What can we expect for the future of the mortgage note investment industry with uncertain financial times? First, it is important to understand the world is not ending, it’s evolving once again.
I’m not a prophet and I could have never predicted COVID-19. But this piece which I originally wrote in 2016, is more relevant than ever.
The original piece titled “Foreclosure in a Gig Economy”, was meant to be an anchor for dealing with loss mitigation in a world of uncertainty. I wrote it in a time when new technologies were pushing our industry into unknown territory.
The good news is, the more things change. The more they stay the same. And the ideas, thoughts and solutions I wrote about four years ago, are more applicable than ever.
This isn’t meant to be some kind of a cheesy philanthropic initiative piece. Or a self-righteous attempt at encouraging soul searching, but rather a thought-provoking set of ideas that could potentially revolutionize our industry and help thousands in the process.
Here are the two main topics this article will address:
- How the proposed model (particularly in a COVID-19 world) can substantially change the behaviors of consumers, users, and borrows alike.
- How we can harness this model to insert new energy into our industry and help thousands avoid foreclosure through principles like trust and technology.
Background
In 2016, government programs aimed at preventing individuals from losing their homes like the Home Affordable and Home Affordable Modification Programs came to an end. Instead, the government tasked service providers with taking over the reins and implementing creative solutions to mitigate loss.
Foreclosure Prevention
“The foreclosure prevention programs established by Treasury, HUD and FHFA in response to the financial crisis have transformed the way in which the mortgage servicing industry has interacted with and assisted struggling homeowners,” said Mark McArdle, Deputy Assistant Secretary for Financial Stability at the U.S. Department of the Treasury.
“While MHA and other crisis-era homeowner assistance programs are ending, their impact will endure. Servicers and investors will need to leverage new or existing loss mitigation programs, but they should build on the best practices and guiding principles that have led to positive outcomes for all parties.”
The question that we should be asking ourselves as investment professionals is what does this mean for our businesses? How can we adapt our organizational structure and systems to address the new behaviors of consumers, users, and borrowers?
Before we delve into answering these questions, here are some ideas, topics and terms you should keep in the back of your minds:
– It’s about matching the “haves” with the “wants”.
- Using community co-ops and or platform co-ops as central hubs
- Harnessing collective accountability
- The role of micro-entrepreneurs
- How to use “reputational capital” and how it can transform the way we think about wealth, economy, markets, and personal identity in 2020
- How peer to peer relationships will become the new default to satisfy a diverse list of needs
- The growing influence of open-sourced technologies
- The role that collaboration, sharing and social participation will play in a post-COVID-19 world. These mechanisms will ensure that our society is able to thrive and grow in the aftermath of this crisis
And most significantly, how we can use technology to build trust between lenders and borrowers, helping people hold on to their homes while revitalizing our industry.
The Trust Litmus Test
If we look at online marketplace lending and peer to peer sites, default rates are substantially lower than those of traditional lending avenues. This could be related to technology’s role in creating trust between lenders and borrowers. The internet leaves no stone unturned in giving us information about individuals that we need to make healthy economic decisions. We can look at an individual’s business history, personal data, transactions, reviews, and more all at the touch of a button.
The internet, where everything is put out into the open for all to see, has probably been one of the most powerful trust builders when it comes to the mortgage industry because lenders and borrowers alike can evaluate one another and determine if the individual passes the “trust” litmus test.
What We’re Seeing Today
As I stated at the beginning of this article, this article isn’t just a social impact pitch (although the model I will share has the potential to help our most vulnerable clients), rather I believe that these ideas can completely change and improve the way in which we approach loss mitigation. Therefore I ask you, to forget everything you know about mortgages for the next couple of minutes and to approach what I’m suggesting with a completely open mind.
Today’s Economic Climate
Let’s start with the evolution of what we call the “Sharing Economy” and what it means in today’s economic climate. If we look back at the early 2000s when the recession completely disrupted the financial sector. We can see a number of new businesses and startups that start to emerge. Strange right? In the midst of a crisis, how can new businesses suddenly thrive?
