As I’m writing this blog post, the major global financial markets have experienced two weeks of down and up (mostly down) rollercoastering due to COVID-19 concerns. The S&P500 index has experienced its six largest point moves all in the first two weeks of March 2020, and the VIX – the very definition of volatility – is at historic levels, surpassing those seen during the crash of 2008. Leaders in the commercial and consumer lending markets are bouncing back and forth between trying to predict the next day’s movements to (and much more importantly) determining how to react to this movement: Is it a time to be aggressive or to hedge?
While no one can accurately predict the rise and fall of the markets, one area of preparation that often goes overlooked is how flexible and adaptable an organization is to fluctuating business volume and challenging environmental conditions. In the midst of an unprecedented crisis such as the spread of COVID-19, most corporate decisions are reactionary. Planning for the unplanned is an oxymoron, but there are two basic truisms that can be applied to most market-altering events:
- The ability to pivot is always helpful to either weather a bad situation, or leverage an opportunity; and,
- The same event that can cause a downturn for one market segment can offer an opportunity for another sector.
Let’s consider the financial impact of the COVID-19 pandemic. Amid a crisis of travel advisories and cancelled business travel, it’s understandable that major airlines have been hit with cancelled reservations and significant reductions in passenger-driven revenue. Yet, private charter jet services like WheelsUp and PrivateFly have seen commensurately higher demand from personal and corporate travelers that want an extra level of prevention and are not particularly price sensitive.
Similarly, in the business lending space, delayed purchasing decisions, and idled manufacturing facilities, have a give and take effect for SMB lending. Those organizations that process merchant cash advances, for example, may see their transaction volume decrease, while some of our SMB Fintech lenders are reporting higher application volume, coupled with lower approval rates.
Perhaps no funding sector has seen a greater impact than residential mortgages. With the Federal Reserve responding to market concerns by lowering prime lending rates, residential mortgage rates are close to all-time lows. According to the Mortgage Bankers Association Weekly Mortgage Applications Survey for the week ending Mar 6, 2020, volume was 192% higher annually. Mortgage refinancing applications spiked 79% from the previous week, marking the highest weekly jump since November 2008 and a 479% increase from the same week a year ago.
This sounds like a great time to be in the mortgage origination business, yet most lenders are not in a position to handle the influx of business. In a recent article on CNBC, Matt Weaver, the vice president of one regional lender Cross Country Mortgage stated “It’s absolute pandemonium. The industry is inundated with requests. Let’s put it this way, we are like Home Depot during a hurricane.”
The story goes on to explain how Cross Country has increased business hours and is trying to find more staff to handle the volume. We suspect many lenders are in the same predicament. However, if mortgage history teaches us anything, the origination environment may be diametrically different in 6-9 months. No matter how fast originators on-ramp employees and upgrade systems, it is difficult to pivot quickly if there isn’t built-in nimbleness to business workflows.
This challenge is not limited to regional lenders. Wells Fargo is undergoing the same on-the-fly reorganization: “We continue to hire underwriters processors and closers into our fulfillment group and we’re also executing on opportunities to shift team members from other non-fulfillment groups into our fulfillment operation,” said Thomas Goyda, a spokesman for Wells Fargo.
Both the Cross Country and Wells Fargo approaches to the mortgage climate are reactionary. While the regional lenders have the challenge of ramping up new employees, Wells Fargo’s human resource reallocation plan could lead to mistakes and sub-optimal audit practices.
At Ocrolus, we’ve seen firsthand how progressive Fintech lenders are able to create a nimble environment for loan origination and servicing. Flexibility was built out of necessity. Fintech lending is an industry that is just over a decade old and has grown as an alternative lending resource for individuals and businesses that didn’t fit into traditional credit scoring models used by depository lenders. Fintech lenders couldn’t grow based on the same models used by brick and mortar lenders: they needed to eliminate process lags and underwriting inefficiencies without compromising due diligence in order to operate and thrive as disruptors to the financial markets. As Fintechs have matured and their respective market share has grown, their practices are being adopted by leaders and innovators throughout the broader industry.
A key factor to flexibility has been the elimination of data entry bottlenecks; successful Fintechs don’t have underwriters keying in borrower information or performing “stare and compare” analysis of income, asset and identification documents. Instead they are using document digitization services and data aggregators to provide underwriters with actionable data. Replacing manual data entry and review with API-called data connectivity enables Fintech lenders to accommodate fluctuating loan volume on call, rather than scrambling to add, subtract or redeploy human resources.
Again, it is impossible to determine with certainty the direction of business markets and their commensurate effect, either positive or negative, on a lender. However it can be predicted that markets will change, loan volume will fluctuate and the need for resource flexibility will be paramount to weather downturns, as well as to capture opportunities.
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Vikas Dua is the COO at Ocrolus.