The construction lending market is heating up again, and so is the technology to take advantage of it. In recent news, we’ve seen forecasts where construction is expected to reach $1.5 trillion in the U.S. and $15 trillion worldwide by 2025. It’s a segment many mortgage lenders are still unsure about. I’m the President and Co-Founder of Built, a technology provider specifically focused on transforming construction lending.
Demand is up, so the active lenders we work with are thinking about growth, risk, efficiency and compliance. Then there’s a large category of lenders who aren’t yet offering construction loans, but see the opportunity and are exploring solutions for how to do so without significant infrastructure investments.
Their biggest concerns and challenges really depend on the individual lender’s leadership team, but we typically see a heavy focus on sales growth and ways to mitigate risk. Regardless, both are interested in ways to utilize technology to achieve their goals. The sales-focused lenders are investing heavily in providing a top-notch “borrower experience” while risk-focused lenders are leveraging technology to manage portfolio risk much more proactively than ever before. The fortunate news is that you don’t have to pick just one.
We’ve found that borrowers and builders care about two things: rate and ease of doing business. Rates are fairly consistent across lenders, so the variable quickly becomes borrower experience, or how easy it is to do business with you. In construction lending, the borrower experience is different from a typical mortgage loan because interim servicing requires the borrowers’ involvement throughout construction. It’s a longer relationship with many more moving parts.
When thinking about “borrower experience”, the main objective is to reduce the friction for the borrower and their builder. Borrowers want the ability to take action on their loans whenever and wherever they need to, so they prefer lenders with the technology to make that possible. They want to request inspections, request draws, see balances, access inspection photos and other critical information from their mobile device or desktop with the ability to invite their builder into the process. With an online platform, everything pertaining to their loan is accessible from anywhere so they get full transparency and feel empowered throughout the construction phase.
The borrower experience in construction lending has essentially been the same for the past thirty years. From the largest financial institutions in the world to the smallest local community lenders, the origination and management of construction loans currently requires heavy loan administration staffing, duplicate data entry into disparate systems, complex and inconsistent spreadsheets, telephone calls and even faxes.
Borrowers want the same level of technology that’s already largely available in personal banking, as well as all other aspects of their lives. They don’t want to be hassled by paper forms, phone calls, emails, long delays and manual processes when they could have real-time control. The goal is to minimize the time required to manage their loan, and facilitate more time focused on completing their project on time and on budget. The ideal experience for the borrower – and the lender – includes the ability to login anytime and see everything related to their loan.
That kind of borrower experience can really drive business for lenders. We’ve seen institutions where up to 60% of new loans are builder referrals based on ease of doing business, so the referral network from that elevated level of service pays for the investment in technology many times over. Builders refer borrowers to these lenders because technology gives them the ability to initiate and co-pilot the entire process with their client. Gone are the days of having their hands tied behind their back with a client unfamiliar with the construction lending process.
The biggest obstacle in reducing construction loan risk has been the lack of visibility into the overall construction loan portfolio. Disparate spreadsheets and antiquated systems don’t help lenders identify the biggest risks to their overall portfolio, like projects not finishing on time or having no hope of finishing within budget. With technology, a great construction loan administration platform should proactively trigger warnings if there aren’t inspections or draw activities on projects over a certain period of time, or raise red flags that prevent mistakes and overfunding. In construction lending, and pretty much everywhere else in life, the best surprise is no surprise. With technology storing and managing the entire process, lenders are able to clearly see and manage these risks far more effectively.
The baseline of technology in construction lending is very low, so the opportunity for efficiency improvement is substantial. One critical point to consider when looking at technology for efficiency gains is its ability to either integrate with your current systems, or work as a completely stand-alone solution. Most lenders have loan origination systems, document imaging, document storage, servicing and other software in place, so your construction loan administration technology should have the ability to plug right into your existing framework to minimize duplicative data entry. On the other hand, if you don’t have the resources, time or desire to integrate, your construction lending technology needs to be a viable solution to help manage an efficient process on its own.
As with many other types of lending, construction lenders are using technology to standardize their processes from origination through administration, and they are dramatically reducing the time spent to effectively manage these complicated loans. For example, at Built, we have seen multiple clients with administration teams of two primary users managing more than 800 active loans. This would never have been possible without bringing all of the key stakeholders into the equation.
Beyond the efficiency gains a lender’s administration team might experience, technology has also vastly improved the inspection turn times and the overall quality of life for inspectors in the field. With a mobile app, they can instantly connect to provide project completion details, upload photos, and more. They don’t have to waste time wrangling spreadsheets and writing reports, which means projects move faster, vendors are paid faster, and everyone’s happier. Faster draw turnaround times are not just good for pushing the project forward, but they can have a material impact on the interest income received, directly affecting the profitability of the loan.
When all parties are no longer managing disparate systems and spreadsheets, manually keying info, generating inaccurate interest statements and playing traffic cop for inspections and oversight, your team’s focus can shift to more productive uses of time.
As lenders know, the regulatory environment is always changing. But technology can keep regulation from crippling an operation by incorporating new and existing compliance requirements into the construction loan administration workflow. A great example of using technology like this would be the Biggert-Waters Flood Insurance Reform Act (Biggert-Waters). The final actions required for escrows just recently went into effect June 30, catching many lenders off guard. At Built, we are already designing the functionality required to help lenders adhere so we can get it live as quickly as possible.
Simplified compliance is a real benefit from using technology. Standardizing your process gives you the ability to reduce the paper-shuffling while continuing thorough documentation of every step in the loan process per lender, state and federal guidelines. Controls can be put in place to standardize the disbursement process based on loan type, amount, borrower relationship, geography and much more. Plus, those standard processes help to ensure consistency in service, which protects your “borrower experience”.
Whether you’re already in it, or you want to break in, there’s significant opportunity within construction lending and it’s needed. I hate that I continue to harp on technology, but it really does reduce the barrier to entry and transform the way these loans are experienced for all involved. When you look at the country as a whole, there was a lot of money going into homebuilder finance pre Great Recession. Homebuilders were getting huge lines of credit to build homes, but many of those lenders are either out of business altogether or no longer extending nearly as much credit. It’s forced homebuilders to work with multiple lenders to get the credit they need, and has created a new demand for consumers to borrow directly for construction. There’s a big opportunity for consumer mortgage lenders to capitalize on this.