Take for example startups like #Airbnb and #Uber which are some of the world’s most profitable companies today. Built on the concept of shared participation. Both of these ideas were born out of the recession. A time when people were looking to save money and make the most out of each dollar. Crises can be an incredible tool for creativity, pushing people to think outside the box. Find solutions for the broken systems that exist in the business ecosystem.
John F Kennedy once said: “The Chinese use two brushes to write the word ‘crisis.’ One brush stroke stands for danger, the other for opportunity. In a crisis, be aware of the danger but recognize the opportunity.”
In a COVID-19 world, this concept is more relevant than ever. Right now it probably feels like everything’s falling apart. But I also think in a few years we’ll look back and credit this period with inspiring us to create life-changing ideas.
So……
Sharing Economy
I started to think about what it would look like if we applied the Sharing Economy to the loss mitigation side of the mortgage industry. How could this affect our most vulnerable borrowers who are at risk of losing their homes?
But, before we explore this further, I recommend that you familiarize yourself with these terms:
Unused Value
This refers to the period in which products and services remain inactive. An example of this is a car, which is unused 92% of the time. Instead of leaving the car unused, why not make a profit off of this very expensive resource by sharing it? Companies like BMW are already doing this through car-sharing initiatives that charge customers who wish to use a car for a period of time.
Social Media
This is the lifeline that allows the sharing economy to exist. Social media refers to a series of open-source platforms that supply users with unlimited knowledge on a diverse range of topics. Allow users to interact with one another, and facilitate business transactions between people online.
Information Technology
The use of technology to store, retrieve, edit, and share information at little cost and with minimal experience.
Reputation Capital
The reputation maintained by individuals, based on the value of online and offline behaviors and transactions across communities and marketplaces. This is one of the biggest changes to our industry. Which has affected how we view status, wealth, markets, and personal identity.
Micro Companies
1–10 individual entrepreneurs who come together and establish companies fueled by creativity and innovation.
Social Responsibility
An ethical framework in which an entity (an organization or individual) is obligated to act for the benefit of society at large. Social responsibility results in a balance between economics, society and a range of other ecosystems.
Presence (in virtual reality)
Derived from the original term “telepresence,” presence enables people to interact with one another via technology without moving or crossing physical boundaries.
Platform Co-Op
A digital platform — a website or mobile app — which provides a service or sells a product and is collectively owned and managed by its members.
One Man’s Hardship is Another Man’s Blessing
Sometimes we forget that the majority of people who default on their mortgages aren’t criminals. They’re people who have fallen on hard times way beyond their control and guess what? It could easily be one of us.
Hardship and pain are relative to each person. We don’t know to what extent a person is suffering and we’re not in a position to decide what meets our “hardship meter”. Disqualifying potential borrowers because of what we determine to be below the hardship threshold is not just unfair but can be unethical.
Because so many borrowers have experienced this kind of humiliation, they’ve lost faith and trust in the mortgage industry. So how can we fix this?
Putting the Us in Trust
One of the basic principles for establishing trust in a relationship is communication. Raise your hand if you’ve ever had a borrower ghost you after receiving a phone call from an unknown number. We’ve all been there. When communication isn’t as smooth, clear or open as it should be, both sides suffer.
That’s why we’ve made it a priority to create platforms for our lenders and borrowers which are easy to navigate. The easier and more seamless the avenues for communication are, the more likely both sides will be able to reach a resolution.
An Empathetic Approach is Needed
We have to remember that borrowers who are on the verge of defaulting on their loans have often reached the lowest point in their lives. As human beings, we should always keep this in mind and approach their circumstances with the utmost respect and sensitivity. As professionals, we should never pursue intimidation tactics, but rather do our best to help them move forward. Unfortunately, some of the systems meant to help our most vulnerable customers avoid foreclosure, have had the opposite effect.
A good example of this is the HHF (Hardest Hit Fund), a federally funded program which was created to help individuals catch up on mortgage payments. In theory, this sounds like a wonderful initiative which can ensure that individuals avoid losing their homes. In reality, the process is extremely complicated, making it difficult for applicants to get the financial assistance that they desperately need. It took almost a year of hard work to secure HHF funding for our first borrower. This shouldn’t happen, especially when something as important as a home is at stake.
