This doesn't look like a great time to make bullish wagers on the mortgage market, what with rates hitting two-decade highs, and a vertiginous fall in originations following the post-pandemic bonanza. But Jeff Sprecher, founder and CEO of commodities and securities trading colossus Intercontinental Exchange (market cap: $64 billion), just made the biggest acquisition in his enterprise's 23 year history on the conviction that streamlining and digitizing the paper-intensive, time-devouring task of securing the loans on the nation's ranches, colonials and condos, and revolutionizing the staid way these staples are marketed represents, as he told Fortune, "The biggest untapped opportunity in financial services." On September 4, ICE bought home loan servicing and data analytics provider Black Knight for $11.9 billion, a price that exceeded the $8.2 billion Sprecher paid for his most famous deal, the 2013 purchase of the New York Stock Exchange.
In an exclusive interview with Fortune, Sprecher discussed how onboarding Black Knight "adds the final piece in the mortgage manufacturing process" and enables ICE to create never-before-seen platforms that provide homeowners with everything from an AI-calculated estimate of the price their dwellings likely command that very day to constant updates on the best new products, government sponsored and private, available for refis.
Black Knight is the latest, and biggest, move in Sprecher's campaign to turn the mortgage journey from a slog to a snap
Sprecher built ICE as the pioneer in transforming exchanges dominated by traders shouting orders from "open outcry pits" into electronic platforms, a transition he engineered at the International Petroleum Exchange, the New York Board of Trade, and the NYSE. In recent years, he been crusading to modernize the traditionally slow motion home loan loop linking lawyers, notaries and lenders, that takes around two months and costs an average of at least $8,000, into a low-cost, digitized sprint.
Between 2016 and 2020, Sprecher assembled three segments of the origination-to-closing continuum through acquisitions. The first puzzle piece was Mortgage Electronic Registration Systems, a giant database that catalogues owners and servicers of home loans, and tracks changes when mortgages, MBS or servicing rights are sold. The second building block was Simplifile, a service that electronically records the loans at county offices. And in 2020, ICE paid $11 billion to enter the "front" or origination end of the market by purchasing Ellie Mae (named for the daughter in the 60's comedy series "The Beverly Hillbillies"), a supplier of software that collects all the contract, appraisal, title and other insurance documents in a paperless "E-closing" room, and deploys AI to identify the errors—a job left in the old-line mode to buyer's and seller's lawyers that greatly lengthened the process.
Before the Black Knight acquisition, ICE rolled the three segments into an end-to-end, all-electronic offering called ICE Mortgage Technology. ICE holds dominant positions in three of the platform's component parts. "Ellie Mae handles 50% of all originations, MERS has 85% to 90% of the registrations, and Black Knight holds 65% of the servicing market," says Sprecher. "We touch nearly every home loan in some way." The network itself is open, he adds, so that customers can either use the components on an a la carte basis, or choose the end to end solution. Sprecher insists that his model's already made big progress. "We've succeeded in getting thousands of third parties on the system, including real estate attorneys, brokers, servicers, and notaries," says Sprecher. "The idea is to get everyone in the industry talking on the same automated system."
Indeed, Sprecher notes that today, ICE is handling around 10% of all end-to-end home loan production on its digital platform. "That's an increase from virtually zero mortgages handled electronically a few years ago," he adds. He believes that once the Black Knight platform is fully integrated, ICE will be able to substantially reduce today's typical lost of $8000 or more, and cut the time from origination to closing to as little as a few days.
The Black Knight acquisition adds a new dimension to Sprecher's quest: Empowering borrowers and lenders with a wealth of real-time data
In making Black Knight a centerpiece of his ecosystem, Sprecher is reaching beyond the mechanics of originating and closing loans, and exploiting opportunities for serving the over 70 million families already making those monthly payments. "A mortgage has four parties, the borrower, the 'lender' who's the originator, the servicer, and the capital markets funder that usually buys the loan from the original bank or other lender," says Sprecher. He notes that it's the servicer that's the borrower's point of contact once the loan's been made, since it's the entity sends the bills, collects the interest, principal and insurance payments, and posts the statements. "Most people think of the servicer did everything, originated the loan, financed it, and collects the payments. But in reality, the three functions are usually separate," Sprcher observes. "Once the loan closes, the original lender, whether a bank or an online mortgage broker, has no connection with the borrower."
Because of that fragmentation, says Sprecher, it's up to the borrower to keep track of how much their home has gained in equity value, and what new, lower-cost products are available. "That information is crucial to deciding if they should refi, or if they can afford a new home," says Sprecher. But the original lenders, he adds, have lost track of the customer for whom they originated the loan. "They usually don't own or service the mortgage," says Sprecher, "so they aren't informing those customers of the new products that are available. The loan is now in an MBS. The lender isn't following their payments history to get a view of their old client's finances. They're no longer marketing to the people who were once their customers."
Sprecher envisions a new paradigm where lenders and borrowers receive loads of real-time information, giving the former far greater marketing reach, and the latter immediate access to the best deals. "Now, the borrower has to do a math exercise to understand their equity position and what they can pre-qualify for," says Sprecher. "We want to put all of this together for them regardless of who is their servicer, who was the original lender or who funded the loan. We want to get all of those parties thinking together in the same data base that the borrower or lender, using an app, can call up instantaneously."
Sprecher notes that ICE can feed info a home's detail into the Ellie Mae algorithm to calculate its real time value, showing the mortgage holder whether the price has gone up or down, and where it stands right now. Black Knight also sees reams of price data as the prime software provider for Multiple Listing Services. That helps customers determine how expensive a new house they can afford, and the size of a new loan they can qualify for. As a giant repository of info about the rates customers are paying and the balances they're holding, Black Knight as servicer would serve as a crucial data source for the new ICE data stream.
The system would also prove a boon to lenders. "Now, they depend on a consumer they no longer have contact with coming back to them," he says. "Using our data base, they could continually market to that original customer. It allows the originators to have a client for life. It's a lot like the relationship local banks had with folks years ago. People tended to stay with that bank for life. Now, the ease with which people move from place to place, and rise in online banking, has severed that link. But using our platform, lenders could stay on top of their clients' needs, and clients would get automatic updates on the price of a new house they could afford given their daily equity position and the rates available." And the platform would also show the nearby homes for sale in their price range.
It's interesting that Sprecher seeks to restore the bonds of loyalty homeowners once felt for their neighborhood banks. If it works, it'll lower costs for consumers—and mean big profits for ICE.
