Most of the regular mortgage loan volume prognosticators have by now weighed in on the question of where our overall industry volume will be for the year ahead. Most are in the neighborhood of the Mortgage Bankers Association’s estimate, which puts 2013’s overall mortgage loan volume at about $1 trillion.
This is not a huge change from 2012, which now looks like it will come in at about the $1 trillion mark when all the chips are finally counted. But there is a change hidden in these estimates and it’s the kind that will catch many lenders off guard. The change has to do with the type of loans that will make up the final volume number.
My company’s mortgage product and pricing search engine is hit many thousands of times each day and the data that ultimately flows through our systems lets us know what product types are most popular with consumers at any given time. For that past few months, we have been observing a trend that shows more consumers reaching out for information about purchase money transactions and fewer borrowers coming back to their lenders for refinance loans.
The trendline is clear. We’re not the only industry participants to identify it and yet so many of the lenders we work with today don’t seem to be making changes in their businesses that will allow them to deal effectively with the new environment.
Originating purchase money loans is quite different from refinance business. There are often more steps to the process and more underwriting that must be performed. Quality control (QC) is required for any type of origination, but investors may require more diligence for new loans than for refinance business. Some industry consultants have claimed that originating purchase money loans actually costs lenders more money per closed loan. I doubt that’s true for lenders who have streamlined their processes with purchase money loans in mind.
Unfortunately, that’s not what we’re seeing in the market today. We’re still seeing lenders rewarding loan officers for the type of behavior that results in attracting more refi business. These behaviors will not serve lenders well when the refinance business is eclipsed by purchase money transactions.
Attracting new purchase money business is definitely more challenging than refinance business. When a borrower refinances, it’s because they have a driving desire to get a better deal on their mortgage, or to take equity out of the deal for something they need or want. This is quite different from the homebuyer who must apply for a loan to transact the purchase. The homebuyer needs the loan and sees it as a necessary evil, while the refinance borrower wants the loan and sees it quite differently.
This fact, more than anything else, turned an entire generation of mortgage loan officers into order takers, most of whom lost their jobs and went to other industries just after the financial crash.
So what can lenders and loan officers do now to prepare for this coming change and attract more business in the meantime? We’ve come up with three tactics you can begin using today that will accomplish these goals. But first, we have to explore a whole new mindset.
Get back to the future
Sometimes, moving ahead means going back into the past. In the case of the popular 1980s movie series, Marty McFly was sent back in time and couldn’t return until he had fixed the mistakes he had made in the timeline. Some lenders surely wished they had a time machine after the crash. The best we can do is to mentally go back in time and remember the techniques that made us successful lenders in the past.
In this case, going back to a time when lenders expected their business to come from people financing a new home and building out their businesses accordingly is essential if we want to respond appropriately to the future. There was a time, perhaps before many of you readers entered this business, when purchase money loans was the primary type of business and lenders just expected to have to work harder for their new business.
Before these tactics will yield all of the benefits we know they can, the lender and loan officer must be willing to go back to that previous time, at least mentally, and accept the fact that this game is different, will undoubtedly take more work and will require more time. On the other hand, it will soon yield significantly more results than waiting by the telephone for it to be rung by refinance buyers who never call.
If you make the commitment to becoming a purchase money lender, for at least a portion of your business, you are ready to put the following tactics into use.
Tactic number one: Build and support a network of business connections
Manufacturing a mortgage loan is a complicated process and it involves many partners. Like making a Hollywood feature film, many specialties are called upon to get the deal from pre-application all the way to close. In the past, close alliances were formed between the lender and the settlement services companies that provided some of the services. This worked great for a long time, with local Building & Loans working with area appraisers, title agents, attorneys and others to get loans closed.
Some companies took it too far and the Real Estate Settlement Procedures Act (RESPA) was enacted to ensure that borrowers had the power to get their best deals. RESPA rules are critically important today and the cost of non-compliance can be devastating to a company. Still, there are many, many ways to work with other businesses in your local community in order to jointly serve consumers.
Real estate agents are the most often cited as potential business partners for lenders and with good reason. These professionals are often the first to know when a buyer is in the market for a new home. They also depend upon their clients finding financing to make sure their deals get closed and they get paid.
But there are plenty of other business professionals that can send their clients in need of home financing to whatever lender they choose. Going back to the days when lenders actively work to build up these relationships is what will be required to be a top originator when the refi business goes away.