Let’s Make Trust a Thing Again
Let’s be real. All of us could be a lot better at giving our customers the confidence and support they need to trust us. We’ve seen a decline in trust amongst some of our industry’s most vulnerable customers and we need to do better.
How can we explain this? Well, increased regulations and red tape mean that big institutions to small there are huge increases in spending avoiding breaking the law, leaving little to no resources to invest in R&D. R&D helps develop the necessary communication platforms and mechanisms in order to help customers know that they can trust us and there are better ways. Instead, our methods and systems remain stagnant, evolving at a snail’s pace. This leaves many of us and our clients (specifically in fintech) frustrated and disappointed.
Technology is Pushing Us to Evolve & Adapt
But not all hope is lost. There have been breakthroughs in technology that are pushing industry leaders to evolve and adapt to the needs of our current ecosystem. I recently spoke with the CEO and co-founder of DIGS, Patrick McLoughlin. His company is a financial platform for homeownership. In our phone conversation, I was blown away by what his company is doing. Particularly, because he’s making the very thing I’ve been dreaming of a reality.
Companies like DIGS are a huge step in establishing the trust that we’ve been lacking between lenders, investors and borrowers. Creating easy to use platforms which allow for open and safe communication between users.
You know who else is in a position to build trust in our industry? Micro companies. Thanks to increased flexibility and outsourcing, micro-companies have enough resources to navigate red tape and regulations. And invest in the R&D needed to adapt to customers needs.
Treating trustworthiness as our most important priority can dramatically transform what was once a traumatic and unpleasant experience for customers, into a beacon of hope and progress.
With Great Power Comes Great Social Responsibility
This is where the social responsibility and “let’s be decent human beings” pitch comes in. What I’m about to suggest is not only an opportunity to add some positivity into the world can ultimately improve the way in which we conduct business.
The idea that our actions matter and that our businesses can benefit society as a whole should guide our organization philosophy
Socially Responsible Investing with Mortgage Note Investing
In the past few years, the concept of what we call “social responsibility” has permeated from sociology classes and mindfulness gurus into our industry. And that is a very good thing. Studies in human psychology have shown that a sense of responsibility to our community, motivates us to work harder and be more creative. Thanks to technology, it’s easier than ever to incorporate social responsibility into our businesses. By staying attuned to our clients’ needs and letting them know that we’re here for them. Trust is a huge part of this process and in helping our clients understand that they can depend on us.
This brings us to to the concept of Reputational Capital:
As I mentioned earlier, reputational capital is based on the value of an individual’s online and offline behaviors.
The way in which people view our reputational capital will ultimately determine whether or not they trust us. To put it mildly, the internet does not forgive nor forget. If you do something dishonest, manipulative or shady, thanks to the world wide web, it will follow you forever and your customers will find out about it. This may sound daunting but it also pushes us to be the best version of ourselves, both as human beings and as professionals.
There’s No Time Like the Present
Think about someone you know who has recently retired: a parent, grandparent or neighbor. To put things into perspective, there are more than 10,000 baby boomers retiring every day.
They’ve spent their whole lives working and raising families. But suddenly they have a lot of time on their hands and for many, the golf course or babysitting their grandchildren won’t cut it. Now think about what they could be doing with their time. Why should their talents and years of professional experience go to waste? This is the perfect opportunity to take advantage of their “unused value”. Imagine how their passions and skills could benefit our industry and help lots of people along the way.
But this idea doesn’t only apply to baby boomers looking for ways to pass the time.
So many people across the United States have extra hours that they would like to fill. And with COVID-19 keeping large numbers of Americans cooped up in their homes, this is more relevant than ever.
Companies like Task Rabit which “matches freelance labor with local demand” have been especially successful at finding ways for people to make the most of their time. Pair the desire to maximize the use of time with a passion for helping others. And boom, we may have found the next big thing for our industry.
Impact Communities through Mortgage Note Investing
Let me help you visualize this. John, a moderately successful communications specialist, finds himself with some free time in his schedule. And is also looking for ways to impact his community. What could be more meaningful than potentially helping someone save their home? All you need to do is to take one look at Upworthy’s Facebook feed to understand how much people love random acts of kindness.
