With the shutdown over with, at least temporarily, lenders are once again focused on what matters: helping their clients. But what if forecasts are correct and overall residential lending volume is down? What are lenders doing, or not doing, to expand in a contracting industry?
Let’s start with a spoiler alert: Marketing skills and prowess will win the day. Will someone create a “new” mortgage that will catapult the industry to new heights? Doubtful. And through vendor use, most lenders have roughly the same technology, or will in the future.
Over the years many currently in the “resi business” have seen growth driven by an overall decline in interest rates since 1982. They’ve benefitted from steady household growth which, given relatively low birth rates, was driven largely by strong and steady levels of immigration. Some offered expanded credit programs (low down payment, Alt-A and sub-prime loans).
Over the past 15 or so years, the mortgage industry has transitioned from being relatively high growth to slow, no, or even negative growth. A few years ago “experts” believed non-QM lending would account for a huge share of residential lending. But by most estimates non-QM clocked in at roughly $20 billion in 2018, or only about 1.5 percent of the overall market. Most lenders continue to provide a limited stockpile of programs: Fannie, Freddie, FHA, VA, HELOC, HFA/bond programs, USDA rural. There are, of course, minor variations on these themes, but for the most part these are what lenders are offering. Being able to broker non-QM is nice from a P&L and volume perspective but usually not a game changer.
Borrowers are faced with higher rates than in recent years. In some areas wage gains have matched house price appreciation and affordability has been steady. But rising health care costs are hurting borrowers. Natural disasters have made inventory even tighter in areas such as California and the Gulf Coast, and rising sea levels due to climate change impact coastal housing stock. Housing stock is limited.
So now we find ourselves in the so-called “new normal” of mortgage lending. Practically every lender has made operational and technological improvements as every owner/CEO is aware of the fabled digital mortgage. The “digital mortgage” is comprised of a set of digital-enabled capabilities that aim to eliminate the major sources of borrower stress and communications breakdown in the mortgage process. Third-party vendors will make the full range of “digital mortgage” capabilities available to any lender.
But if every lender has this, does that make them special? As my colleague Garth Graham says, digital is no longer a competitive advantage—it’s a reality. Operational and IT advancements are things that every lender is doing, and though these tactics have become a necessity to compete, they will probably not provide a long-term sustainable competitive advantage.
So LOs and CEOs are taking other approaches to growing/increasing market share in a stagnant environment. They are taking advantage of immigration trends, hiring LOs indicative of their neighborhood, taking advantage of minority home ownership programs. They are offering expanded credit programs from Fannie and Freddie, Housing Finance Authorities, or non-QM investors. And many believe that portfolio lenders have the ability to create products which have special features, eligibility requirements and/or fulfillment processes. Lenders can choose to be price leaders, as we are seeing now with horrendous margin compression, or compete based on maximizing the borrower experience.
Price? Get over it. STRATMOR MortgageSAT data has shown that price (interest rates) is rarely (2% to 5%) the primary reason for selecting a lender. (Price is a strong secondary factor.) Rather, the choice of a lender is primarily driven by referrals from a realtor, builder, friends or relatives or a prior relationship with the lender, loan officer, etc. with online reviews serving to affirm a referral but not serving as a primary factor. Are you encouraging relationships?
Dr. Matt Lind with the STRATMOR Group believes that if a lender seeks to be a price leader, it may strive to be a low-cost producer, to develop margin advantages that can be applied to offer better pricing, by achieving superior productivity in back office operations. This is the traditional way to be a low-cost producer. But it is not the solution.
Is there a solution? There are steps lenders can take.
Banks can focus on their cross-selling advantages. They can seek to achieve margin advantages by maximizing the value of the borrower relationship through cross-selling other products and services to mortgage customers so as to increase so-called “share of wallet.” Independent lenders typically have nothing else to sell other than HELOCs or second trust loans. Depositories, on the other hand, have a range of deposit, consumer loan and investment products to cross-sell which allow them to hold steady or lower the price of mortgages.
Maximizing or optimizing the borrower experience appears to be the path that most lenders are taking today to building a competitive advantage. This approach seeks to define the mortgage product as “the product + the borrower experience,” product selection advice plus an easy and smooth fulfillment process. Seems many years ago, Countrywide’s CEO Angelo Mozilo was right when he said that all the steps between application and closing were “friction.”
Lenders are increasing turning to marketing excellence or superiority, which can take many forms that are not easily replicated and are therefore sustainable. Some believe that the value of the customer in a mortgage transaction goes well-beyond the traditional standalone value of the mortgage itself. Having multiple financial relationships with a mortgage borrower can be an advantage as it increases contact with that borrower and through that relationship to their friends and family—other potential mortgage borrowers.
Non-depository lenders must focus on marketing, and the borrower experience, in order to compete with bank and credit union product advantages. Conversely, community and regional banks and credit unions will be striving to press their advantages. And both groups will find that marketing skills will be a key differentiator between winners and losers in the future.
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