Odd Lots - Why You Can't Get a One-Click Mortgage Refi

Episode Date: December 12, 2024

You can do a lot of things with the click of a button nowadays. You can get insurance, open a bank account, or trade 347 different stocks all at once via an ETF. But one thing you definitely can't do via a single click, is refinance your mortgage. In fact, securing a mortgage still requires reams of paperwork -- a lot of which has to be physically mailed to all the different parties involved. So why is mortgage finance stuck in the stone age? In this episode we speak with Mike Yu, co-founder and CEO of Vesta, about why we don't have one-click mortgages refis. He describes how a mix of clunky legacy IT systems and regulation have combined to make mortgage finance a technological laggard. Read More:US Home-Purchase Applications Rise to Highest Since February Become a Bloomberg.com subscriber using our special intro offer at bloomberg.com/podcastoffer. You’ll get episodes of this podcast ad-free and exclusive access to our daily Odd Lots newsletter. Already a subscriber? Connect your account on the Bloomberg channel page in Apple Podcasts to listen ad-free.See omnystudio.com/listener for privacy information.

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That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Bloomberg Audio Studios. Podcasts Radio News. Oh, and welcome to another episode of the All Lots Podcast. I'm Tracy Allaway. And I'm Joe Wisenthall. Joe, do you remember a month or so ago, we recorded an episode all about why mortgage rates were going up, even though the Fed has cut?

Yes, this was a big one at the time. And I think it still is really important. Basically, there's this intuition that people have that the Fed affects policy by cutting rates and one thing that happens when rate cuts is that borrowing costs go down and one form of borrowing that's very popular is mortgage rates. But we're in the middle of a rate cut cycle. The Fed cut 50 in September, then kind of another 25 at a subsequent meeting. But mortgage rates have generally not moved down at all and, in fact, moved up after that 50 basis point cut. By the way, we're recording this November 25th. We haven't seen much improvement at all. And so there is this,

I don't know if it's really a mystery. But there is certainly a story about the Fed in the middle of a rate cut cycle and yet it not really feeding through to a lot of kinds of borrowing. I don't think it's a mystery. We did a whole episode on it. No, you're right. You're right. We explained it all. You're right.

But what I was going to say is as part of that conversation, you asked a really interesting question. Thank you. Which is for once. For once. Which is why can't we have a one-click mortgage refi? Do you remember that? Yes. So, you know, like I've refied a mortgage in my life.

It's kind of annoying. You know, if you're in the right situation, you can save money and it's probably worth it. But it involves a lot of paperwork, et cetera. And, you know, I think we're so used to one-click financial transactions or maybe two clicks or whatever. You know, one of the things that came up is that there are often a lot of mortgages out there that theoretically are sort of in the money where the borrower or the homeowner could take advantage of lower. rates, but they don't for whatever reason. Perhaps one reason is they don't know that rates have gotten down. Perhaps another reason is they can't be bothered to do all the paperwork and stuff. And so there are these lag effects. And so I've always sort of wonder, why can you just have a

one-click, one-click refi at the new lower rate? As someone who lives in fear of paperwork, I think this is an interesting question. And we should talk about it. And it turns out we actually have the perfect guest. We're going to be speaking with someone who was involved. in a one-click mortgage lender. Mike, you, co-founder and CEO of Vesta. Mike, thank you so much for coming on all thoughts. Yeah, thanks for having me. So why don't you give us a very quick career summary? Why are we talking to you? Yeah, so I've spent my entire career in the mortgage industry on the tech side. Purely, I like to joke that everyone who ends up in mortgage origination stumbles into it by accident. So I work that blend. Kids don't dream of like one day I'm going to be a mortgage.

originator. You didn't dream of that when you were in elementary school. Anyway, keep going, sorry. Actually, when I'm recruiting engineers here at Vesta, I tell them, I'm like, you know, lots of founders will give you some weird story about how they've dreamed about doing this thing since they were 12. I could tell you a story like that and you wouldn't believe me anyways. So let's be honest, we stumbled into it. I started at a mortgage tech startup blend in 2016. So the company was about 50 people back then. And we built a ton of the bar we're facing experience for big banks, big mortgage lenders, et cetera, with the goal really being how you make the process more digital, like it was all paper forms back then, even for the borrower to fill out.

And then how do you eventually consolidate that down into one click or one tap if you're on mobile? That company went public in 21, but I left in 2020 to go and build a different startup, Vesta, where I think a lot of what we struggled with that blend was the core infrastructure in the back end of the system made it really hard to consolidate the mortgage process, accelerate it, cut costs for lenders, save time and make it easier for. for borrowers. And so kind of working on the backend system of record now where I think a lot of the other technology problems are. And I think as this is about one-click mortgages, I think there are, of course, some technology limitations, which is why we started the whole company. But there's also

a fun variety of regulatory implications that I'm sure we'll dive into today too. Great. You know what funny is I think not only on the podcast did we talk about why were there no one-click refi is available. I think we specifically put out a call. We were like, if you ever been in a startup, some Y-combat. thing, which is attempted to do one click, reach out to us. And you were one of the, I don't know if Blend was ever a Y Combinator thing, but that's not really that important. But you answered the call, literally, and you heard it. Answered the odd lots call. Answered the odd lots call. So you're the perfect guest.