Let’s Apply This to Loss Mitigation
A great example of how this could work in our industry is LetGo, a mobile app that connects local sellers to local buyers, based on where they live. The process is extremely simple. Once a user finds a product that he/she is interested in he/she can then view the seller’s entire history with the touch of a button. This includes everything from past transactions, to reviews from other buyers, to a list of all items sold. If there is any additional information a customer is looking for, they can then contact the seller directly. This kind of communication automatically creates a level of trust between buyers and sellers.
Technology & the Mortgage Note Industry
Apps like these also allow us to avoid situations that make us comfortable or put us on the spot. As a personal anecdote, I hate talking on the phone. And if you make me do it in order to finalize a purchase, you’ve lost me.
Imagine if we could apply this kind of technology to families struggling with mortgage payments. Let me paint a picture for you. This kind of platform would be open to anyone who would meet certain qualifications and could serve as a sort of virtual matchmaker between lenders and borrowers. Individuals who are looking for financial support to save their homes could instantly be connected with those who are interested in earning money while helping a worthy cause in the process.
Data Privacy through Mortgage Note Investment Fund Platforms
And all of this, while protecting the privacy of users. So how will this work? Borrowers will be able to anonymously answer questions that pertain to their financial circumstances such as “are you on the brink of missing your mortgage payment?” Potential “saviors” who see these responses can then contact the borrower and offer assistance in some form. This data gathered is extremely valuable to big banks portfolios as now they wouldn’t just be reacting. They could put a plan in place before symptoms of default start showing up. Since it’s generally too late at this point.
This is the first step in building a trustworthy and open relationship between all parties. That’s where we come in to help facilitate the terms and conditions needed to finalize this agreement. Market research supports our idea that borrowers are much more receptive when an intimate and sympathetic approach is used.
A platform like this would be ideal for micro-companies who unlike larger institutions can rely on outsourcing and freelance workers to develop the proper technological systems for this kind of a project while navigating all of the red tape put in place by regulation guidelines.
So, How Do We Make This Happen?
The goal would be to match the “haves” with the “wants”, by using the platform to connect borrowers, lenders and small investors etc, all while protecting the dignity and personal identities of our most vulnerable users. We could also take it a step further by adding a level of competition to the platform, by encouraging lenders, investors etc to submit proposals on courses of action which are then reviewed by borrowers. This would be the equivalent of the way in which Lending Tree creates a competitive environment for mortgage companies.
Financial Independence through Mortgage Note Investing
Most importantly, this element could empower and liberate borrowers by giving them the independence to make their own choices and control their own fate within reason. On the flip side, a platform of this kind could also persuade big companies to better spend their time and resources dealing with their business plan and market, instead of focusing on the kind of loans or situations that don’t make sense or fit into their bucket.
As this network grows, we can also consider offloading small to medium balance loans to micro-investors or micro-entrepreneurs.
Scenario 1:
Harry is a recently retired accountant, who’s looking to earn a bit of money on the side, so each morning, he starts his day by logging on to the platform and looking to see if there are borrowers that catch his attention.
He comes across an ad that says “hardworking individual that got in over his head and lost his job is looking for some help getting back on his feet. I have a wife and four kids and am reaching out to any kind soul who could help me avoid losing my home.”
Harry is moved by this plea and then contacts the anonymous borrower. Once they both agree to move forward, the anonymous buyer can connect Harry to a specific bank with a click of a button.
The bank or institution can then choose to sell this debt to a private fund like the MWMfund and Harry can take over the debt. Before notices like these are ever put on the site, they have already been fully audited and reviewed to ensure that all of the details are correct and in full compliance with regulations.
Valuable Data
The data that is gathered from each user can also be extremely valuable to big institutions who can access the information at a later time to assess whether or not to grant the borrower a loan or assistance.
This kind of platform is well beyond a cry for help from homeowners on the brink of foreclosure. It’s an opportunity for those who have reached the lowest levels of despair to take ownership of their lives and determine their own destiny.
Some of you may be worried about potential borrowers taking advantage of this kind of platform. But collective accountability and a well-structured ecosystem will ensure that those who attempt to undermine the platform be held responsible.
