Ending the Annual Exodus of Mortgage Borrowers

Each year mortgage servicers see a wave of payoffs in their portfolios. But the lenders retain very few borrowers — only 18% of refinances went to the same firm for their new mortgage in Q4 2020. How can servicers retain those borrowers? Here are strategies to convert mortgage servicing rights from mere hypothetical loan opportunities into lifetime lending relationships.

Mortgage leaders have long claimed any expenses incurred from buying and managing mortgage servicing rights (MSRs) because they anticipate new business won from those portfolios. It’s a compelling argument for the mortgage lenders that service approximately $11.7 trillion in loans in 2021.

Yet the mortgage industry doesn’t perform when it comes to realizing the full income potential of MSRs. According to Black Knight, servicers retained just 18% of the estimated 2.8 million homeowners who refinanced in Q4 2020 — the lowest share on record — despite originations hitting all-time highs.

And the retention problem is about to get much, much worse.

Lenders typically face their highest runoff rates during the spring as the purchase market begins to ramp up. Today’s low mortgage rates and higher home prices are motivating more homeowners than ever before to refinance their mortgages, buy new homes or sell existing homes. In 2020, lenders originated a record-breaking $4.3 trillion: $1.5 trillion in purchase loans — the largest annual volume since 2005 — and an all-time high of $2.8 trillion in refinances. Industry experts forecast the market to post similar results in 2021. (See “How to Retain Customers in the Wake of the Refi Boom”)

While good news for the industry overall, this “double-wave” of 2020 and 2021 is accelerating runoff rates, shrinking the pool of refinance candidates and shining a bright spotlight on the effectiveness — or ineffectiveness — of mortgage lenders’ retention strategies.

“Many lenders take a seasonal, ‘one-and-done’ approach to retention marketing despite investing quite a bit of money to initially obtain the MSRs,” says Joe Welu, founder and CEO of Total Expert. “They do very little in the way of providing ongoing value to borrowers throughout the course of the year. As a result, they aren’t thought of as a preferred lender when borrowers need a new mortgage or when unexpected things like this year’s double-wave market phenomenon prompt urgent and massive mortgage needs.”

It stands to reason that strategic, purposeful information delivered at the right time to the right borrowers could significantly improve a lender’s mortgage servicing retention rate. But not every tactic delivers the same impact. Lenders that take these four steps are most likely to become the preferred lender for their borrowers’ next mortgages and beyond, according to Welu.

Lifetime Value – Weaving Relationship Building into Servicing Processes

Mortgage leaders are now turning their attention to the servicing portfolio as a long-term opportunity to deepen customer relationships. With monthly statements, actions required by regulations and borrower interactions, servicing interacts with borrowers more than any other mortgage department. Yet, many lenders do not seek to build stickiness into the relationship with borrowers.

“MSRs are an awesome new opportunity for lenders to develop longer-term relationships with their customers — it’s about connecting the customer journey in a holistic way, from beginning to end,” says Julian Hebron, founder of The Basis Point. “Everyone in lending has been on a modernization journey [focused] modernizing originations. Now, the second phase is modernizing servicing.”

“Custom Tailoring” Can Pay Off:

Lenders’ first opportunity to modernize servicing comes from customization options available in the servicing relationship. Consumers tend to like companies that offer a customized experience.

Here’s an example: A significant number of borrowers are paid twice a month, but most mortgages come with monthly payments. Most servicers allow borrowers to shift to biweekly payments — a schedule that would more closely fit their biweekly cash flow — but they don’t share these options with borrowers. Offering these types of options when available provides the borrower a better experience.

Provide Relevant Resources

No lender can begin modernizing their servicing, however, until they do one key thing: gain a holistic view of unified customer data. A servicer’s customer knowledge, especially combined with the data, allows lenders to anticipate borrower needs.