Obviously, we want to get into what you're doing at Vesta and just how it all works. Talk to us a little bit more. What did Blend do to attempt to solve the problem of, I don't know if it really gets to one click, but simplifying or streamline. the mortgage application process. Yeah, it's really funny because it's only been 10 years, but 10 years ago, actually, if you wanted to get a mortgage, you couldn't even go and apply on the internet. I would actually say in the early days of blend,

2016-17, we'd talk to lenders and they would be like, you don't understand. People applying for a mortgage, they don't want to do it online. It just blew our mind. And there were a lot of old school loan officers who are like, I call my borrower and I interview them, and I literally take the paper that's called the 1003 1003 or the Uniform Residential Loan application, I take this paper form and I fill it out with a pencil.

I like pull over to the side of the road. My bar was talking to me on the phone. I take them through my process and I fill it out with pen and pencil. Then I give it to my assistant and they go like type it into the back end system. And we were getting this kind of pushback left right and center in the early days, really just around the idea that people wouldn't want to apply online. And then Rockets big Super Bowl ad came out, push button get mortgage. And then all the banks were like, oh, well, if Rocket's going to do it, we probably need something competitive. with this. And I would say that was really an inflection point for that company. But so much of it was like, if you want to get to a one-click mortgage, well, first of all, you need people applying for the

mortgage on the internet, not via physical paper. And then it really becomes about how do you start to pull into data from all these various sources. So blend was one of the first to work with, you know, some of the GSEs on getting asset data direct from the banks and pulling that into the mortgage application. So you can get faster underwriting and not needing to upload a whole bunch of paperwork and bank statements. Similar things for like income data. And then people are making big pushes around property data and AVMs. It's a whole variety of data sources you've kind of got to stitch together in order to really save the borrower from sending in a whole bunch of paperwork.

Because one thing that I think is a little less obvious, when you send the lender, your pay stub, you're not just proving that you have the income. They actually take a bunch of the numbers on that pay stub that they didn't, you know, ask you to fill out anywhere and fill that out in a spreadsheet or something to calculate your income based on their models and what the GSEs tell them to do and things like that. And so so much of it was just if you can digitize the process and get that data in a structured format from a whole bunch of sources at the beginning, the belief was that's really going to drive you towards a faster, more efficient process and eventually one-click.

So you mentioned the GSEs a couple times there. I imagine if you're doing a mortgage, at some point, you're going to have to get the guarantee from Fannie and Freddie, and so you're going to have to go through them. What are their systems like? You mentioned you worked with them. How did you plug into the GSE systems? Yeah. So as you might expect from, a couple of large financial institutions that are also now under conservatorship. Their systems are definitely of varying degrees of maturity. One thing that I will say that I actually really appreciate about both Fannie and Freddie is they have invested a lot in technology over the last decade. I think when you get down to it, financial products are all, the nice thing is there's no physical

commodity, right? It's all money and numbers in a ledger. And so I think they've definitely started to embrace their role more as needing to provide technology to the ecosystem that is modern, that is effective. But very honestly, like the core piece of technology they built that gives you guidance on whether your loan is going to qualify or not for sell to Fannie or Freddie, it's called desktop underwriter in the Fannie case and loan product advisor in the Freddie case. The original versions were built in the 90s. And so definitely some older systems. It's all still, you know, XML system to system conversation. If you can integrate to them at all, some of the systems don't have, you know, any capability for system to system integration.

And so if you want to actually sell the loan to Fannie or Freddie, someone has to go to their existing loan origination system, download an XML file, log into their website, and upload it. So there's definitely, I would say, varying degrees of modernization and capability across those technology systems. And that is, I would say, no more true at Fannie and Freddie than it is that most of the major financial institutions you think about, even most of the smaller lenders you think about. It's all kind of on the spectrum of everything was built.

between one and 30 years ago, and everyone's got to kind of move. 30 years is long enough in technology. Everyone's got to kind of move and rebuild a new version of this, a new version of that. Oh, yeah. Joe, I remember, you know those charts that show like all the acquisitions that a JP Morgan or Bank of America has done. It's sort of like a flow chart. Every single one of those probably has a different IT system. Totally.

So I always hear that one of the big difficulties in building a giant bank is basically sorting out. the IT. Totally. Big institutions, you know, it's easy to sort of assume that sort of quasi-government institutions are going to be worse on so forth, and maybe sometimes that's correct and sometimes that's not. But big, gigantic institutions, particularly ones that had all kinds of mergers and roll-ups, et cetera, they all have this. And this has been something that's come up a little bit in the past. We've done some episodes on bank software in general. And so I'm not particularly particularly surprised to hear that Fannie and Freddie have a lot of still work to do, even if they have invested. Why is it hard? Maybe from your perspective, from the perspective of either a Fannie or Freddie, or just any other gigantic financial institution, how would you describe why it's challenging to update these systems so that they resemble the type of software we're used to in 2024?

