What to Do after the Refi Boom Goes "Phfft." (Mortgage Refinancing)
Jones, James D., ABA Banking Journal
Many bankers, while gratified by high volumes and robust earnings from mortgage lending during the refinance boom, view 1994 with apprehension.
A sustained rise in long-term interest rates could produce fewer lending opportunities, because refinancings will slow dramatically and purchase-money mortgages will likely decline.
How can the local bank produce profits in this new environment?
Currently, competition is fierce for new business. In any given location, consumers have numerous borrowing options available to them. Among the major players are mortgage bankers, mortgage brokers, bank and nonbank correspondent lenders, local and out-of-market banks, thrifts, and even credit unions. In recent years, the market share of banks and thrifts has slipped (from 65% in 1990 to 51% in 1992). The main weapons used by competitors are rate, product features, processing speed, and service quality.
When rates rise, competing firms will rapidly place themselves into one of three categories, depending on their response to the new environment:
1. Exiters--opportunistic firms who will leave the industry to pursue more attractive opportunities.
2. Downsizers--who will slash staff and operations to fit the new, lower, volumes.
3. Market Share Seekers--who will grow their business in a declining market.
The challenge of the local bank will be to succeed as a market share seeker.
Certain strengths and weaknesses tend to be prevalent in bank mortgage lending operations.
First, the strengths. Over the years, banks have developed institutional qualities that have supported the success of the mortgage lending operation: a reputation for quality customer service; a long-term employee base; well-known local "brick and mortar" presence; an understanding of local real estate markets; local processing, closing, and loan servicing capabilities; an established customer base; community involvement; name recognition; and the ability and willingness to offer portfolioed mortgage products.
Another natural advantage for banks in a higher rate environment is that they can offer adjustable-rate portfolio loans to consumers on favorable terms.
Further, banks have the advantage of owning a customer base for whom they provide daily bank services, creating continuous selling opportunities.
However, some banks have exhibited weaknesses that have partially contributed to their recent losses in market share. A representative list: reactive strategic plans; insufficient capital expenditures on newer product lines; (and thus) a limited product line; relatively few sources of loan originations; failure to make efforts to attract many customer segments; relatively high servicing costs; insufficient automation; poor profitability and productivity management systems; few options for selling loans; and a high degree of manual processing.
Some banks struggle with setting a strategy for secondary market mortgage lending, only to settle for a passive, low-cost option, which results in only attracting a portion of the bank's customers interested in a limited product line. No effort is made to meet the demands of other customers shopping for innovative products or to compete aggressively for non-customers.
While these banks avoid the capital expenditures a more aggressive effort would require, they have effectively abandoned the battlefield.
Note that many banks have traditionally provided superior service to their customers. However, this service has been achieved at a high cost, particularly because routine procedures haven't been automated.
Banks can add volume and increase profits by building on the positives they already have established. Here are three ways:
* Leverage employees, Marshall the troops more effectively. Use commissioned staff to court real estate brokers, builders, and other parties who have an "in" on purchase-money-mortgage business.
* Real estate brokers, for example, don't regard "lowest rate" as their primary criterion when recommending a lender.
They tend to recommend those who do what they say they will do when they say they will do it, and who get things right.
* Use your commissioned sales force to win this business for you, and train salaried bank staff to process "walk-in" refinance business.
* Research, then sell. The competitive bank must take steps to keep abreast of consumer preferences. In addition to formal surveys, a helpful technique for doing so is periodically conducting focus groups"--roundtable discussions among prospective or recent mortgage customers where a moderator puts questions to the group or tries out ideas.
The composition of each group depends on what the bank is attempting to find out. If a general discussion is intended, the bank ought to gather people from different age and income groups. If the bank is trying out a specific product, it may be more appropriate to put together a more homogenous group-consisting, say, solely of potential first-time homebuyers.
In addition to performing aggressive research, banks that want to survive the coming mortgage loan battle must sell more aggressively. Combining mailings, lobby displays, appearances at home shows, homebuyer seminars, and telemarketing all help keep the bank in the mortgage public's eye.
