As the market continues to slow, lenders are finding the need to look beyond the traditional loan products that sold so well during the pandemic and explore new solutions for borrowers, many of whom are starting to wonder if they’ve been priced out of the market.
Expanding the lender’s loan product menu may just be the solution for today’s market, according to Joe Camerieri, executive vice president and client account management executive at Mortgage Cadence, an Accenture company. This gives both loan officers and prospective borrowers more options.
But it’s not as easy as just adding new products to the menu. To find out more, MortgageOrb sat down with Camerieri, as well as Seth Hooper, associate director of product management, Mortgage Cadence, to find out what they are seeing lenders do in today’s market.
Q: Why is product innovation important now?
Camerieri: At this point in the cycle, lenders have more capacity than they have business. If they hope to retain their best staff, they must get creative about how they’re bringing in new business.
The borrowers who can be served with a plain-vanilla, 30-year fixed-rate mortgage from Fannie Mae or Freddie Mac have already been served. With rates where they are today, these homeowners are not likely to refinance. If the lender wants to grow in this market, they’ll have to look outside of this demographic for business.
Hooper: But product innovation isn’t just important for the lender’s business. There are still customer segments in the market that are having difficulty getting loans. The government wants the industry to serve more borrowers. It will take innovation to get that job done.
Q: What are some examples of product innovation you are seeing in the market today?
Camerieri: With interest rates where they are today, many borrowers are feeling priced out of the market or derive income from non-traditional ways that create problems for more conventional loan programs. Product innovation, predominantly in Non-QM lending, can help these borrowers and the lenders who serve them.
Unless lenders have product innovation, there will be consumers left out of the market. If an ARM makes sense, it’s up to the lender to find out how and take it to market.
Hooper: Second liens are another opportunity. Wall Street investors are looking for opportunities to earn a higher yield for unique customer seconds.
We’re also seeing more reverse mortgage loans. With rates rising, these loans are less attractive to seniors, but they still make sense for many. Also, with the continued stress on housing inventory and rising prices, manufactured homes, and the subsequent lending products attractive to many consumers in this economic environment.
Another market that thrives during this part of the cycle are investor loans. There will be more single-family homes purchased by investors to rent back to consumers.
And we’re seeing innovation around existing loan products. For instance, we’re seeing more lenders offering the ability to lock in the interest rate before the buyer finds their next home. These are the kinds of ideas that can set a lender apart and win them more business.
Q: What do lenders need to be innovative here?
Camerieri: Well, there are some considerations that lenders must bear in mind as they innovate in this area.
First, most lenders will probably not originate new products for their own portfolio, so good secondary market relationships will be very important. Even the best relationships carry risk. If the new products aren’t delivered to the exact specifications of the investor, it will come back to haunt the lender.
This leads directly to the second consideration, which is having a very tightly run loan origination shop that can manufacture loans to the investor’s specifications, quickly and affordably. Many of these products, particularly Non-QM production, must be perfect when they close because the cost of a mistake is simply too high.
Hooper: For most lenders, the key to this type of error-free efficiency is going to be better loan origination technology. They need a powerful but flexible LOS that can easily accommodate new workflows without putting limitations on the lender’s ability to innovate. Having doc capabilities built into the system is a huge advantage because that’s one less partner the lender must get into lock-step with to make changes that will benefit the borrower and the institution.
Q: What typically stands in the way of product innovation?
Camerieri: The first is the lender’s risk tolerance. Change can be scary and costly if improperly managed. The problem is that not changing in today’s environment is worse.
The second thing is capital market expertise. Many lenders want multiple secondary market options before they bring a new product to market because they don’t want to get caught with a pipeline of loans if an investor leaves the business. Managing past that limitation will require some expertise, but it can be done.
Hooper: The third limiting factor is the lender’s technology. An older system that worked well during the boom years of 2020 and 2021 may not be nimble enough to support the new workflows that product innovation requires. Having to work with external partners to develop and generate doc sets adds time and risk and decreases the chances that the lender will be the competition. Having a good technology partner that can deliver the right tools and understands regulatory requirements and how to work with investors to dial in a process that delivers exactly what they want is critically important.
Q: What are the risks of not expanding product menus now?
Camerieri: That’s an easy question to answer. It’s all about market share. What the lender was doing last year will not bring in loan volume this year, so lenders who don’t get serious about product innovation now will give up market share to those who do.