Definitely. Maybe I'll start even way back, like 50 years ago. Are we going to talk about cobal? I hope so. We can talk about cobal if you'd like. But I think it actually, when I was at Blenda, I was fortunate enough to work with Tim Myopolis, who was before Blenda CEO at Fannie Mae. And he has this line which really stuck with me,

which is that everyone says that banks are like slow adopters of technology. But the problem with banks actually is that they were very early adopters of technology, right? Going back to everything really is just a number inside a spreadsheet at a bank, there's no corn that you're shipping or gold bars or whatnot. The financial services industry, was really an early adoptive technology. What that means is they installed a lot of technology very, very early on,

that then became harder and harder to rip out. And one thing that we find, for example, at Vesta, where we're replacing one of these core systems, when I talk to other founders in the technology space, it's much easier to install a new system to replace a spreadsheet that just like so obviously doesn't work. The enterprise security is terrible, the controls are terrible, et cetera, than to get someone to upgrade a system that, you know,

kind of works for them. It's clunky, it's inefficient, and slow. But it isn't a burning pain where they're like, oh, if I don't modernize, I'm going to lose the business or lose my job or something. On the other hand, I would say there's a very strong incentive in all these big institutions. If you try and do like a huge modernization project of a big existing system of record and it doesn't work, you're basically putting your job on the line. And if it does work as a CIO or a line level CIO at a bank, you're getting a small promotion. I was just going to- The trade-off is pretty bad.

I was just going to ask, like, how much is it tech-quate? tech versus institutional inertia and incentives that really create that problem of why it's harder to upgrade? I think it's mostly institutional inertia and incentives. There certainly is a lot of work that actually goes into it, right? And so you've got to get budget, et cetera. But it's all very tractable. I will say in financial services, there are relatively few technology problems that are fundamentally hard technology problems. Like we're not launching rockets over here. They all tend to be people problems, organizational problems, ownership problems that get in the way. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and analysts, and

traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. All investing is subject to risk Vanguard Marketing Corporation distributor. Eating well shouldn't be complicated, but somehow it turns into recipes, prep, cleanup, and half your Sunday gone. Factors solves all that. These are fresh, ready to eat meals designed by dietitians, delivered to your door and ready in just minutes. No prep, no cleanup, no excuses. And it's not just about convenience. You're getting real food, balanced nutrition, and zero artificial stuff. Meals that help you stay on track for all of your goals without the grind of doing it all yourself.

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Can you talk to us about the sort of life cycle of a mortgage in terms of technology? So, like, what's the first thing that happens, what system is it put into, and then where does it go next? Sure. So we're talking one-click refies today. So we'll start with the refi. In let's call it a relatively idealized case. Let's talk to the real ideal, which is like the borrower is going to get an email from their servicer, right, which says, hey, you're in the money. Like we service your loan. We know what you pay. We know what rates are. We know roughly your credit profile. We can tell you that you probably want to refinance. So the consumer is going to click on that link and they're normally going to go and fill out an online application. Today they're going to go type in a whole bunch of their data again. I think you probably know your servicer has a a ton of data on you. Do you really need to type it in? And this varies kind of depending on how tech forward your servicer is, but often people are still typing in their whole application again. They're uploading a whole bunch of documents. And this is kind of sitting in the consumer facing system, which today is, you know, they call it a point of sale. This is the space where really blend is the category leader now. And so the borrower is going to kind of type all that information

in. They're going to hit submit. That's going to push it to what's called a loan origination system on the back end. And you can think of that as both the system of record and it's going to do all the compliance checks. It's where the people are going to do all the processing and the underwriting. It's where any automated underwriting might happen. And it's also the system that's going to be integrated to like 15 other systems. So one really annoying thing about the mortgage ecosystem is to produce your loan from front to back. You're probably hitting at least 15 different different technology vendors. Wow. Can you run some, what are some of these and what different parts of the stack are they serving? You don't have to list all 15, but give us an example of like

the various things that need to be hit and who's doing them. Yeah. So, I think of it as that there's a whole bunch of stuff around the property, right? So you've got to go to a title company. You've got to go to an appraisal management company, kind of get the appraisal. So there's a whole bunch of stuff around the property. Someone's got to check what flood zone it's in. And we'll get into why some of the rules are really hard to change. But if you want to know what flood zone of property is in, I mean, you can go on House Canary or Zillow and kind of figure that out pretty quickly. If you want to sell a mortgage to the GSEs, you've actually got to hit one of their four or five designated flood certificate providers for an official flood certificate, quote unquote, which is really just, you know, those are the providers that signed a deal with the GSEs where they get the FEMA maps that everyone else gets and they produce a piece of paper that's official enough and the GSEs trust them. So that's a provider you basically have to hit. And so there's a whole variety of property, you know, vendors you've got to hit around those categories. There's a bunch of borrower vendors you've got to hit around pulling credit is the obvious one. But you're going to want to verify their income. You're going to want to look them up in fraud databases.

