Owning a home has long been the American dream: nearly two-thirds of Americans have purchased a home, most often with the help of a mortgage, yielding nearly $10 trillion (and growing) in residential mortgage debt. Most homeowners spend hours shopping for the best rate and diligently choosing their mortgage originator (e.g., a bank like Wells Fargo, a non-bank like Rocket Mortgage, or a newer player like Loansnap), but what happens to this diligently chosen mortgage after close? More often than not, monthly payments are sent to an entirely different entity, one that can change several times over the life of the mortgage. It is ironic that aspiring homeowners carefully select their originator, but then have no control over the company they’re expected to interact with for up to 30 years.
The company to whom homeowners remit their mortgage payments is called the mortgage servicer. To those not in the financial industry, that term can seem ironic—there is nothing service-oriented about most mortgage servicers (they average an abysmal NPS score of 16).
Want to check your balance? You’re likely visiting a website that was built in the 1980s and doesn’t work on mobile. Try to set up autopay or request a payoff letter? You’ll find yourself printing, signing & faxing paperwork. Want to figure out the status of your escrow account? That’ll likely require 15 calls to the call center before you get an answer. Moreover, who do you turn to when you lose your job and can’t pay the full amount of your mortgage? Whose job is it to inform you of your options and to help you during this stressful time? In theory, all of these are the job of the mortgage servicer—a company you likely haven’t heard of and most definitely didn’t choose to be in business with.
More concerningly, even before COVID hit, 50 percent of Americans were already living paycheck to paycheck, often facing uncertainty in paying their mortgage each month. Now, more than 5 percent of mortgages are currently on forbearance payment plans. That’s nearly 3 million homeowners who are concerned about their ability to pay for, and hence stay, in their homes long term. When you consider both the financial scale of the asset class and the personal importance of the assets being managed by these antiquated servicers who aren’t set up to manage the situation, it’s both shocking and worrying. Even though the CFPB continues to file enforcement actions, little has changed.
The opportunity
As the adage goes, a crisis is a terrible thing to waste. The perils facing many homeowners will add focus to the opportunity: a new mortgage servicer built from the ground up and its potential to benefit everyone in the mortgage value chain.
For homeowners, imagine you could have a trusted confidant to not only help you better digest this complex financial product, but also to navigate the process when financial challenges arise. Can you pause your payments? Pay a lower rate? When do you have to make up for the missed payments? Or even more crucially, what can you do to stay in the home you worked so hard to buy? In extreme cases, the right plan will make the difference between staying in your home and foreclosure. In times of lesser financial stress, when rates drop, you’re automatically alerted that you should refinance and are guided through the process.
For originators, a modern, software-driven, regulatorily compliant servicer will become a competitive advantage in the market. Today, consumers generally choose their lender based on a streamlined application process and the best rates. However, this has commoditized the lender’s relationship with the consumer, making it difficult for the originator to leverage and maintain its connectivity with the borrower. This is further compounded by the fact that the vast majority of originators do not have the size nor the infrastructure required to keep the mortgage servicing. Hence, they lose the relationship with the homeowner after origination (servicing has traditionally been a low margin business that only makes economic sense at scale). A tech-forward servicer with higher gross margins and easy onboarding processes could support lenders at any scale. In addition, they could provide the tools necessary for the lender to continue directly working with the homeowner throughout the life of the mortgage.
For investors, the economic case for a new full-stack servicer is even stronger. The average cost to service a performing loan has risen $59 to $156 from 2008 to 2013. For non-performing loans over the same time period, it’s jumped from $480 to $2,350. Why? First, there are hundreds of pages of regulation that differ on a state-by-state basis. Most servicers were built in the 1960s and still operate on blue screens. As more regulation was enacted over the years, it was nearly impossible for the servicers to update their software, so more bodies were thrown at the problem. As a result, mortgage servicing is an extremely low-margin business. A new software servicer will reduce the transaction cost (software handles most tasks, not people in call centers), reduce credit loss (by helping consumers avoid foreclosure), and increase returns. Furthermore, if the consumer is comfortable being more honest and transparent with a servicer they believe will present them with their best options, it should take excess costs (like legal expenses) out of the system and lead to better outcomes for all parties involved.
Investing in Valon
Given this massive market filled with antiquated players, why hasn’t there been a parade of new entrants? Let’s look at what is required. First, you need a team deeply steeped in consumer finance (and specifically mortgage) regulation that is highly credible to regulators. Second, that same team needs the engineering expertise required to translate thousands of pages of regulation into modular, extensible code with a modern, mobile-friendly interface. Third, this team needs credibility in the mortgage world, where it can convince owners of mortgage servicing rights to take a chance on an unrated new company in the space.
This trifecta of capabilities is the unicorn skill set possessed by the team at Valon. CEO Andrew Wang is an engineer by training and brings years of experience as a principal investing in this asset class at Soros. His cofounders, Eric Chiang and Jon Hsu, bring product and engineering expertise from Google and Twilio. They also have the support of industry veterans from New Residential Investment Corp and Tim Mayopoulos, former CEO of Fannie Mae. Together, they’ve built a mobile-first servicer that will elegantly handle today’s reality (e.g., check your balance, understand your escrow account, present forbearance plans understandably) and scale for the complexity sure to come in the future (e.g., model new forbearance plans, incorporate new regulations, etc.). Valon recently became the first new servicer to obtain Fannie Mae licensing with a new proprietary system.
Valon is leading the evolution of mortgage servicing for consumers, originators, and investors. Most importantly for homeowners, they transform an antiquated experience that, at best, allows homeowners to make payments (while often charging unexpected fees) to a trusted, software-driven advisor to ensure that you, as a homeowner, are presented with the best financial options in good times and bad.
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