Academic journal article ABA Banking Journal

What to Do after the Refi Boom Goes "Phfft." (Mortgage Refinancing)

Academic journal article ABA Banking Journal

What to Do after the Refi Boom Goes "Phfft." (Mortgage Refinancing)

Article excerpt

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?

Three strategies

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.

Bank strengths

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.

Bank weaknesses

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.

Leveraging strengths

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. …

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