So there's a whole set of those. And then there's a bunch of compliance stuff to do. So generally, you know, there are entire companies that are dedicated. to, I have all the data in the mortgage, and I'm going to prepare the disclosures for you. Like, the disclosures are so complicated. That's less a technology problem. That's like those companies have an army of lawyers who basically read all the regulatory updates, all the updates in each of the 3,800 counties in the U.S., any state updates, any

investor updates around exactly what you have to tell the consumer before they can kind of sign a lien on their property, which, as you know, like some states are very onerous about that. And so between compliance and property and kind of checking the borrower, there's just this whole constellation of stuff that has to be done, a lot of data sources and a lot of rules. Talk to us a bit more about the rules then. I'm curious how these rules come into place, what sort of factors they're being based on, and then how often they actually change. Yeah, I kind of think of rules in two buckets. There, of course, the regulatory rules.

So you can imagine a ton of those regulatory rules were driven by 0708 and a lot of the things that we saw during the great financial crisis or that kind of led up to the great financial crisis. So a lot of regulatory stuff around what you disclose to consumers, around, you know, you have to qualify their ability to repay in order to have a compliant loan. So there's lots of regulatory stuff. And then there's investor rules, which overwhelmingly, you know, come from Bannie or Freddie. There is a small private label market and some other stuff. One thing that is true about all of these rules, right, the investor rules and the regulatory rules, is they're both kind of set, again, talking about organizational inertia by pseudo-government institutions that have really been burned by mortgages in the last two decades. And so they're pretty nervous about that.

And there's very little incentive to simplify the process or remove rules. And so the rules change, I would say, every month or two. You get a few new rules from the investors, but they very rarely subtract rules, which tends to be a reason that you end up with. I want to say the Fannie Mae selling guide is now 1,200 pages, basically of rules that the loan has to satisfy. And these rules can vary from, you know, relatively straightforward things like you can't refinance an FHA loan within a certain amount of time after the loan was originally,

originated. So there's like a seasoning requirement. You know, there's a lot of documentation rules. Like if you're going to provide an income to Fannie Mae, you normally have to have a pay stub and a W-2 attached to it to kind of verify that income. And you get into like really complex and arcane rules as well once you get into 1,200 pages. Like, are you allowed to have a 10% increase in income year over year and use that new income? Well, you have to document that a certain way. If it's about 30%, you have to document it another way. So a whole kind of slew of rules, which is why you have this huge body of people, basically, that have to work on every single loan because they have to learn all the rules.

So one thing that would be really nice, and it sort of gets to the one-clickness of what we're trying to get at, is if it were really easy to pull in data quickly from all these disparate providers. So I go to your website, and I want you to know my income, and maybe I want you to know my assets that I have, but I'm not sure if that's as important in a mortgage. and I want you to know the location of my property so that you can do various things, including see what the floodplain looks like. The various providers of this stuff,

so one of the providers might be my payroll provider, another provider might be the bank that I use, the bank online, etc. How forthcoming are they in making these systems easy for a third party, say yours or a blend or some other FinTech or a rocket? etc, to just go access them such that I don't have to download PDFs and then re-upload them somewhere else. Yeah. So I imagine you're asking because you know the answer is going to be there, very mixed results.

Okay. So when it comes to banks, for example, there have been a whole advent of new kind of players that help you connect your banking data in the last 10 years. Plaid is the big one. Exactly. And then the banks, I would say, clearly had mixed feelings about it. People are worried about security of people typing their bank password on something that's not the bank's website. They're very notably over the last 10 years or so, but a number of times

when Chase just shut off Plaid's access. And so there certainly was some complexity in that relationship earlier on with some of what's going on in open banking in the U.S. I think the idea that you'll have access to your own asset information is definitely a place the regulators are pushing as well. And that gets easier and easier every year. Payroll is a particularly interesting one. It's a very hot topic in the mortgage world now because everyone basically uses a product offered by Equifax called the Work Number, which you may have heard of. So the work number, basically they have a partnership with ADP where ADP charges them a very large amount of money actually to use the borrower social to look up the data. And then the work number turns around and marks that up a

whole bunch. So they also charge a ton of money to the lender. So I've heard of lender spending, you know, like four or five, $600 a loan, like to close one loan to get that income and employment data in this digitized way via the work number, which is, I think, obviously ridiculous. And so there certainly is some struggle going on with the data ecosystem. They're much of startups now trying to basically do what Plaid did where the borrower can log into their payroll provider. One problem you might imagine with that is like, do you know your payroll password? Because I don't even know who my provider is.