The most important consideration when deploying this tactic is to make it easy for business partners to refer business to you. Every lender would love to have the other business people in the community send them leads, but few have thought through the process and made it easy for their referral partners to do so.
Tactic number two: Tap into your database of past customers
In a refinance-focused world, we rewrite the loans as fast as they come in and move on to the next. If we look back at our database of borrowers at all, it’s to try to figure out who might be interested in a refinance next. Because there are many factors involved in the consumer’s process of returning to a new loan, this can be tricky to predict and so too many loan officers just go back to watching the phone.
The database of satisfied customers is a very powerful tool and lenders need to reacquaint themselves with it. Of course, this presupposes that the lender has actually satisfied these customers in the past, but with federal regulators focusing more attention on the borrower’s experience, we expect more lenders to have more satisfied borrowers in their databases today than they may have had in the past.
One of the best uses of the database is another blast from the past called customer referrals. Back when I was originating loans instead of developing Point of Sale technology, I made good use of our database and always asked for referrals. I did it because I was taught to do it. It’s not difficult to call up a past customer, ask them how they’re doing and ask them if they know anyone who is looking for home financing. It’s a skill that can save lenders a lot of money.
Consider for a moment that Internet leads generally cost the lender about $1,000 per closed loan, when everything is taken into consideration. That’s a big number. A good loan officer can get a lot of referrals for that amount of money, just by asking people the lender already knows.
Seeking out referral business can be particularly important to smaller institutions. We’re seeing some strong evidence that the larger lenders are being favored by some online lead providers. This is understandable as these companies need the prestige that comes from offering programs from the nation’s largest lenders if they hope to attract enough consumers online. But the result is that it can be harder for smaller lenders to get enough qualified leads through these channels. Don’t get mad; get asking for referrals.
Tactic number three: Increase your conversion rate
Regardless of what kind of business you’re going after, you’re going to be more successful if you can convert more leads to applications and more applications to closed loans. Lenders should be carefully tracking their conversion rates across their enterprises in an effort to drive down their cost per closed loan. Here are some easy ways to drive up conversion.
First, do more, faster. The further down the path toward the close you can get the borrower, the less likely they’ll leave you for another option, so get as much done on the file upfront as you possibly can. We know that if you can get a new loan applicant to let you pull a credit file, they have a reason to stay engaged with your mortgage company and are less likely to leave. If you can also order the appraisal, the chances that the borrower will go to another lender falls to the floor. Don’t let hot leads simmer. Do something with them as soon as possible.
Second, open up your lines of communication, wide open! This is for your borrower but also the partners you’re working with to close the transaction. It’s not that hard to keep all of the parties to a transaction up to date and on the same page, especially with the technology we have at our disposal today. But not enough lenders are doing it. Better communication leads to shorter times to close and a better borrower experience. Find a way to do it.
Third, don’t waste time on applications that cannot close. Use the best product & pricing engine you can find and pre-qualify the borrower as soon as you possibly can. It makes no sense wasting resources on a deal that can never close, so move those that can’t into a drip marketing or other lead nurturing campaign as soon as you’re sure they won’t qualify. We call it separating the app from the crap, but highly recommend that you maintain contact with every potential borrower that doesn’t qualify today because one day they might.
Fourth, get your process mobile. While I don’t see home loan borrowers filling out entire 1003s on a smartphone, I do see more consumers than ever leaning on these devices for just about everything. A lender can pre-qualify a borrower for a loan through more traditional methods and then hold that data until the borrower finds the home they want to buy. This is likely to happen out in the field somewhere, perhaps an open house. When they find it, the borrower can connect via mobile device and move the process forward. Mobile consumer technology is a huge trend. Ignore it at your own risk.
Finally, work every lead source you’ve got. Too many lenders think that Internet leads are the only leads. They forget about referrals from business associates and past customers, as well as Facebook, Twitter and other social media outlets. Traditional media is still important as is direct mail and other consumer direct marketing. High conversion rates are key to your success, but so is loading your pipeline with plenty of leads, so find them everywhere you can.
If this looks like I found an old article from 1995 and dusted it off, well, that’s just a coincidence. These ideas will serve you well in the mortgage market we expect to be working in for the remainder of 2013 and the foreseeable future. Use them well.
Don Kracl is vice president of mortgage products for Mortech Inc., a Zillow business. Don may be reached by e-mail at
[email protected].
