The emergence of “robo-advisors” in the mortgage business could improve the affordability of loans and the credit quality of residential mortgage securities, suggests a new report Moody’s Investors Service Inc.
The primary role of the robo-advisors in the mortgage business is to “simplify how prospective borrowers access” traditional lenders, according to the Moody’s report. By helping consumers find lower-rate loans and facilitating refinancings, robo-advisors could help enhance loan affordability, it says.
“Robo-advisor intermediaries have the potential to dramatically speed up the time taken to match a borrower with a mortgage provider and/or to complete a loan application,” says Steven Becker, assistant vice president and analyst at Moody’s. “This could increase loan affordability by making it easier for consumers to choose the best deal that will help them reduce their interest payments.”
Moody’s expects that lenders’ underwriting standards would remain the same and that they will continue to carry out their usual due diligence, such as income verification and credit checks to prevent fraud.
At the same time, by making it easier for borrowers to refinance their mortgages at lower rates, robo-advisors could also be positive for the credit quality of mortgage pools underlying residential mortgage-backed securities (RMBS). For example, it estimates that borrowers with prime variable rate mortgages in the U.K. could save up to 50% of their monthly interest payments through a product switch to a lower fixed rate.
“Robo-advisors and the technology platforms they have at their disposal thus have the potential to help consumers make cost savings much quicker than has been the case historically,” says Greg Davies, assistant vice president and research analyst at Moody’s, in a statement.
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