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Hi, fintech fam! 💜
I hope you had a fabulous long weekend! The snow is falling in NYC. ❄️
As we commemorate Martin Luther King Jr. this time of year, I am reminded of his wise words:
"Economic injustice is the inseparable twin to racial injustice."
His words highlight the crucial role that our industry plays in advancing society.
In 2018, I was a reporter covering the mortgage industry just a decade after the Great Recession.
It amazes me to see how little has changed since then.
So, in today's column, let's explore the potential of fintech in rewriting the (outdated) mortgage system.
Plus, showcasing fintech companies that have found opportunities to innovate in this critical sector of our economy.
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INNOVATION
Rethinking Mortgages: Fintech's Answer to an Outdated System
MLK JR
Our mortgage system plays a crucial role in determining who can achieve financial stability, secure a place to call home and build generational wealth over time.
With the rise of technology, those opportunities should be wide open for all Americans.
Unfortunately, it's not.
Our economy has totally transformed in the last 50 years, but mortgages have remained largely unchanged.
Updating our system to serve everyone in America better will profoundly advance us in having a more ethical economy.
With home prices soaring and affordability becoming a distant dream, it's time to question whether the very mechanism designed to make homeownership accessible is now a hindrance for many.
And discover if fintech paves the way for a more accessible and ethical mortgage system.
Let's dive in.
Rising Rates
We must understand the current housing landscape to understand where technology fits into the equation.
Mortgage rates are on a relentless climb. The average interest rate for a 30-year fixed mortgage hit 7.38% last week, with the rate for 15-year fixed mortgages increasing to 6.46%.
This spells trouble for 63% of American homeowners paying off their mortgages.
Especially for low and moderate-income families, the rate spike translates to an unwelcome surge in monthly payments.
While the broader economy might justify these rate hikes, it's nothing short of a barricade for those aspiring to own a home.
High rates are just one issue with mortgages that could hinder Americans from achieving home ownership.
The price of a home often exceeds the amount of money that most Americans save.
Mortgages exist to allow these individuals and families to purchase a home with a small down payment, receiving a loan for the remaining balance. But costs remain a big issue.
This means the heart of the issue lies in affordability.
Affordability Woes
COVID has laid bare the crisis, showing that the problem isn't just recent; it's deeply rooted.
The Federal Reserve Bank of Atlanta's revelation that a median-priced home demands almost 35% of a household's yearly income is staggering.
For those paying over 30% of their monthly income on housing, the Department of Housing and Urban Development deems them "cost-burdened."
The question arises: How can families save for a down payment when basic living costs are skyrocketing?
40% of families in America have no financial margin, and they can't even afford a $400 medical bill or emergency.
So, the idea of being able to save a 20% down payment is almost unimaginable.
And again, it goes back to the fact that the consumer is squeezed more than ever – food costs are rising, energy costs are rising, and rents are skyrocketing much faster than incomes.
All of those factors get in the way of families being able to save for a down payment.
The cost factor is also why many renters wonder if they'll ever be able to move from renting to owning.
Downpayment Assistance
While downpayment assistance programs exist, they are a drop in the ocean.
The lack of standardization and insufficient funds make them less effective.
The failed attempt in Congress to enact a substantial downpayment assistance package for first-time homebuyers in the Build Back Better debate only underscores the systemic shortcomings.
The absence of small-dollar mortgages, or loans issued for less than $100,000, exacerbates the problem.
With higher denial rates and comparable costs, lenders favor larger loans for the revenue they bring.
For example, it costs the same amount of money to process a $700,000 mortgage as a $70,000 mortgage.
But if lenders receive fees and interest based on the loan amount, they'll get less revenue on the smaller mortgage loan.
This preference leaves affordable homes in the hands of profit-driven investors, pulling them out of an already scarce market for smaller, less costly houses.
Credit Scores, Discrimination, and the Unleveled Playing Field
Even if you can afford a mortgage, qualifying for one has become a steep climb.
Scarred by the 2008 financial crisis, lenders and investors got very tight about their underwriting criteria and have kept them at this reactive level, disproportionately affecting those with lower credit scores.
A three-digit number shouldn't determine the standards for homeownership and shouldn't put a title on anyone, especially since circumstances are individual, not aggregate.
One of my favorite quotes from Tori Dunlap's book, Financial Feminist, is:
"Personal finance is about 20% personal choice and 80% circumstantial."
Credit scores do more to reflect how much privilege and personal wealth you have than anything else.
And despite the many regulations designed to prevent lending discrimination, racial bias is still prevalent in the mortgage industry.
According to the most recent Home Mortgage Disclosure Act data, denial rates for home purchase applications were:
18.1% for Black applicants
12.5% for Hispanic white applicants
6.9% for non-Hispanic white applicants
9.7% for Asian applicants.
