Mortgage Supply Chain Failure and Innovation

Abstract

The standard mortgage supply chain is so costly and inefficient that large national banks have dramatically scaled back their provision of mortgages to low- and moderate-income households. Absent regulatory requirements, subsidy, improvement in the way the mortgage supply chain works, or maybe all three, low- and moderate-income households will continue to be underserved by those banks with the largest share of the mortgage market. A number of factors contribute to this problem, including expensive marketing costs and commissions, as well as the obsolete, paper-based technology for loan production. Arguably, the national banking system has never excelled at providing fairly priced mortgages to low- and moderate-income borrowers or in low- and moderate-income communities without external motivation, and furthermore, has still not dealt with a history of discrimination that underlies this lack of capacity. While community development organizations, local and regional banks, and credit unions have developed small local capacity to address these credit gaps, we need a system for scaling up and integrating the ability to serve this sector of the market. For example, we need a method for integrating the housing counseling system and the risk mitigation benefits it provides into the loan origination process and secondary market pricing.

This Article envisions a new way of organizing the community development sector in order to expand sustainable credit to qualified low- and moderate-income borrowers. To reduce costs, the existing housing counseling system would be tapped to provide outreach and marketing in place of the marketing structure used by mortgage brokers and banks. In this new supply chain, housing counseling agencies would refer loan applicants to community development financial institutions (CDFIs) or credit unions, which would originate mortgages at reduced cost. To further limit costs, marketing would be shifted to a technology platform that would allow applicants to apply online and connect housing counseling agencies to CDFIs and secondary market buyers. CDFIs would be connected to one another and able to share, standardize and manufacture not only loan products but also efficient systems for delivering them both to consumers and the secondary market. The Article closes by describing two initiatives that are seeking to create a national marketplace of CDFIs, linked to the housing counseling system, to create a wholesale conduit for home loans.