For most borrowers, their home is their single greatest source of wealth. What are their objectives for home ownership? Are they just looking for a low mortgage payment for 30 years, or are they pushing for early payoff? Do they want to rent it when they buy their next home? Do they want to add a deck beyond that sliding glass door or a mother-in-law suite?

Mortgage-focused platforms, like Total Expert, allow lenders to ask these kinds of questions and to identify when they’ve hit on the right point of interest. A positive reaction to email messages can automatically launch follow-up, marketing journeys paired to the borrowers’ future needs.

With the right integrated data sources — such as marketing automation, core systems, loan origination and point-of-sale systems, and pricing engines — lenders can build a complete picture of the borrower. Lenders’ technology should also manage the transition of a borrower from a journey to a conversation with a loan officer. With a single source of truth, the loan officer enters the conversation better-informed and more to win the borrower’s next loan.

Educate to Help Borrowers Achieve Desired Outcomes

Mortgage lenders know what trends in their industry mean for their borrowers. Explaining what industry conditions mean for borrowers is a significant opportunity, especially when a lender uses customer data to pair education with personas.

For example, home prices rose 11.1% during the past year, the most significant jump in almost 15 years. Industry experts forecast monthly price gains will begin to slow. They also expect the frenzy to moderate even more as additional inventory comes on the market in the spring and summer months of 2021. At the same time, economists warn that mortgage interest rates could rise — even significantly — in the latter half of the year.

What do these conditions mean for borrowers?

For a retiree, looming declines in home prices signal that prime time to sell will soon be at an end. For those wanting to renovate, the amount needed in a cash-out refinance may soon be unavailable. And those looking to purchase will probably want to sell soon. Buying a new home with the outlook of selling their old home in a declining market may not be in their best interest.

Using the method described in the last section, education on the market has a specific business purpose: Providing value and creating urgency. Education allows the lenders to show up with timely information that supports borrowers in reaching their desired outcomes.

There are few ways to generate more goodwill than when borrowers need a lender the most.

Investing in Retention – The Pay-Offs Are Very Real

Mortgage servicers experience so many loan payoffs in a year that even small increases in retention create significant returns on investment.

Let’s consider a Forrester study, which aggregated six Total Expert customers into one mortgage lender for anonymity. The combined hypothetical lender had a team of 300 loan officers. Through its partnership with Total Expert, loan originators increased their origination volume by 3.28 loans in the first year — and to 5.9 loans per loan originator by the third year.

If this same lender improved loan retention from servicing by 3.28 loans across the LO team — based upon an average $225,000 loan amount and an average profit of $3,500 per loan (gross profit calculated as revenue per loan less variable costs directly related to consummating the loan equals gross profit) — the lender would increase its annual volume by $199.4 million and its annual gross profit by $1.5 million. If servicing retention rises to 5.9 per loan officer, profit climbs to nearly $3.1 million.

Retention’s benefits are also compounded by cost savings. The per-loan cost for mortgage leads ranges from $800 to $1,200 per loan, according to National Mortgage News. When the servicing portfolio isn’t returning leads, the mortgage company also must spend to fill its pipeline. Reducing the lead generation spend saves $787,200 for 984 loans on the low end. When marketing competition drives higher lead prices, the same 984 loans would cost nearly $1.2 million.

Just one year of numbers like these proves that investing in retention from the servicing portfolio will pay off. Since the probability of selling to an existing customer with whom you’ve already built trust is 60-70%, according to Sales Boomerang’s March 2021 White Paper “Cracking the Code”, the long-term, cumulative effect of improved retention represents one of the most significant opportunities available to mortgage lenders today.

About Total Expert:

Total Expert is the leading fintech software company that delivers purpose-built CRM and customer engagement for modern financial institutions. The Total Experience Platform unifies data, marketing, sales, and compliance solutions to provide a cohesive experience across the customer lifecycle.

Total Expert turns customer insights into actions to increase loyalty and drive growth for banks, lenders, credit unions, and other financial services firms. For more information visit totalexpert.com.

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