No idea. And so there certainly is some difficulty in getting the data together. I would say the ecosystems made a lot of progress on that in the last 10 years. But payroll and income tends to be a lot harder because it's much more fragmented. with banking and open banking and every bank, you know, has some kind of electronic system of record. That's a problem where I'd say they've made a lot more progress. How much does mortgage financing depend on just your sort of basic mail? I want to be able to say the housing market is powered by FedEx or something. So actually every closing, I wouldn't say every closing package,

but the vast majority of closing packages in this country, like you go to your lender or a title office and you sign the closing doc and the notes and whatnot to actually the legally binding piece of paper that says there is a lien on my property now like I have to pay this loan back and that gets FedExed back to the lender and the lender then you know scans it they upload it to their electronic system and they turn around and they like FedEx that to a dock custodian and some lenders are more efficient with their FedEx schemes than others on like it just go straight to the dock custodian and the doc custodian scans it and sends it to them but I would say that very much all of the actual debt and recording and like all the legally binding stuff. Probably 90% plus is still physical pieces of paper that are getting mailed

around. There was a big trend, especially in 2020, around how do you digitize those notes, how you do e-closing? Then it's a matter of you've got to get 3,800 counties to accept it, all the title companies have to accept it, et cetera. So it's a big network problem. Again, you're probably hearing a theme of it's just like organizational inertia. Yeah. But you very much can say that home financing is still powered by FedEx because pretty much everyone, I mean, we have a field in our system where people are like, we need a FedEx tracking number field for the note. Like, not even kidding. And that could be really cool if you could integrate that to FedEx to like automate, like

looking at the tracking. And it's like, of course you can do that technology wise. But sometimes you ask yourself, like, what problem are we really solving here, guys? Like, we should just move it to the cloud. So I think the last time I applied for a mortgage was late 2017. And I just remember like documents and documents and checkboxes. And I didn't read any of those documents. I just signed the checkbox.

And I assumed it was all okay. What were all those checkboxes I was, or signature boxes that I was putting a digital signature into? A lot of those signature boxes are basically people disclose in your rights. So very similar to when you have a checking account, you want a bunch of disclosure. Yeah, it's like you sign something that gives them authorization to pull your credit in many cases. And then you sign something that, you know, it's like, hey, here's your credit score and here's how it was calculated in the state of California. Or you might sign something, which is like if you are getting an FHA loan with lead paint, which I hope you didn't, there's a disclosure. that says, hey, like, we determined that the house has some old lead paint, like sign here to

acknowledge that we disclose that to you. And then the other thing that happens is because each of these disclosures are legally mandated, and it's really hard to make sure that you signed all of them in the one go, they'll just say, hey, when you first apply for the loan and we disclose to you the terms, we're going to stick all of those disclosures in there. And then when you get to the closing table, we're going to put them in there again, just so we've built and suspended that, you know, you've signed it. Like, you're at the closing table. You're not going to walk away now. like let's just make you sign it one more time. So probably if I had the guess, you got 50 or something disclosures, depending on the state

you were in, there's a whole bunch of, you know, some states are more owners than others. But you probably also signed each one an average like two and a half times. I did. Just real quickly, how different was that experience for me in 2017 than it would have been in 2007 before the mortgage crisis? Well, in 2007, you can imagine there were way fewer disclosures. Actually, in 2015, they passed what's called Trid or TILARESpa Integrated Disclosures, which is actually the main reason you can't have a one-click mortgage today.

So Trid puts a minimum timeline as well, where you have to give people, you know, within three days of getting what's called a full application, you have to provide them an estimate of all the fees that really clearly in a very standardized format discloses all the fees. That comes with a bunch of disclosures. And then you have to give the borrower seven business days from giving them that loan estimate to close the loan.

And so we actually talk in mortgage now a lot about the 10-day mortgage because you actually can't have a one-click mortgage, purely by virtue of the fact you need that seven-day waiting period. There's some other timelines in there. Even if you got rid of that seven-day waiting period, you'd still have to remove a whole bunch of other regulatory timelines to really get it down to one day. But in 2015, they released this new regulation,

which I would say made it a lot more onerous, a lot more documents to sign. And I mean, it's good, right? Like pre-2015, people were getting loans and they were getting bait and switched, and people were having new fees pop up that they didn't know about, and now all that stuff is really strictly regulated, but it definitely adds to the paperwork work. Eating well shouldn't be complicated, but somehow it turns into recipes, prep, clean up, and half your Sunday gone.

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Not someday, but right now. Register at Democrathomes.com and get everything you want right now. So how to Blend actually try to solve all of this? Because when I listen to you talk about all these sort of challenges in the mortgage market, It just sounds like an unsolvable kind of spider web of requirements. Yeah, it certainly is very challenging. I wouldn't call it, you know, nothing is really unsolvable, except the regulatory timeline is going to be what it is.

But for a lot of it was, hey, can you really get to a one-click and tell the bar that they're clear to close? And what that means is we've fully underwritten everything. We know that you're going to close. The only thing we're really waiting on is the compliance clock. And so you kind of split it up into the various things that get underwritten in the loan. So in property, for example, the most clear thing you have to do in order to say I can instantly underwrite your property is they have to be able to get no appraisal and get instant title. And today, title insurance is this whole other thing that I'm sure you could do 10 episodes on. Oh, yeah.