* Exploit portfolio product. Unlike big mortgage banking firms that sell everything into the secondary market, community bankers are experienced asset-liability managers who know how to handle floating-rate loans. Borrowers often want to know if their mortgage lender is going to keep the loan or sell it Off, and the portfolio lender has an advantage.
As rates rise, adjustable-rate mortgages--which had fallen in popularity in the face of low fixed-rate loans--will become more popular again. Exploit your advantage to offer portfolioed ARMS and short-term fixed-rate product (such as five- and seven-year balloon notes) and you'll have an edge in the new environment.
Banks can also obtain market share by minimizing or eliminating their weaknesses. Here are some ways:
* Establish a strategy. The advice to "set up a mission statement" sounds pretty standard, but it's terribly important in the mortgage area. Deciding what type of mortgage lender your organization is going to be dictates many other aspects of the operation: Will the bank stress service or price? What types of mortgages will it concentrate on? The answers to these and other questions will drive other decisions, such as the means of funding the loans made and the selection of processing systems.
Once the mission statement is agreed on, the bank can set targets for market share, revenues, expenses, capital expenditures, profits, and productivity.
* Develop multiple origination strategies, Market share can be added rapidly by pursuing new origination sources that your bank may not be tapping currently.
First, consider linking up with third parties. These can include mortgage brokers, who typically prospect for mortgage borrowers and then take the application for the lender's processing, and correspondent lenders, typically other lenders who originate and close a mortgage in their own name but who then immediately sell the loan, servicing released, to a wholesaler. An aggressive bank--even a small one --can be the broker's lender and the correspondent's wholesaler.
This can be a win-win situation. Brokers and correspondent lenders would benefit from the bank's administrative support and the new source of funding. The bank would increase its market share immediately by adding successful, aggressive marketing expertise.
Additionally, consider acting as a wholesaler for other banks, thrifts and credit unions, which want to provide mortgages to their customers but are unwilling to make the capital investment to offer the service themselves. In such cases these institutions would typically be the go-between for the borrower and your institution.
Again, these lenders serve their customers and your bank taps an additional source of volume.
* Develop a broad product line. Be aggressive when you offer portfolio product.
The bank can broaden its product line by offering customers specialized mortgage loan products that are sold servicing released to specialized mortgage organizations. These types of loans can include jumbo mortgages and biweekly mortgages.
Obtain the benefits and fee income from meeting customer needs, but avoid saddling your servicing organization with a product that loses money for the bank.
Taking part in state, federal, local, and private mortgage insurers' affordable housing loan programs can also add volume.
* Processing drives quality. While your bank does not have to retain every loan type it originates, it must be able to provide superior service, at a profit, for the loan types it chooses to close and service. Having the right kinds of automation in place makes a big difference.
Do not use a software system for handling mortgage loans simply because it is part of a larger, integrated, system that the bank is already using. The benefits you obtain from integration may be heavily outweighed by a shortfall in functionality. You could constrain new product development and create a high cost per loan, without producing any competitive advantage.
An essential of profitable servicing is an automated system that satisfies the technical needs of a secondary mortgage market operation. The ideal system should be capable of sharing information among three key functions:
1. The origination system--the software used to analyze and extend the mortgage.
2. The servicing system--the software that handles such aspects of servicing as collections and changes to adjustable-rate mortgage plan rates, etc.
3. The investor reporting system--the software that generates overall reports on loan packages for the use of the investors who bought them from the bank.
A system in which all three elements "talk" to each other can save the bank a huge amount of time. Systems that can't do this require extensive rekeying of information.
Mr. Jones is president of First Wellesley Consulting Group, Inc., a mortgage banking consulting firm based in Wellesley Mass.…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: What to Do after the Refi Boom Goes "Phfft." (Mortgage Refinancing). Contributors: Jones, James D. - Author. Journal title: ABA Banking Journal. Volume: 86. Issue: 1 Publication date: January 1994. Page number: 51+. © 2009 Simmons-Boardman Publishing Corporation. COPYRIGHT 1994 Gale Group.
This material is protected by copyright and, with the exception of fair use, may not be further copied, distributed or transmitted in any form or by any means.