We always hear that technology will significantly change how real estate markets operate, and revolutionize an industry often regarded as an ancient mastodon. There is, however, one clever bit of real estate technology that’s been around for some time and has already transformed both the residential real estate markets and the national economy in a most disruptive fashion: mortgage analytics.
Simply put, a mortgage analytics platform automates processes for acquiring, managing, and securitizing mortgages (i.e. re-package them as mortgage-backed securities, or MBS). I happen to have a solid understanding of this technology because my partner built one of these platforms at a venerable investment bank.
These remarkable machines greased the engines of our economy for many years, allowing financial institutions to gobble up trillions of dollars in mortgages and recycle them as MBS. This kept interest rates low for homebuyers (a national priority during those years), fed investors’ MBS hunger, and brought in great margins for investment banks.
For those of you who don’t know, here’s how they work: Jane wants to buy a home and walks into her local mortgage broker to get a quote. The broker enters Jane’s data and, in a matter of seconds, gives Jane a few alternatives.
So, what just happened? The broker requested a quote from a few banks and, in generating their quotes, banks in turn sent Jane’s info all the way up to a trading desk on Wall Street. It is here where Jane’s quote was originated based on a variety of indicators (Jane’s credit score, zip code, LTV ratio, etc.). One of these indicators is Wall Street’s current bidding price for Jane’s mortgage note, which is in turn based on the price Wall Street can get for an MBS based on thousands of mortgage notes like Jane’s.
And so the story we all know unravels: Jane accepts quote and buys new home; bank takes mortgage and sells it to Wall Street; Wall Street repackages mortgage as MBS and sells it to insurance company. This all happens in a matter of days. Everyone keeps a clean balance sheet and generates riskless fee income. (Well, almost everyone. There are still those holding the MBS…)
No one can deny the efficiencies that this technology brings to the financial system. However, its primary weakness is also its core strength: its capacity to scale massively makes it a double-edged sword that can both fuel our economy and bring it to its knees.
Now, that’s what I call disruptive.