Some people have asked for them. Yes, I would say every two years, some Silicon Valley person tweets that like title insurance is a racket and someone should go take it out. And I always get that tweet texted to me like 10 times. But there's a complexity around, well, the problem with title insurance is actually someone does have to go to the county office. still in a bunch of counties and go downstairs into the basement of the courthouse and get the key and unlock it and go look up the records for that house or something like that. So you have to figure out how you're going to make title insurance instant, which there are a whole bunch of startups that have worked on, are working on, have had some success in digitizing that process

in some counties. You've got to make the appraisal instant, which basically means you have to get a message from Fannie or Freddie that for this particular property, they've written a loan on it recently enough that you don't have to appraise it again. And so that's the property side. Those two things you can imagine combined are already like you're taking the 100% of properties in the U.S. and you're shrinking your hitbox to like 20 or 25% or something like that. And then you've got to look at the borrower. And for blend, a lot of the approach was, well, we partner with a lot of big banks. And so can you get the banking data directly from those banks and use that to either figure out the income or use something like the work number to instantly get income?

You can verify assets, income and the property. And then you can, of course, pulling credit is the easiest one because we've been able to pull credit digitally for decades and decades in this country. if you can kind of check all four of those boxes, then you're quite a bit further towards a instant clear to close. You're still not fully there. There's a bunch of stuff around the margins. You've got to go and sort out. But it really is a matter of blocking and tackling,

executing detail by detail. And it's like there are 1,200 pages of rules. I've probably read those 1,200 pages of Fannie rules three or four times. And you've just got to systematically tick them off one by one. What are you doing now at Vesta that you weren't doing at Bland? Yeah. So a lot of the struggle that, that we had a bond was you really, because you own the front end of the process, if you could get to fully automated, you could pull it all in and be done. The problem was you, you know, you heard how I talked about appraisal title. You kind of shrink the hit box for what you can do fully automated. And so what we found was that if you fully automated, like, let's say you really to fully automate 1% of a lender's loans, that would be great, but they're still, you know, spending a ton of manual dollars, a ton of, you know, operational people on 99% of their loans. And the big problem was all of the data that you got.

at the front, who was really hard to use that to drive efficiencies at the back of the process or for any of the loans that did have even one manual touch. Like I ticked through all these rules. You can imagine if only 10 rules had to be done by a human, well, now it's got to go through this manual process. And what it does today is it goes through this old manual process where they basically have to underwrite the whole loan manually because the system doesn't have an understanding of what's already been done.

It's not, you know, task or workflow oriented. And people basically have muscle memory. So the underwriter is going to look at everything, order the appraisal, whatnot, even if they don't have to. And so a lot of what we realized was the back end of the process was making it really difficult to realize any efficiency from the good work you're doing at the front end because the change management and organizational inertia of, you know, you've got 3,000 people on your mortgage manufacturing line, so to speak, doing exactly what they've always done. And the software isn't really guiding them to do anything different. Like it's not a piece of

software like you might be used to working in today, like Slack gives you notifications, for example, it's really almost like a spreadsheet with a different UI layer on top of it and you've got to figure out exactly what you're going to do. So a lot of it was how do you change the way the operation works so that people are doing a lot less. And then the other big thing was with the existing loan origination systems being so difficult to integrate to, that was one of the biggest hindrances and actually getting all of the data and making that process one click was that you couldn't actually do all of the jobs that needed to be done by that old system. Like that old system has all of the integrations I mentioned, and they have hundreds of integrations to all these

data providers, like coordinating the appraisal. So you ended up having to build around the old system instead of through the old system to achieve a lot of this stuff. And that just seems like so clearly the wrong way to do it. Now, the downside is you have to go and modernize the old system, which is a really hard problem. But by kind of modernizing the old system, you unlock A, the operational efficiency that you actually get from all this data. And then be a much easier platform for everyone who wants to build a front end to get that data through your integrations and through your processes that the lender already has that exists manually today, instead of having to recreate it on the side to try and automate it, if that makes sense.

I have a slightly random question, which is, given that we're talking about technicalities, how easy is it to commit some sort of mortgage fraud nowadays? Totally random, not out of personal interest. Yeah, I did listen to your recent episode about government fraud, where Joe was the one I think was very interested in. Yeah, I was the one entering to start doing fraud. Yeah, mortgage fraud, I think, is actually quite difficult these days, mostly because there are so many human eyeballs that look at the loan. And so let's take something really simple, like you wanted to, like, doctor a document, like probably the most straightforward thing, because it's not like mass scale

fraud. It's like, somebody is like, I want a mortgage on my primary residence. I can't afford it, and I'm just going to doctor the documents to make my income look bigger. Well, first, you have to hope the lender doesn't check some third-party verified data. resource or they don't reach up to the employer, which they often do. And then you have to hope that like your document makes it through the processor looking at it and the underwriter looking at it and the underwriters especially, they're looking for things that don't add up. And so I would say mortgage fraud is probably really pretty to very difficult to actually accomplish today. It sounds a lot harder to achieve than like, you know, figuring out how to get some Medicare dollars. So it's

probably not worth the squeeze. Now we'll like generative AI make it way easier to make fake profiles and all that stuff, maybe. That's something that I think lots of people worry about. But today, I would say it's definitely, the mortgage industry has done a pretty good job of doing that. And I would say the regulators have done a good job of making it really hard, just given everything that happened two decades ago. Back to the question of refis.