It would be naive to discount those who don’t have the best intentions, but I’m a cautious optimist who believes that there are more good guys than bad guys. These are exactly the kind people we’re trying to serve: Low to middle-income folks who are just looking for one more chance to keep their families afloat.
The Proof is in the Pudding
We put this idea to the test through a case study of 100 small balance NPLs nationwide which took place over the span of five-plus years. During this time the question was should we scale our efforts? The answer was yes.
Our team created a fund (Regulation A+ Tier2) MWMfund.com which allows us to crowdfund some of these efforts, create an investment for all investors to participate directly online. We’ve been buying the kind of notes mentioned in this article and applying a concept which I like to call “The Frankenstein System”.
The Frankenstein System for Note Investing Strategy
This system consists of gathering a slew of information and developing SOWs, flowcharts, a list of potential strategic relationships, relevant servicers etc., creating an in-depth database that allows us to make educated decisions about how our platform should function. In tandem, for the past two years, we’ve been developing a platform called Paperstac.com which will facilitate the resale of loans between all kinds of investors from big to small.
A Work in Progress…
It’s definitely a work in progress, so far both platforms (MWMfund.com and Paperstac.com) have proven to be very effective within the small scope we’re using it for, specifically in handling online digital transactions from a-z and in building trust between(investors) along with bringing much-needed transparency to processes.
Thank you for reaching this point in the article and for actually listening to what I have to say. This article was more than just me thinking out loud, but a call for all of us to rethink the way in which we approach our industry. This is in no way a panacea but I would love for you to comment on this article and share your own perspectives, thoughts, and constructive criticism so that we can brainstorm and work together to help millions of Americans hang on to their homes and create a better economy.
We at the MWMfund.com are on the path to making this happen, but we need your support to get to the finish line.
Technologies & Business Practices to Help Revolutionize the Mortgage Note Industry
Before I wrap this monologue up, here is a list of technologies and business practices that could substantially revolutionize our industry in a post COVID19 world.
Remember the world is not ending, it’s evolving and it’s time we evolve with it.
1.) Virtual Reality
I just had my first virtual reality experience and it was more than just trippy, it was mind-blowing. When participating in a virtual reality experiment, we feel what is called “presence.” Presence is used to describe the way in which we experience virtual reality as if we were experiencing the moment in the real world. VR can evoke very real emotions like empathy, happiness, or anxiety. I recently read a story about a VR film about a girl in a refugee camp which was shown to world leaders at the World Economic Forum in Davos. Some of the leaders were moved to tears without ever meeting the girl in person.
Imagine what this would mean for our industry. In 10–20 years we could create virtual reality opportunities in which borrowers share their personal hardships with lenders in a format which makes you feel like you are sitting right next to them. Think about what this could do for building trust and personal relationships.
2. Asset Tokenization
The process of converting all kinds of physical assets (such as real estate, art, wine and cars) into digital assets on a blockchain.
3. Digital Currency
Yes, it’s time to start taking this seriously. Physical money is just dirty and spreads germs like crazy (shoutout to Covid19).
4. Virtual Meetings and Conference Technology
Self-explanatory. God bless the people at Zoom.
5. Telemedicine and Healthcare
Can potentially save millions of lives.
6. Blockchain (as related to healthcare)
A report by BIS Research suggests that health-related blockchain spending is expected to climb to $5.6 billion by 2025 — up from $177 million in 2018. Blockchain has a wide range of applications and uses in health care, including managing patient records, coordinating medical supply chains and streamlining clinical trials.
The Centers for Disease Control and Prevention (CDC) uses blockchain to monitor diseases and report outbreaks in real-time and is presently working with IBM to develop a blockchain-based surveillance system so that public health agencies can more effectively gather data about patients and prescriptions.
7. Online Fundraising
Using online platforms to raise money isn’t just a nice idea, it’s the future of our entire industry. Raising capital, virtual deal rooms, and online roadshows may be hard for veteran investors to swallow, but they will become a staple for anyone dealing with fundraising and investments in the years to come.
I’ve left you with a lot of food for thought, but hey, it gives you something to chew on while in quarantine. Stay safe!
Have questions about investing with MWMfund? Reach out to us at hello@mwmfund.com.
Be sure to check out The MWMfund Learning Center for more educational content.
