Mortgage lenders across the industry are reporting high levels of stress as they struggle to maintain loan volumes in an increasingly challenging environment. Volume is down, refinances are dwindling in the face of steadily increasing interest rates and more lenders are competing for a smaller group of purchase money home loan borrowers.
Not that this was a surprise. Last October, the Mortgage Bankers Association (MBA) forecast that 2018 would be a tougher year for lenders, with loan volume decreasing 3% to about $1.6 trillion. With interest rates rising, the refinance business is down to 25% of total originations – and the MBA says it will fall more this year. The bright spot is the purchase market, which the MBA expects to increase to $1.2 trillion this year.
Fannie Mae was also reporting weakness in the mortgage market in February of this year, when it reported that rising rates were impacting consumers’ interest in loan products. Overall, Fannie only expects to see total single-family loan originations in 2018 amount to $1.2 trillion.
This data suggest that to be successful in 2018, lenders will need to target new home buyers. While Fannie Mae expects to see refinance loans continue to make up nearly 30% of overall volume, lenders will not be able to support the companies they built in 2017 unless they become experts at attracting purchase business.
That will be challenging for at least three reasons. The first, stated above, is that lower overall loan volume decreases profitability and reduces operating budgets. The second is that increasing rates will make home loan buyers more cautious. Freddie Mac said in February that it expected to see the average interest rate on the 30-year-fixed-rate home loan to reach 4.6% by year’s end. As of May 17, Freddie reported the average rate had already risen to 4.61%.
The third reason is that every lender knows it must win business in 2018. That means competition will be fierce. Not all lenders can win. So, what will set the winners apart?
Research recently conducted by our firm shows that the single biggest advantage a lender can bring to bear in the battle for new mortgage business in 2018 is mobile origination.
Winning Back the Mortgage Borrower
Although lenders could reduce their origination fees in order to capture business, that is not a sustainable strategy in a market with fewer prospects. If a lender hopes to attract more business, it must focus on meeting the unique needs of today’s mortgage loan borrowers.
It’s not realistic for lenders to compete on rate or even loan fees, as they are all tied to the same secondary market investors and third party service providers. In fact, in the eyes of the borrower, mortgage lenders are the same. In a recent survey conducted by ValueInsured, when borrowers were asked how they felt about the mortgage industry, more than 53% said they could not see any differences between lenders.
The survey also revealed that nearly 55% of homebuyers think the mortgage industry lacks innovation and that lenders are operating today in virtually the same manner as they were 10 years ago.
Meanwhile, federal regulators are also finding it difficult to approve of the way lenders operate. The government continues to levy heavy fines and judgements against industry participants. The nation’s biggest banks are grappling with massive settlements. Meanwhile, consumers’ satisfaction with the mortgage lending process fell this year, according to J.D. Power’s 2017 U.S. Primary Mortgage Origination Satisfaction Study.
Meeting the needs of today’s borrower will require change because there is ample evidence that today’s consumers do not like the traditional mortgage process. Lenders will have to offer something different in order to get the new borrower’s attention. This is a fantastic opportunity for lenders to truly set themselves apart from their competitors. But failure to make a change now could carry serious consequences.
According to a report by McKinsey Global Banking Annual Review entitled, “The Fight for the customer,” cited in a study published by Genpact Research Institute, banks could lose more than 20% of their margins over the next seven years.
“With a volatile market and changing lender landscape, mortgage lenders must balance the need to capitalize on growth opportunities against cost and risk,” the report states. “By driving transformation efforts through a combination of Lean principles, agile development practices, and advanced process-centric digital technologies, mortgage lenders can transform their operations to become more nimble, efficient, and ultimately, more competitive.”
To respond to these challenges, lenders need to adopt new technology.
Upgrading to Meet Consumer Expectations
Traditional lenders need not become fintech lenders to compete with this new class of competitors. They do, however, have a driving need to continue to be found where the modern borrower is looking for home financing. For all of the reasons stated above those borrowers are now mobile. There can be no better proof than the incredible rise of Rocket Mortgage.
So, what technology would be required for a traditional lender to duplicate the success of fintech firms? A digital suite of mortgage services that can seamlessly connect the home loan borrower with the lender through any online channel they choose to use.
This includes mobile apps, of course, but that’s just the beginning. The suite should also include a borrower portal that will connect the borrower (and the real estate salesperson, title company, attorney and others) to the company seamlessly. This might also include certain help desk functionality and will certainly maintain detailed audit trails for compliance and reporting. Analytics should be built in and provide detailed, fully customizable reports and dashboards.
Mobile document imaging is a must. Borrowers should have the ability to scan and upload documents through the mobile app. The ability to quickly offer the borrower a pre-qualification is required. This involves taking a full application and then checking provided information against guidelines.
While not every mobile mortgage lending application makes it possible to take a full application online, the best do and make it easy for the lender to capture basic borrower and property information through the app.
Finally, borrower communication should be enabled through an omni-channel interface, making it easy to stay in touch with the borrower in the manner they wish. It also makes it easy for the lender to capture additional documentation as required and to provide the borrower and others with loan status information.
Developing a Mobile-First Strategy
All of this functionality is currently available in the leading mobile loan origination solutions. Going mobile is a competitive mandate for today’s lenders, but from an operational perspective, it is certainly not without its rewards. Here are some of the operational advantages mobile origination platforms bring to lenders:
Easy document validation: It allows the lender to retask staff currently handling borrower documentation, including verification, collating, analysis and other processing. In their place, a good mobile-based origination solution will reduce paperwork man-hours, improve documentation accuracy, and ultimately save time and money for the lender.
Shorter time to close: The self-service feature of a mobile mortgage app allows the borrower to not only check and decide on the offered feature of the platform on the go, but also facilitates them to click pictures of required documents and send it across for approvals. Half of the lenders’ job is done and hence, they can close much faster.
Better process integration: In a brick and mortar office, different functions like the documentation collection team, verifying team, underwriters, and the back-office team must seamlessly coordinate to close the application in a step-by-step process. All this takes time, cost, and manpower. A mobile app cuts across the silos in a seamless fashion, reducing friction and costs.
Better customer acquisition, branding and exposure: American consumers are mobile, with about 88% of 30-49-year olds and 74% of 50-64 year olds using their smartphones regularly. The average time spent by today’s customer on mobile is around two hours and 51 minutes per day, putting the mobile lender right where the customer is.
Technology will be the key to engaging more borrowers in 2018 and beyond. It is also the key to controlling operating costs. While there are ways the lender can control costs and improve margins by improving processes and leveraging the right technology, the best way to offset the margins challenge is to ensure sustained growth.
All of this means that the key to success is to apply technology to customer acquisition, which is exactly what the most successful brands in the mortgage lending business are doing today with a mobile-first origination strategy.
Note: This article is based on a Visionet Systems white paper, “Why and How Can Lenders Use Mobile as a Competitive Advantage,” which can be downloaded here.
Alok Bansal is managing director of Visionet Systems Inc., a New Jersey-based technology and mortgage-services organization.