So you mentioned that theoretically, if you're a homeowner and you're in the money on your mortgage, that is to say where it would make economic sense for you to refi, you might get an email or something. It's like, hey, you should refi and you can save this much. But it's, as we're talking about, it's going to be a lot of paperwork and all this stuff. After our episode came out several weeks ago, someone on Twitter, they said, why can't we have a mortgage product that you pay a higher premium up front, but it's a floating rate mortgage that only resets downward. In other words, basically, if rates drop lower, your mortgage mechanically drops with it. And again, obviously, if you're going to have that, you theoretically, that's a more valuable.

option and you pay some premium up front. But then in theory, you save all of this effort and time and document checking and human hours that go into this. In your mind, does that seem like a plausible financial product that could exist? Seems like a totally reasonable financial product. I think that there may even be somebody doing it in like the private label securities market. There is a small market of basically hedge funds that will like underwrite non-QM is what they're called mortgage products and offer those to lenders and lenders can originate them. One thing I will say is it seems, It seems unlikely to come from the GSEs just because so much of the GSE's mission these days is affordability and democratizing homeownership. And I can't really think of a marginal person that that product would get into a home.

Right. So even if it makes sense, that's just now we'll move to the dial. Yeah, I think it makes sense from a, you know, like single person financial instrument perspective. Yeah. I would love to have one of those, for example. But I think that from the kind of stated policy goals of the biggest investors in the market, it's just not really something that aligns with their policy goals. And so I can't see that being a big area of where we're going to see a bunch of those in a decade. So a lot of mortgages get bundled together into mortgage-backed securities.

I'm curious, like, how much of that granular detail about pay and, you know, lead paint in the house and things like that gets ported over to the securitization aspect of it? So it's really not a lot. I actually have capital markets people reaching out to me all the time being like, if you have a modern loan origination, system, you can solve my problem of I can't actually get any of the data or much of the data that underlines these instruments when I am going and securitizing them or trading them or whatnot. What generally comes out, as much banking technology still is today, is you export a big CSV of some of the data fields. You take a bunch of docs and you send them off.

And then that CSV, which they fancally call it tape, but really it's a spreadsheet, just gets ingested. And now you've taken a process that had 3,000 fields and hundreds of pages of docs. and you've boiled that down into like 50 or 100 fields that describe the mortgage, which maybe is for the best. Like, I'm not really sure that people buying MBS should be thinking about, you know, the specific credit profile of the thousand different mortgages that are chopped in there and put in. And so it's nice that there's some standardization. But it's definitely very lossy.

And I will tell you it is something that mortgage traders complain to me about a lot. So what's realistic? I don't, it doesn't sound like you'd ever get like true one-click because it's, you know, at a minimum, you're probably going to have to tell the front end who your payroll is and who your bank is and a few other things. What is a plausible version of if, you know, there's continual coordination among different banks, if Fannie and Freddie continue to update their technology so that, you know, it's a little easier. What could it look like if I were, say, in 10 years, I'm applying for a mortgage again? I think it's very reasonable to strive for a world where it is,

to your point, as close to one click as possible on the very front end, maybe you're talking about like a 10-minute application max where you connect some accounts. Once that's done, I think that what you should get instantly is one of basically three decisions. Hey, you are definitely clear to close. You're going to get your disclosures. And then we're just going to wait 10 days and we'll close you. Option two is, hey, you as a borrower are definitely clear to close.

But we need some additional information on the property. So you're going to wait 10 to 14 days. you're going to pay for the appraisal and we're going to close you. Or a three is basically, unfortunately, you know, we're not able to close you here. Some things you can do to improve your stance. I think that property is probably going to be the thing that even if you ask me 10 years from now, it's like it's really a question of there will always be those corner cases. It feels like where the GSEs are going to want to see an appraisal unless they're the big

credit profile change or if they get privatized. You know, there's all sorts of things that can happen in 10 years. But I think those three outcomes being 10 minutes away, fingertips wise, from the borrower, when you close in 10 days is very much attainable. And it's really what everyone in the industry is and ought to be working towards. Does blockchain solve this? And I mean that somewhat seriously. Because like I've often thought like one of the few real world applications of blockchain

technology could be in the mortgage assignation space where you have that sort of chain of title moving around constantly. But also I'm thinking like from a wallet perspective. if you could have like a personal profile that carried with it, you know, your pay and how much you're worth and et cetera, you could use that too. Yes. So those are two very interesting use cases. On the wallet perspective, the way that I think about blockchain helping here is it almost

