STRATMOR Group has released the results of an internal statistical study that shows that direct lenders earn much more for retention loans than they do for attracting new customers. According to STRATMOR Group Managing Director Dr. Matt Lind, a statistical analysis of consumer direct lending for 2013 showed fully loaded pre-tax profit margins (as a percentage of loan balance) of 146 basis points for "retention" borrowers versus only 32 basis points for "new" borrowers.
“There are two primary forces at play here,” explained Dr. Lind. “First, revenues for ‘retention’ borrowers in 2013 reflected a relatively high net gain on sale for HARP refinances. Second, and more important, marketing and other customer acquisition costs for new borrowers are substantially higher than for existing borrowers seeking a new loan (i.e., retention borrowers).”
Dr. Lind said STRATMOR is currently studying a third possible factor driving this result. Retention borrowers often involve a higher percentage of refinances than new borrowers. Back office costs for refinance loans are considerably lower --- by about $900 --- than the costs for purchase loans. Additionally, lenders price somewhat more aggressively for purchase loans than for refinances. Thus, if a retention loan is more likely than a new loan to be a refinance, the margin differential resulting from just these factors alone could be around 40 bps. With the acquisition cost differentials also being around 50 bps, we might expect the total differential to consistently be around 90 bps.
Dr. Lind noted, "These results underscore the challenges faced by direct lenders that do not have an existing customer base against which to market. Included here are not only existing servicing customers but also customers of an affiliated entity, e.g., the customer base of an affiliated bank. These results should be of particular interest to mid-sized regional banks that are not capturing a high percentage of the mortgages being done by either existing mortgage customers, i.e., payoffs, or non-mortgage bank customers (deposit and wealth customers). Such institutions have a big opportunity to increase both origination volume and profits by using advanced lead generation methods coupled with a consumer direct origination platform."