Quicken Loans has managed to cause quite a stir with their Super Bowl ad marketing their new app, the Rocket Mortgage.
The commercial touts the reasons why homeownership advocates support increased homeownership. The justification that housing leads to a stronger economy squares with both conservative justifications for a market economy and progressive efforts to increase homeownership for poor and racial minority households. One can argue about the wisdom of making this reasoning explicit as a marketing strategy; but, the ad makes explicit what lots of people already think (part of me wonders if the ad wasn’t aimed at consumers as much as preempting policymakers who might want to regulate interstate products like Rocket Mortgage).
Unsurprisingly, critics pounced on the idea that a smartphone app foretells the return of the housing crisis. I think that they might be right, but for the wrong reasons.
The Rocket Mortgage app draws data from a number of databases to let potential borrowers know how much they could likely get in the form of a mortgage loan. Because underwriting must be at least somewhat dependent on the underlying collateral — the house the borrower is purchasing — the app seems more like bank pre-approval than a guarantee of a loan. And just as pre-approval from a bank does not lock consumers into a loan from that bank, most people end up using the bank from which they get pre-approval. Rocket Mortgage seems to want to do the same. But Quicken Loans realized that most people do not shop around after getting pre-approval; they just apply with the institution who pre-approved them. (If I am wrong about actually granting a mortgage not based on underwriting the underlying collateral, then this is a huge problem.)
The fact that the app is not, itself, a mortgage application undermines many of the criticisms that came out of the commercial, like Dave Weigel’s hilarious (but incorrect) tweet below. While it’s true that lax underwriting standards helped cause the financial crisis, if the Rocket Mortgage app does not actually provide a mortgage then the critique of the app as leading to lax underwriting standards falls short.
Rocket Mortgage: Let’s do the financial crisis again, but with apps!
— daveweigel (@daveweigel) February 8, 2016
That does not mean, however, that the Rocket Mortgage does not cause problems for the economy. The problem derives from the fact Quicken loans wants to increase the market share of people using the actual Rocket Mortgage (not the app). The app provides nothing but a clever (and expensive) marketing device to drive more people to their mortgage product.
At some point, having so many mortgages housed with a single company will be dangerous unless one of two things happens: Quicken Loans holds much more capital in reserve or they find a secondary market to which to sell the mortgages. Capital reserves will limit Quicken’s ability to capture a larger share of the mortgage market. They could bundle their mortgages into residential mortgage backed securities (see, The Big Short). The market for residential mortgage backed securities has shrunk massively, but with enough volume it’s possible that the Rocket Mortgage could create a market to provide an incentive for more players to re-enter that market (let’s hope this time the CFTC regulates them).
If they go the route of not holding the mortgages on their own balance sheet, the re-selling is where the real risk to the financial market comes. Quicken Loans becomes a pass-through; their profit will come on the flow of mortgages that they process, not on the profit the loans produce. They have first-mover advantage and will likely capture some more of the market share; but they won’t be in the position of being the only company to offer these mortgages for long. More companies will attempt to operate in the fast pre-approval market and each of them will be racing to gain market share. They, too, will want to pass the loans through their books and then sell the loans to other firms.
If this comes to pass (which it might not because I am not a housing economist or regulator), the business model for these firms requires selling a constant flow of mortgages. This will create incentives for the underwriting standards to decline because there will not, all of the sudden, be a surge of borrowers who are prime risks. As Bethany McLean and Joe Nocera write in All the Devils Are Here, this incentive is what turned Countrywide from a relatively well-respected lender into the firm that — more than any other — contributed to the mortgage meltdown.
Let’s hope both the market and financial regulators are more up to the task to regulating the market this time around.