Mayela and Ben Scott couldn’t wait to refinance their home. They had purchased it in 2014, when they were expecting a baby, and were only able to make a small down payment. Their FHA mortgage came with a steep monthly insurance payment.
By early 2017, they thought they were ready. The value of the home had increased, and the couple had built up some equity, bringing their stake in the house over 20% and qualifying them for a conventional loan with no monthly mortgage-insurance premiums.
Refinancing also seemed like a chance to try something different. “The original process was eye-opening because I had no idea all the financial reporting that went into it,” Ben said in an interview. “But I did feel the process was a bit archaic given that you can do everything else on line. I remember coming away thinking, Did we need to have four or five meetings with a lender?”
Then a high-school classmate of Ben’s mentioned on social media that he’d just worked with a startup called Morty to refinance his mortgage. Intrigued, Ben and Mayela contacted Morty, and completed the refi “piece by piece,” uploading documentation and e-signing forms whenever they found a few minutes between work and taking care of their toddler.
The Scotts’ monthly mortgage payment fell from $3,100 to $2,600, and the entire process was completed on their schedule. There hadn’t been anything wrong with the original mortgage process, which they completed with a local mortgage broker recommended by family, they said. But there was something not quite right about it, either — a sense that the endless paper shuffling wasn’t necessary for compliance or regulation. It felt like make-work.
“It almost seemed to me that the system was in place to justify [the broker’s] position,” Ben told MarketWatch.
‘Kayak for mortgages’
Morty was founded in 2016 by Brian Faux, a mortgage-industry veteran, and Nora Apsel and Adam Rothblatt, both programmers. Rothblatt and Apsel were both interested in online consumer marketplaces, and Faux wanted to wring the inefficiencies and the patronage out of mortgage lending.
(It’s worth noting that none of the three founders, all 32 years old, has ever taken out a mortgage or bought a home. Here’s Rothblatt on why: “The millennial generation are now the single largest segment of first-time home buyers, and urban dwellers still lag behind, so statistically speaking we will all buy eventually, just later, and probably more expensive homes.”)
Faux sometimes describes Morty’s business model as a “Kayak for mortgages.” Most people know mortgages can be obtained online — thanks in part to the aggressive marketing of Quicken Loans and others — but are less aware that most online providers are lenders that offer only their own products. Morty currently works with 12 lenders and can offer hundreds of products to any borrower.
The founders want Morty to be as self-directed, or not, as customers want it to be. They still remember the email from a customer who’d completed a refinance in nine minutes and was convinced he’d done something wrong. Borrowers who don’t want or need to talk to a Morty employee never have to — but they’re welcome to ask for help.
What the founders are evangelical about is bringing transparency to the process. They want borrowers to understand what’s going on, and how all the mortgage-market players are making money from the transaction. They want Morty to be not as much a salesman as an “honest broker.”
The person who helped the Scotts with the original mortgage may have been a mortgage broker — a category of professionals that’s been heavily regulated since the financial crisis. Or he may have been what’s often called a loan officer.
Anyone who brokers a mortgage is paid a commission on the mortgage that’s a percentage of the loan and often also profits from an administrative fee, which can exist under all kinds of names: as “rate-lock fee” or an “origination fee” and so on. Morty’s fee is equivalent to 1.5% of the loan amount — and it’s paid by the lender.
As Rothblatt put it, that jargon makes it impossible for borrowers to do an “apples-to-apples comparison.” Phrases like “rate-lock fee,” to many borrowers, are meaningless.
“It’s a zero-sum game — the lender’s going to make their money, it’s just a matter of what they call it and where it is,” he said. “It’s completely opaque to the borrower, and the only thing that they understand is how it’s being described to them in a very salesman-like way.”
Faux had left Washington and was working for a lender in Connecticut when he connected with Rothblatt, who convinced him to try something new. Shortly after, Apsel joined the effort — and, shortly after that, they were selected to participate in the Techstars venture-capital incubator funded by Barclays. Morty has raised $3 million from investors including Techstars, MetaProp, SV Angel and others.
Jenny Fielding, the Techstars manager who recruited the trio, told MarketWatch that it was the founders, even more than their product, that made Morty compelling. “I thought the product was interesting — they’re doing something that hasn’t been done before — but the most exciting thing was the three of them. Brian with his incredible background in D.C., and Nora and Adam being stellar developers. The support and respect they have for each other was unprecedented.”
That’s not to say Fielding isn’t focused on the scale of the opportunity in Morty’s business plan, which was reinforced when she discovered her bank was of no use lining up financing when she was buying a co-op in New York. “I have perfect credit, I make a really good income, I literally have been a private client for 30 years, and they still couldn’t help me with a mortgage. I just thought, seriously? This is so broken.”
Fielding was stuck going to a broker. As she put it, he “was nice, but I had no idea what was going on behind the scenes, no idea who he was making deals with.”
‘What do people really want?’
The ranks of mortgage brokers thinned considerably after the financial crisis set of 2008, for which they shouldered a good bit of blame. Brokers originated fewer than 10% of all mortgages in the fourth quarter of last year, according to Inside Mortgage Finance, down from about 30% in the years leading up to the crisis.
