Rising Cash-Out Refis Impacting Mortgage Servicer Retention Rates


The growing popularity of cash-out refinances is creating volatility in the refinance market and, in turn, the mortgage servicing industry, Black Knight’s Mortgage Monitor report shows.

When a borrower opts for a cash-out refinance, they are able to take a chunk of equity out of their home in the form of cash. However, as with rate and term, the loan is a new mortgage, and in this highly competitive, rate-driven market, it is more often than not from a different lender.

Black Knight’s research shows that for mortgage servicers, cash-out retention rates have been roughly half that of rate/term refinances in the years following the financial crisis.

As a result of this trend, customer retention has become a more serious issue for mortgage servicers.

The report shows that in the first quarter, as rates fell and refinance volume rebounded, fewer than one in five homeowners remained with their prior mortgage servicer after refinancing their first lien mortgage.

That is the lowest retention rate since Black Knight began tracking the metric in 2005.

“Anyone in this industry can tell you that customer retention is key – not only to success, but to survival,” says Ben Graboske, president of Black Knight’s data and analytics division, in a statement. “The challenge is that everyone is competing for a piece of a shrinking refinance market, the size of which is incredibly rate-sensitive, and therefore volatile in its make-up.

“Just a month ago, we were reporting that recent rate reductions had swelled the population of eligible refinance candidates by more than half in a single week after hitting a multi-year low just a few months before,” Graboske says. “Then, with just a slight increase in the 30-year fixed rate – less than one-eighth of a point – 1 million homeowners lost their rate incentive to refinance – almost 20% of the total eligible market.

“This is critical, because refinances driven by a homeowner seeking to reduce their rate or term have always been servicers’ ‘bread and butter’ when it comes to customer retention,” he adds. “Offering lower rates to qualified existing customers is a good, and relatively simple, way to retain their business.

“Unfortunately, the market has shifted dramatically away from such rate-term refinances. In fact, nearly 80 percent of 2018 refinances involved the customer pulling equity out of their home – and more than two-thirds of those raised their interest rate to do so.”

As Graboske explains, retention battles are no longer won – or lost – based on interest rates alone. Rather, mortgage servicers need to take equity position into consideration.

“A simple ‘in the money analysis’ doesn’t provide the insight necessary to retain customers and can’t take the place of accurately identifying borrowers who are likely to refinance and offering them the correct product,” he says. “Rather, understanding equity position – and the willingness to utilize that equity – is key to accurately identifying attrition risk and reaching out to retain that business.”

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