In early May, Intercontinental Exchange (ICE), a diversified information technology company, announced that it was about to acquire Black Knight, a major provider of software that is used to service mortgages. If this were to occur, the impact on the mortgage and housing markets would likely be profound.
ICE currently provides loan origination software (LOS) to roughly 50% of the mortgage market, while Black Knight accounts for roughly 65% of the mortgage servicing (MLS) space. Combined, the two companies would control roughly two-thirds of the software that is currently used to originate and service the country’s mortgages.
If approved by the FTC, ICE’s acquisition of Black Knight would dramatically change the face of the mortgage industry, creating a monopoly that effectively controls the technology used to originate and service the vast majority of mortgages, and in the process, acquiring massive amounts of data and pricing power that could be used to stifle competition and discourage the emergence of new market entrants.
The proposed acquisition also raises the possibility that after solidifying its dominant position in the mortgage IT space, ICE would be tempted to move into the primary (or even the secondary) mortgage market. Such a move would profoundly affect the ability of smaller originators and specialized servicers to compete, and transform what is now a competitive mortgage market into one that is dominated by a small number of mega lenders.
While such issues should be enough to cause the FTC to pause before approving any deal, policymakers also need to consider the potential impact that the acquisition could have on the ability of the mortgage market to address the needs of lower income and minority families.
The homeownership rates of Black families today are some 30 percentage points below the rates of non-Hispanic Whites — roughly the same difference that existed in 1960, eight years before the passage of the Fair Housing Act. Hispanic households are similarly disadvantaged when it comes to owning a home. Among other things, addressing these racial and ethnic disparities clearly requires innovation that challenges established industry norms.
Standardization has provided many benefits to the mortgage market, including increased efficiency and lower costs. However, most affordable housing programs today do not easily fit into the standardized approaches and systems that are used to originate and service the vast majority of loans.
While many lenders and the two GSEs have specialized programs designed to address fair lending and affordable housing goals, even these programs fail to meet the multifaceted needs and circumstances of historically underserved communities.
Addressing existing disparities in the housing and mortgage markets will clearly require innovation in a host of different areas, including the creation of alternative scoring models, less racially biased approaches to property appraisals, more flexible mortgage products, and more innovative approaches to the servicing of delinquent loans.
If a single entity such as ICE has effective control over the software that governs the origination and servicing of large segments of the mortgage market — as well as the vendors who provide the products and services required to support that software — the incentive to innovate would inevitably be reduced, as would lenders’ ability to originate loans that fall outside established industry norms.
Indeed, other than maintaining their technology to the standards required by certain investors — for example, the GSEs — there would be no real incentive for a monopoly in the IT space to tailor its products to the specific needs of certain segments of the market, nor any explicit regulatory requirements that would motivate it to meet fair lending or other public policy goals.
In the end, addressing the needs of underserved communities requires further innovation in the way that loans are originated and serviced, not additional standardization and reduced competition. As a result, when considering ICE’s proposed acquisition of Black Knight, policymakers need to ensure that the mortgage market would remain competitive and open to innovation.
While there may be ways to achieve this objective, in my view, creating the equivalent of an Amazon in the mortgage market IT space is not the way to go.
Dr. Ann B. Schnare is President of AB Schnare Associates LLC. Previously, Dr. Schnare was Senior Vice President for Corporate Relations at Freddie Mac and Vice President for Housing and Financial Research.
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