Still, other players in the lending space behave a lot like brokers do, steering borrowers to a particular lender or type of product.
Fred Kreger, who heads the National Association of Mortgage Brokers’ board of directors, said he has watched the rise of technology-first companies like Morty with some skepticism.
“What do people really want? If they’re going to be investing the largest amount of money in their life, they want a person behind it,” he said in an interview. “The danger is financial services being commoditized. The consumer only knows what they know. They don’t know every product out there. If they do, great. Go online.”
It may come as a bit of a surprise that the three millennials who’ve never owned homes and want to bring lending into the digital age have thrown themselves into the intricacies of personal-finance counseling that go along with mortgage shopping.
Apsel ticked off a laundry list of borrower considerations: How big should a down payment be? Should closing costs be rolled into the mortgage? Should borrowers necessarily buy homes that are as expensive as the amount they’re approved for?
As Rothblatt put it, “We only reserve the human component to the meaningful part, which is the hand holding and the advice and the expertise in the products. We want to build an education into the product as well, but we think there will always be a role for the human adviser and the expertise.”
A ‘scary’ transaction
But most participants in the mortgage industry agree it’s more than prime for disruption. “It’s pretty clear there’s a need to do something about the fact that no one shops for mortgages,” said Ellen Seidman, a senior fellow at the Urban Institute’s housing finance policy center.
“This is an incredibly difficult, scary, emotional, transaction. You only do it a few times in your life. There’s an enormous trust factor. You want to work with someone you can trust. One of the things that makes a good salesperson is being able to gain trust. Some earn it, some don’t.”
It can be hard to pre-shop for mortgages before going out on the market looking for property, in part because the information can change, and in part because pulling credit scores too many times can be a red flag for lenders. But by the time most buyers have found a property to bid on, they’re too frazzled to start shopping for a loan.
Dave Stevens, president of the Mortgage Bankers Association, the influential lobbyist for lenders, hired Faux for one of his first jobs in the mortgage business — as a summer intern at Freddie Mac FMCC, +1.56% — and then kept on hiring him, right up to a top-level role at FHA .
“I never count Brian out. I always assume he’s going to be successful,” Stevens told MarketWatch. “He knows that fintech is clearly a much larger part of the mortgage finance system, and millennials are far more likely to shop online than with some mortgage guy in a suit.”
Still, Stevens said there can be inertia rooted in the layers of bureaucracy that the residential real-estate industry has set up.
“I still believe most real-estate agents are going to recommend their person unless the buyer comes in with a predetermined selection and you don’t want to upset the apple cart. The secret sauce is in the generational shift with millennials. Are they going to keep using the traditional methods that we’ve been using all our lives or is there going to be a break?”
The trend seems clear, Stevens said. “All markets shift, and this is a pretty archaic market. The vast majority of financial products emerge into online.”
Going beyond early adopters
Seidman sees parallels, she said, between the mortgage-brokerage model and the current tussle over the fiduciary rule that the Obama administration tried to enact to govern investment advisers. Mortgages are complicated not just because they’re such enormous transactions that happen so infrequently, she said, but because there are huge numbers of very personal variables, from credit-scoring models to the size of the down payment. A technology-based model like Morty “could be really useful” in bringing some order to that marketplace, Seidman said.
She sees another possible application of Morty’s technology, as well, she said. So far, the company has been content to operate under the radar as the founders finalize the website and the loan process. Most borrowers have found Morty by online word of mouth.
Almost by definition, the high-tech early adopters who’ve used Morty are more affluent than average. As Faux put it, “Lenders love us. We are essentially delivering highly qualified, high-quality gift-wrapped loans to them.”
But that pool of customers isn’t unlimited — and a lower-cost service provider like Morty will need to make revenue in volume, Seidman suggested. It’s also questionable how disruptive Morty can be if it continues to serve only borrowers privileged enough to seek out the best deals and make sense of complex financial information.
Her idea: to pair a tool like Morty with the thousands of housing counseling agencies that work with first-time and other marginalized borrowers around the country. “A mission-oriented trusted intermediary on the customers’ side making use of a complex product,” Seidman said. “There are real opportunities there.”
For now, Faux isn’t worried about scale. Morty is building the model, and the customers will come, he said. Neither is he, or his fellow founders, worried about a newer startup catching Morty from behind.
“The more, the merrier. If we can make the process better for consumers throughout the country and raise awareness, great,” Apsel said. “There can be a lot of winners in this industry.”
Faux put it differently: “I wish them luck going through the state licensing process.”
As the mortgage industry veteran on the leadership team, it falls to him to study — and sit — for licensing exams in each state, a tedious process that’s accompanied by legal paperwork and more.
Morty launches this week after an initial pilot phase. Faux said that no other originator has been able to beat Morty’s rate offerings, and that no customer has walked away from a Morty application after starting it.
Faux also has an olive branch for the “mortgage guys” he wants to put out of business, especially from the perspective of the post-financial-crisis lending landscape.
“Do I think they’re overcharging and getting rich? No, but they’re inadvertently doing so by not modernizing and realizing that there are digital automated processes that can not only lower costs, but make a better mortgage overall.This is a better way to do it, top to bottom.”