lets you build like a more encompassing decentralized credit bureau. And decentralized is actually really important because I don't think the banks are super excited about the idea of helping build like a fourth credit bureau. Like they built three and now they pay the three for their own. data, which I think is a little bit difficult for them. And then, you know, the regulators are not super excited about decentralized credit bureaus, et cetera. And so I think the idea that each consumer could have their own key that unlocks, you know, access to all of their data on this decentralized credit bureau that all the payroll providers and financial institutions,

et cetera, are writing to is very much an idea that has legs. It is really hard to implement for, you know, a lot of similar organizational inertial reasons. But I do think that is a real use case for blockchain because it solves the incentives problem where people are basically like I don't want there to be one middleman with every consumer in America's financial data. And so blockchain lets you kind of like decentralized and split that up. So I think there's some really interesting avenues there that people can go down. And there are some companies, I think, actually looking at that. On the title front, what I usually tell people on could title be on blockchain, absolutely. Is it an interesting use case? Absolutely. The hard part of digitizing title is getting

3,800 counties to even move to like putting, you know, capturing the records digitally and not in the courthouse basement. Getting 3,800 counties to move to blockchain seems, further away than that, not closer. I don't know if I've ever mentioned it on the show before. I once had a gig right after college in which there was some company out in California doing some of his best as lawsuits. And they needed names of all these people who had been partied to some suit. They were maybe putting it together a database for lawyers.

And part of my job was to go to various county courthouses all around rural Texas in central Texas and go to the basement and just literally pull out files and ask for names. I'm just going to ask one last question, since Tracy hit one tech buzzword, which is blockchain, generative AI, whether it's in the field of scanning documents or understanding documents quickly, in your work right now, is there a substantive use that you're getting out of this technology? Yes, it is definitely, to your point, it's scanning and understanding documents. And so you can think of mortgage. The way that I think of at high level is it's a whole bunch of data and it's a bunch of rules.

And the rules are well defined by investors, the government, etc. And the data is just data. And so data and rules to, you know, a lot of this conversation should be a one-click experience. Like, we've known for decades how to run rules on data. And a lot of the problems come about because the rules are written in this 1,200-page PDF and there's a little gray and someone has to learn them. And the data comes in a bunch of documents and a bunch of, you know,

disparate places from the borrower. And so it's not structured. And so if you can bring structure to the data and structure to the rules, both of which generative AI is really good at, right? It can read the Fannie Mae selling guide and turn that into code rules. It can read a document and turn that into data point. If you can use generative AI to structure those two things, then you still have structured data, structured rules, and whatever rules the GSE set. So you don't have these compliance things with, oh, is AI underwriting below?

But we're seeing a lot of really promising results, taking the most cutting edge large language models and applying them to these documents, both to write the rules for us and to lift the data off the documents. All right, Mike, you, thank you so much for coming on all thoughts and explaining to us why we can't have a nice thing. Yeah, thanks for having me. That was amazing, Mike. You were the perfect guest. Thank you so much for coming on. Yeah, that was fun. Thanks for having me. Joe, that was really fun. That was really fun. I thought Mike was exceptionally clear at explaining how all this works. And although it's still annoying the process of getting a mortgage and lots of documents that I didn't read and attached my signature to, like, I guess I understand a little bit more why now.

Do you remember after the financial crisis, there were all these problems with loan documentation? And I remember, like, there's a big thing about assigning mortgages in blank that all turned into, like, court cases. Yeah. I kind of wonder. We did a great episode on that with David. Yeah. David Dian of the American prospect, like in 2015. What was the name of his book? David, Chain of Title.

Oh, I totally forgot about that. We did an episode with David Dian, Chain of Title, and how crazy that was. It was just the state of disarray in documentation after the mortgage. crisis. But you understand why it is when you still have, you know, so much at the county level and the county level, I guess for obvious reasons, not feeling any particular pressure to update or digitize or modernize or coordinate all of their systems. Yeah, that's really it, isn't it? It's sort of like a hodgepodge of state and county law. I feel like we're going to be waiting a while for a solution to this. Yes. And I've sort of hinted at it before on the podcast,

but for very arcane reasons that I'm not going to get into, I do have a loan that will need to be refinanced at some point in the next couple of years. You're very optimistic, Joe, about interest rates. No, I'm very pessimistic and I'm very anxious about it. But if I'm not optimistic about the path of interest rates, maybe I'll be optimistic that in a couple years the process is at least a little bit better than it was the last time I applied for a mortgage. We'll see. You'll have to tell me how many documents. like get mailed out and stuff. Although I guess most of that is on the sort of like lender and servicer side.

I'm not looking forward to it. Yeah. All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Allaway.

And I'm Joe Wisenthall. You can follow me at the stalwart. Follow our guest, Mike U. He's at Michael underscore you. Follow our producers, Carmen Rodriguez at Kermin. Dashel Bennett at Dashbot and Kail Brooks at Kail Brooks. Thank you to our producer, Moses Andam. For more Oddlots content, go to Bloomberg.com slash Oddlots, where we have transcripts, a blog, and a daily newsletter.

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