The hard road for the mortgage industry

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Editor’s Note: This feature will appear in the July 2021 issue of the magazine. MReport magazine, available here.

All warning signs have been posted. The rates went up. The fields have thinned out. Lead purchases from third-party lead companies have increased. The mortgage industry is about to get tough, and lenders must be willing to hone all aspects of the marketing and sales process if they haven’t already in order to survive. Unfortunately, there will undoubtedly be casualties in the next 12 months.

The home finance industry was a bright spot for the economy last year. In 2020, rates hit record lows over a dozen times. The creators break records time and time again. While the U.S. unemployment rate hit an all-time high of 14.8% in April 2020, the mortgage industry has been severely understaffed to meet strong consumer demand flocking to buy homes and refinance lower mortgage rates. Demand has soared that lenders have actually raised rates significantly to cap volume, resulting in the highest net operating income in nearly 13 years.

Marina Walsh, CMB, vice president of industry research and economics at the Mortgage Bankers Association, said: “With the growth of mortgage lending in the third quarter, the net operating income of independent mortgage bankers increased, exceeding 200 basis points for the first time. since the creation of the MBA report in 2008 ”.

Lenders were no longer focused on competing for customers; they fought for talent to cope with the huge volume of production. This led to a rampant hiring. The use of the term “recruitment craze” seemed to underestimate what was really going on, as lenders also offered large signing bonuses and guarantees. Many also create training programs to remotely transform newcomers to the industry into mortgage lending professionals.

The industry has grown significantly in a relatively short period of time. This is all well and good until you start thinking about what will happen when the rates go up. Well, the time has come. Rates are rising and demand for refinancing has dropped compared to last year. Unfortunately, the industry is now overwhelmed with human resources, and overhead costs are detrimental to lenders’ bottom line.

The Economics of Mortgage Marketing

To keep production high, lenders have already raised their prices, which has lowered their margins, and are spending more dollars on marketing to attract more leads in order to produce enough products to keep staff busy.

One of the simpler channels for attracting more leads immediately is through effective marketing (lead generation) channels, where suppliers sell every consumer request to multiple competing lenders. As the demand for buying leads (mainly refinancing leads) increases, the value of leads increases. At the same time, as rates increase, the overall lead conversion rate drops, resulting in a spike in marketing costs for each loan financed.

For example, last year about 10% of potential clients for high-quality refinancing were converted into a funded loan. So if a performance marketing company generates 100 leads, 10 of them will be funded. However, these leads are not usually sold exclusively to one lender, they are often sold “up to 4 times.”

As many lenders reduced their purchases of leads, many leads were sold to only one or two lenders. Selling to one lender at $ 60 per lead, a 10% conversion rate will translate into marketing spend on a $ 600 funded loan. Selling two lenders for $ 30, each lender would convert roughly 5% and still have a marketing spend of $ 600 for each funded loan (although they each had to work twice as many leads to get the same number of funded loans on compared to the purchase. for only $ 60).

Today, it is more realistic to see a 40% drop in overall lead conversions due to higher mortgage rates, which increases demand for more leads to counteract the decline in conversions. Each prospect is now typically sold to three lenders, which brings each lender’s conversion rate down to 2%.

If prices rise to $ 40 per lender, it will cost $ 2,000 in marketing costs for each loan financed — a 233% increase in costs! Certainly a shock to the system.

Purchases are not refinancing

Many direct consumer lenders focus on refinancing businesses because it is a simpler loan that is easier to master at scale through marketing automation. It is also a shorter cycle from the time you spend dollars on marketing to the time you generate the proceeds from the sale of these secondary market loans. Purchase loans take longer as borrowers need to find a home and enter into a sales contract (if they ever will!), Not to mention some of these pre-approved borrowers – often referred to as “TBD” as the property’s address must be -Specific – Their realtor may be persuaded to contact their preferred local mortgage specialist.

Trying to go from 90% refinancing to a 50/50 refinancing / purchase split is a major challenge. Since the purchase loan cycle is much longer, there is a much longer time span from spending marketing dollars to generating income. It also takes more patience and thoughtfulness about the timing of follow-up with borrowers so that you are present enough to help them when they need help, but not too much to annoy them.

Because of the differences, a separation of loan officers is required for sustained success. If a loan officer has a choice between trying to convert a purchase or refinancing, they will tend to refinance because they are more likely to get the original face when refinancing than when buying. Soon, potential buyers are neglected and conversion rates drop.

Lenders who are trying to increase the number of home loans while the marketing costs of refinancing loan financing are jumping 233% face huge hurdles. This is a double whammy in the form of higher costs and lower revenues – which warehouse lenders no doubt realize when they put warehouse lines at risk.

Selling or taking orders?

If cost increases and margins were not enough, lenders needed to ensure that loan officers successfully transitioned from taking orders to becoming a salesperson again. Most credit managers had record numbers and bigger commission checks in 2020 than they’ve ever had in their careers, but we can’t ignore the incredible winds that have been in their sails.

Loan officers had a full year to pick up the phone and capitalize on the huge opportunity that the low-interest environment presented them. That doesn’t mean they didn’t work hard, but making as much money as they did in 2020 was significantly easier than in previous years, and we’re starting to go back to what those other years looked like.

The mortgage industry is so weird. Taking orders is easier and pays off higher than selling in an environment with normal mortgage rates, and you need to keep your ego at the doorstep to mentally overcome this dynamic quickly. When the incredible tailwind dies down, it will take a lot of paddling to maintain momentum forward. And when the headwinds start to hit the industry, it will take more than just rowing with brute force.

Supreme Adaptability Reins

Charles Darwin is often credited with saying: “It is not the strongest of the species that survives, not the smartest. This is the one that adapts best to change. ”

Adaptation is based on the ability to improvise. Lenders can deal with the challenges of consumer behavior like data and technology.

PwC reports that more data has been accumulated in the world over the past three years than in previous years of human existence. Technology platforms such as lead management systems, loan disbursement systems, CRM, etc., have become mandatory in every organization.

Understanding your own raw data and combining it with third-party data is now also an important element of the table. Lenders who are working with prospects in 2021 the same way they did in 2019 have not adapted to the changes that have taken place around them.

When 88% of consumers finance their loan with the first or second lender they talk to, understanding when consumers in your database first start looking for a new mortgage is vital. Historically, credit triggers and MLS listing alerts have helped lenders signal that a buyer they know is in the market, but targets have shifted.

We now know that consumers are starting to shop research in 100 days of these other traditional signals, giving knowledgeable lenders ample opportunities to influence a consumer’s buying journey and close more businesses by being the first lender to be attracted.

Pioneering lenders who have developed their strategies for collecting third-party data to gain a better understanding of consumer behavior are playing a completely different game.

Whether it’s promoting your marketing automation, deploying machine learning algorithms, or simply informing loan officers who should call the next best customer to give them the best chance of success … using just your own data won’t get you where you need to be anymore.

Think about the behavior of consumers and potential customers outside of your four walls. This accounts for a much larger share of consumer behavior and the intention to fund downloads. The winning combination expands your own data with external or third party data on consumer behavior… This is where the rubber meets the road in this bumpy terrain.



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