Who Will Survive the Fintech Winter of 2022?
This article originally appeared here in HousingWire.
As a financial technologist specializing in mortgage since long before “fintech” was a thing, I appreciate how tough market cycles force us to focus. For some individuals and companies, this is your first mortgage down cycle. For others, it’s just a new chapter in your journey. But one thing is certain for all of us: without technical expertise, fintech is just a buzzword, and markets like this are when we earn our place serving America’s consumers. So below I highlight some beyond-the-headlines opportunities, and offer tips to companies and individuals as we navigate this fintech winter of 2022.
Warm Spots In The Fintech & Mortgage Winter
We all know firsthand the pain of today’s sharp cut in mortgage activity. Refi volume and units from 3Q21 to 3Q22 are down 83.6% and 76.5%, respectively. Plus purchase volume and units are down 22.4% and 21.9% respectively in the same period.
In crypto, the total sector market cap is down 61.8% from $2.5 trillion in 3Q21 to $954 billion now. And in broader financial technology, public company fintech valuations are down 70-80%.
These valuation declines hit category-leading software fintechs even though they have huge lender customers – and hit originator-servicer fintechs even though they have hundreds of billions in volume and servicing portfolios.
But all is not frozen as winter approaches. The warm spot in mortgage and fintech this winter will be that our industry has $13.3 trillion in outstanding mortgages and will still originate about $2.3 trillion in new volume this year. There are plenty of opportunities for people and companies in an industry this big.
The $2.3 trillion in new volume this year is 6.6 million units, 67% of which are purchases. These may become refis as soon as next year, when the MBA predicts rates will drop from current levels in the upper 5% range to the upper 4% to low 5% range by 3Q23. Yes, these projections are market dependent and change monthly. But they reflect broad macroeconomic and housing trends, so here are two takeaways:
For originators, use these technicals to keep you focused on your purchase game, use your advisory skills to educate your home buyers on what’s going on beneath the headlines, and use your fintech stack to remain engaged with your customers.
For servicers, remember that 65.8% of occupied housing units in America are owner-occupied. These folks all need help optimizing financial plans using today’s record home equity, thinking about whether life events will cause them to need to trade homes, or managing hardships that will inevitably hit some as the Fed’s inflation fight plays out.
Now let’s look at how the cycle may play out for companies and individuals.
Mortgage & Fintech Companies Must Focus
We’ll continue to see two things with companies from here.
First, lenders will continue to adjust budgets and strategies. This will likely include continued headcount reductions to align with current volume and fine-tuning of certain visions. Examples include some lenders reducing channels to those most strategically important for them.
If a great full-cycle retail shop added wholesale or correspondent in past cycles, they may pare back to their core strengths. Or if a great full-cycle consumer-direct shop added non-mortgage or mortgage-adjacent businesses to gain consumer wallet share in recent years, they may revert to mortgage-only for a while.
Second, software companies will continue reducing budgets, fine-tuning visions, and seeking out smart deals. Some may reduce to absolute core platforms and some may lean into long-term visions.
If a great POS or marketing firm was adding new mortgage channels and/or non-mortgage capabilities, they may refocus efforts on the most reliable products for customer success and recurring revenue. Or in the case of Sagent, we’ve been leading homeowner-first servicing modernization in America and we’re using this market moment to lean into our long-term vision. This includes long-term alignments like our cloud-native servicing software deal with Mr. Cooper.
When executed well by mortgage and fintech firms, these actions help you focus and refine.
Mortgage & Fintech Pros Must Become Utility Players
In our case, we’ve used this market not just to focus on our long vision, but also to keep building talent for a market segment – servicing – that requires great technical expertise.
The Sagent/Mr. Cooper deal wasn’t just about Mr. Cooper, one of America’s largest servicers, becoming a software client of Sagent. It was about combining the best of Mr. Cooper’s and Sagent’s servicing fintech platforms under Sagent to deliver the most modern core, consumer, and default servicing to our industry.
So it included moving 200 Mr. Cooper fintech employees over to Sagent, and this is a landmark case study of mortgage expertise making people more versatile in fintech.
Because the Mr. Cooper team had so much mortgage experience from being inside a large lender/servicer, they are the gold standard for talent in our highly-technical, highly-regulated space.
With technical expertise, your optionality as a mortgage and/or fintech pro is simply huge. It makes you able to easily switch between the lender/servicer and fintech software sides of our industry. And when the market moves like it has this year, the opportunities move as well.
If you’re a utility player, these opportunities are yours. So as this challenging cycle plays out further this winter, ask yourself:
Is your mortgage resume relevant for the fintech era?
For many, the answers come back to your technical skills, which then enable you to be a utility player. If this sounds like you, your opportunity set will stay warm.
Best of luck to all companies and individuals this winter, and please reach out with your thoughts on this topic.