While Congress debates what to do with the Fannie Mae and Freddie Mac, big data is reforming the mortgage market.

It is reforming the mortgage market in two different ways.

First, big data is bringing a measure of transparency to the market for both individual mortgages and mortgages packaged into securities.  Bloomberg’s Matt Scully wrote:

The New York-based startup sucks in data from marketing firms, public loan filings, courthouses and dozens of other sources, and sells it to mortgage bond and loan traders. The vivid detail the company turns up — the types of stores borrowers tend to shop at and whether they rent out their homes on Airbnb Inc., for example — may unsettle privacy advocates, but it’s a boon for investors trying to figure out how likely homeowners are to pay their obligations…..

Good data is critical for investors in the $9 trillion mortgage bond market. For subprime securities, prices can vary widely due to the differing quality of loans backing them, and being able to compare bonds quickly can be the difference between finding a bargain and getting stuck with a turkey. The average fund manager can gain 0.40 to 0.70 percentage point of return by using more intelligent data when trading mortgages, at least for home loans that haven’t been bundled into securities, according to John Ardy, chief executive officer of Resitrader, an institutional marketplace for home loans.

Please note how much a fund manager can improve their return by intelligently using good data.

Second, big data is paving the way for a fin-tech mortgage company who will offer two plain vanilla 30 year mortgages: a mortgage where the borrower voluntarily waives their financial privacy and another mortgage where the borrower asks to retain their financial privacy.

Funding for both types of mortgages will come from the capital markets.

When the Securities and Exchange Commission wrote new rules for how much information mortgage securities and related bonds should disclose about individual loans, known as Reg AB II, it ended up requiring less information from issuers than it had originally planned, to protect borrowers’ identities.

Mortgages where the borrower retains their financial privacy will provide the minimum level of disclosure currently required by the SEC.

The mortgage securities comprised solely of mortgages where the borrower voluntarily waives their financial privacy will provide investors with a much higher level of transparency.

A fundamental principle of finance is investors pay more for a transparent security where they can know what they own than they do for an opaque security where they are blindly guessing at its risk/value. If this principle holds, it would not be surprising to see the mortgage back securities containing mortgages where the borrowers waived their financial privacy trading at a significant premium to the opaque securities where borrowers retain their financial privacy.

Based on Mr. Ardy’s comments above: in exchange for providing investors with additional information, borrowers would expect to save themselves 0.5 – 1.0% per year on their mortgages.

With savings like this to offer borrowers, the fin-tech mortgage company should rapidly make Fannie Mae and Freddie Mac irrelevant.