conduct loan settlement steps through digital,
internet-based applications, including obtaining the title, closing on the loan, and buying title
insurance. Advances in property value and condition verification, widely adopted during the
pandemic, helped reduce the need for an appraiser to be on site and have remained popular

Fintechs are also exploring how to provide alternatives to traditional title insurance, for example,
through the application of blockchain technology

Pre- and Post-Purchase Innovations
Fintechs have introduced innovations that enable homebuyers to compare mortgage rates and
products online or connect with a wide network of lenders by submitting a single online loan
application. Some fintechs provide similar services for homeowners seeking home improvement
loans or to cash out home equity. 12 Some fintechs use their platforms to offer alternative
products that allow homebuyers to reduce down payments in exchange for sharing a portion of
future home price appreciation. These products are especially attractive in areas with
affordability challenges or high median house prices, often above the maximum “conforming
limit” on Enterprise loans. Such products, however, carry risks for borrowers and for holders of
mortgage credit risk, such as the Enterprises. For borrowers, shared appreciation mortgages
reduce the rate at which they build equity and may leave them more vulnerable should home
prices fall. Fintech lenders may not inform consumers of these risks. 13 For holders of mortgage
credit risk, shared appreciation mortgages may reduce the borrower’s incentive to maintain or
improve the property, increasing the holder’s exposure to credit risk

11
CFPB, “Consumer Financial Protection Circular 2022-03: Adverse action notification requirements in connection
with credit decisions based on complex algorithms,” May 2022 available at
https://files.consumerfinance.gov/f/documents/cfpb_2022-03_circular_2022-05.pdf

12
Choi et al. Op. cit

13
See “Bad Credit? No Savings? Unconventional (Maybe Risky) Ways to Buy a Home” New York Times, Feb. 18,
2022, available at https://www.nytimes.com/2022/02/18/realestate/home-buyer-risks-bad-credit-savings.html

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Servicing is an area where the use of fintech has been limited but could drive efficiency gains

For example, fintech applications could simplify compliance with complicated and manual
processes or regulatory requirements, allow for payment tracking to reduce duplicative
processes, or create predictive analytics to improve loss mitigation. Fintech applications could
also be used to better serve Limited English Proficiency borrowers, or borrowers who have
preferred languages other than English. Servicers must be careful, however, to ensure that
innovation does not penalize or otherwise treat borrowers differently due to predictive analytics,
especially if variables used in these models are correlated with protected class status

The Secondary Mortgage Market
Fintechs have also affected the secondary market, including through product and pricing
engines (PPEs) and hedge advisory services. PPEs automate the determination pricing,
lender rate sheet generation, and rate lock processes. Hedge advisors provide pipeline risk
management, best execution, hedging, whole loan and MBS sales, and valuations of
mortgage servicing rights (MSRs). These services are integrated into the Enterprises’ suite
of tools used by mortgage originators. Such tools link the primary and secondary mortgage
markets by helping lenders know whether a mortgage is eligible for purchase by an
Enterprise and the price at which it can be sold on the secondary market

Fintech in capital and derivative markets may also affect FHFA-regulated entities

Algorithmic trading systems, automated settlement and payment confirmation processes,
and automated hedging systems may affect the trading of mortgages and mortgage-backed
securities and the nature and management of certain mortgage-related risks

Fintech Risks
Fintech use in the primary and secondary mortgage markets offers opportunities but also raises
concerns. Relatively little is known about the effects of fintech on the performance of the
housing finance system or the well-being of consumers. A variety of risks have been
identified with rapid innovation generally and with specific technologies associated with
fintech. Historically, innovation and rapid growth have at times been associated with increased
risks to the safety and soundness of financial institutions and to financial system stability. The
financial crisis of 2008 offers one example. That crisis occurred after a period of significant
private sector innovations, including the development of complex securitized products backed by
subprime mortgage collateral credit models that predicted credit risk and probability of default
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based on insufficient loan documentation, and the expansion of non-agency mortgage
securitizations. 14
In the context of housing finance, such risks could result in adverse impacts to the FHFA-
regulated entities’ operations, reputation, and assets, and could harm individuals or other
organizations

Examples of risks associated with fintech include:
• inadequate regulation of the fintech sector;
• cybersecurity vulnerabilities introduced through complex, poorly understood, or
poorly managed innovations;
• threats to consumer privacy;
• potential for violating fair lending requirements;
• increased exposures to legal, compliance, and reputational risk;
• the possibility that artificial intelligence and machine learning algorithms may have
differential and negative impacts on minorities or underserved markets; and
• new products offered through fintech platforms may come with undisclosed or
poorly explained risks that could, for example, erode the accumulated wealth of
individuals and firms participating in those fintech platforms

Specific technologies raise particular concerns around cyber, data, model, reputational, and legal
risks. Such risks may be more complex if the technologies are acquired from third-party
providers. If not well managed, these risks can exacerbate credit and market risks faced by
FHFA-regulated entities. Because the integration of various data and computing resources is a
key feature of fintech, cyber risk looms large. FHFA has issued a number of Advisory Bulletins
that provide guidance to FHFA-regulated entities on certain technologies or risks related to
fintech that have raised supervisory concerns. 15
14
See, for example, The Financial Crisis Inquiry Commission, Financial Crisis Inquiry Report: Final Report of the
National Commission on the Causes of the Financial and Economic Crisis in the United States, January 2011,
available at https://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf

15
See, for example Advisory Bulletins on Artificial Intelligence/Machine Learning Risk Management, Enterprise
Fair Lending and Fair Housing Compliance, Business Resiliency Management, Oversight of Third-Party Provider
Relationships, and Cloud Computing Risk Management available at
https://www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins?k=ContentType%3AFHFA%2DAdvisory%20Bulle
tins%20AND%20FHFAPublishedDateOWSDATE%3D01%2F01%2F2022%2E%2E12%2F31%2F2022

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Frequently Asked Questions

What is fintech and what is a fintech application?

What is fintech? And what is a fintech application? “Fintech” is a combination of terms “finance” and “technology.” It refers to any business that takes advantage of technological solutions to build, automate, or improve financial services and processes.

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How is fintech transforming the uk residential and buy to let mortgage industry?

The UK Residential and Buy to Let mortgage industry is experiencing a wave of technological innovation as both mortgage brokers and lenders seek ways to automate, simplify, and speed up each step of the mortgage application process. Fintech has played a major part in this space.

What is the fintech house?

The Fintech House was launched in January 2020 and is the home of the fintech community. On top of a physical space to base their offices, Startups have now a place to develop their solutions through a closer contact with the entire ecosystem, from banks, insurance companies, partners, technical consultants, legal firms, investors or regulators.