Expecting communities that have not historically had the privilege of financial liberties to be financially secure when making one of those essential purchases of their lifetime is like expecting an athlete with no training or coaching to win the Olympics.
So, what can we do to become a part of the solution instead of exacerbating the problem?
Create new systems to determine someone's worth.
And we are leveraging technology to overcome systemic barriers preventing specific subgroups from achieving home ownership.
A great example is the Black-owned fintech company Ready Life, founded by Ashley D. Bell and overseen by Dr. Bernice A. King (daughter of Dr. Martin Luther King Jr. and Coretta Scott King) as Advisory Council Chair.
Dr. Bernice A. King
Discrimination between the housing and banking sectors is an issue Dr. Bernice King has long been serious about influencing.
So, she teamed up with former White House Policy Advisor for Entrepreneurship & Innovation, Bell, to change the mortgage loan industry with an all-new fintech platform:
Ready Life, launched in July 2022, offers a way to homeownership that excludes credit scores from eligibility requirements.
How It Works
Ashley Bell, the visionary behind Ready Life, launched the fintech startup with a bold mission—to bridge the racial wealth and homeownership gaps that persist in the United States.
The strategy? Redefine the criteria for mortgage approval by shifting the focus from credit scores to a good rental payment history.
Ready Life's approach involves using its banking system, via a Visa card functioning as a debit, to track on-time rental payments for at least six months.
This unconventional method aims to prove the cash flow of potential homebuyers lacking a traditional credit score.
The truth is that traditional credit scores are not very good at showing how well someone can pay their bills.
This means that many people who could benefit from financial services are being left out.
By leveraging blockchain technology and partnering with Fannie Mae, Ready Life is challenging the status quo and working towards turning 100,000 renters into homeowners.
The Credit Score Conundrum
Jay-Z
As Ready Life targets homeownership barriers, another Black-owned fintech company, Altro, takes on the credit-building challenge.
Altro, a no-cost credit-building app, incorporates nontraditional payment histories, such as streaming subscriptions like Netflix and Hulu, to help users build credit without encouraging more toxic consumerism.
Michael Broughton, Altro's CEO, draws on his experiences growing up in community-driven societies in Japan and Korea to fuel his mission of bringing communitarianism into the fintech ecosystem.
Altro's community-focused approach has attracted investors like Jay-Z's Marcy Ventures, enabling the company to raise funding for its Series A.
While both Ready Life and Altro bring fresh perspectives to the fintech landscape, it's crucial to recognize the broader context.
The traditional credit scoring model, established in 1989, has faced criticism for perpetuating systemic inequalities.
People and communities of color have borne the brunt of discriminatory lending practices, leading to damaged credit profiles.
With its algorithms and innovative approaches, fintech has made strides in reducing discrimination, but challenges persist. And those challenges open the door to opportunities to build.
Whether it's enabling homeownership for marginalized communities or reshaping credit building through nontraditional means, these companies are on a mission to redefine financial inclusion through technology.
Additional Resources:
Check out this episode of Humans of Fintech, where Altro's founder, Michael, and I chat about major trends like education, community building, and rewriting the rules.
Morty, a fintech company founded by Nora Apsel, is tackling the mortgage system. Listen to our conversation to understand why mortgages and homebuying lag behind other financial services innovations.
WTF ELSE?
Payments in 2024: Five predictions for the year ahead
X plans to launch peer-to-peer payments in 2024
Mastercard unveils AI mentor for small business owners
Airwallex sets up for IPO by 2026
Pier banks $2.4M to launch ‘Stripe for credit’
JOBS
Full Stack Software Engineer & Founding Marketer, Plenty:
Plenty, a fintech startup, is creating a place for families to build wealth together. The platform is designed for couples who want to combine their lives and work towards their financial goals as a team. Plenty is currently hiring 2 full-stack software engineers and a talented marketer to join their founding team.
Want an intro? Reply to this email, and I’ll connect you to Plenty.
I WANT IT, I GOT IT
👀 Today’s Watch: Sleep is your superpower. Truly, watching this talk reminded me how critical it is to get sleep. Our society glorifies being able to function on less sleep, but you’re really operating at a deficit without proper sleep.
🍣 Today’s Eats: Celebrated a dear friend’s big 40th bday at Insa for Korean BBQ followed by karaoke until 2 AM. What’s your go-to karaoke song?
FINTUNES
Guess who just released her first solo single in three years? It's Ari! And let me tell you, she's totally channeling Paula Abdul's vibes with this one.
That’s all for now! Stay safe, everyone. Hug your loved ones. See you Thursday!
Love,
Nicole
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