Many mortgage businesses are shutting their doors, merging with other companies or selling their business – a bleak start to the new year.
But while some mortgage lenders fail to keep up with the changing times, others are excelling, capitalizing on the change and those who weren’t ready for it. So what’s their secret? Customer service? Technology? An innovative approach to loan originations, and who to lend to? It’s actually all of the above, and more.
But it’s not too late to make sure you can keep up with the changing mortgage environment. With the start of the new year, many in the mortgage industry are left wondering what to expect in 2019. This list will help mortgage executives better prepare for the year to come. It shows trends that they will likely have to manage, or in some unique cases overcome, over the next 12 months.
Loan Volumes Under Pressure
A number of factors will conspire to put downward pressure on mortgage volumes this year – especially as it applies to refinance loans. Those lenders that avoid a significant drop in volume next year are likely going to be those that ramp up their sales departments and take volume from competitors. Within this new, more competitive environment, some factors to consider include:
1. Rising interest rates
The Federal Reserve has all but promised that it will continue to increase rates in 2019, and while most lenders do not expect to see rates rise too dramatically, it will indeed have an adverse impact on refinance businesses, and could also influence new home purchase decisions, particularly with first-time homebuyers. As a result, loan volumes aren’t likely to grow dramatically in the coming year — at least not outside the realm of improved or expanded operations.
2. Housing inventory challenges
Low housing inventory continues to be a problem that will put downward pressure on the purchase originations market well into the year. Inventory is at lower levels across the board, but this is a particularly daunting dilemma when it comes to affordable housing.
Higher home prices have created a significant affordability challenge for borrowers in multiple markets across all income brackets, but it has become a major factor for those in the market for lower- to middle-income housing. In many areas — particularly major urban markets — older, more affordable housing is being systematically demolished and replaced with higher priced properties, all of which is pushing housing inventory out of reach for most lower income consumers.
Additionally, natural disasters continue to play a role in negatively impacting inventory levels. Historic hurricanes, flooding and wildfires all caused record levels of devastation in 2018 and that troubling trend could continue this year. Beyond the initial devastation, these events wreak havoc with the mortgage process overall, forcing lenders to put deals on hold, reassess property values or even cancel loans all together.
3. Rising home prices
For the past few years, lenders have seen an increasing number of sellers over-pricing their homes in an effort to realize a meaningful profit on the sale. The effect has been that many homes have remained on the market longer than they ordinarily would have, had they been priced more reasonably. The unrealistic expectations of sellers is a reaction to the dramatic increase in home values in some markets like California, Oregon, Seattle and Colorado, and has ultimately resulted in a drain on sales across all states.
While some of the increase in home prices is in response to valid growth in home values in certain areas, when paired with overpricing, it has resulted in an unwelcoming home buying environment for first-time buyers and renters who might otherwise have attempted to buy had they not been priced out of the market.
Responding to a challenging environment
All of these factors will come together to make originating loans more challenging in the year ahead. As competition for purchase loan originations heats up, it simply won’t be enough for lenders to offer the same low rate as every competitor. Rather, lenders will need to bring more value to the table, including guidance and support for borrowers throughout the mortgage process. Great lenders this year will go beyond just telling borrowers what they can afford, but also help them identify homes available in their price range and help them make a successful offer.
In the immediate future, however, it looks as though the housing market will be awash with “amateur loan officers,” many of whom are shifting their business from refinances to purchase loans. This will further add to the competition on price and increase pressure on profit margins. Long-time professional lenders will have to work that much harder to maintain their market share, much less expand. Lenders should expect to see their peers approaching these challenges in a number of ways, including:
Focusing on cost-saving operations
With the cost to originate at historic highs for most lenders, there should be room to economize next year. Lenders be better positioned for success in 2019 if they invest in seamless lending processes, employ expert managers and utilize a solid operations team to support their loan officers. Having the infrastructure necessary to quickly and easily close loans for borrowers will be a necessity.
This all hinges on smart investments in technology with a demonstrable ROI that allows lenders to readily track and trend every transaction to drive continuous improvements, even marginal ones. In this way, they can make the mortgage process an educational and perhaps even more pleasant one for borrowers.
On the reverse end, however, this also means lenders will need to avoid chasing expensive, flashy investments with low returns. In 2019, a strong mortgage lender will be defined by their ability to challenge how things have been done, even if they were highly successful in the past. This requires the courage to make significant changes that challenge the status quo and create a unique competitive edge.
Changing credit requirements
Until now, many lenders have failed to differentiate between low-score borrowers and no-score borrowers, but it is important to remember that these two are fundamentally different, particularly as lenders look to target niche markets.
Low-score borrowers are those who may have made poor financial decisions in the past which damaged their credit score or have had significant life events that strained their financial resources. No-score borrowers, however, are those who may have a strong financial background or who may have demonstrated in the past their ability to eliminate debt from their life or avoid it altogether.
As new, potential consumers impacted by the last financial crisis enter the housing market in 2019, no-score borrowers are going to make up a larger portion of the market as financial literacy grows in prominence.
Varying loan structures
In the coming years, the structure of the mortgage will matter much more than it has in the past. While the 30-year fixed-rate loan will likely remain the industry standard, consumers now recognize that it is not necessarily the best option for every borrower. Lenders will need to accept this evolution in order to bring additional value to the table.
Lenders today have the unique opportunity to truly go above and beyond by helping borrowers identify the loan option best suited to their unique financial situations and goals. And it’s not only about the rate – the structure and type of loan is also important. Lenders should keep in mind that some borrowers may be better suited to a 15-year fixed-rate loan or a variety of other mortgage products or features available today. The key is asking great questions and partnering with customers to review the analytics required to identify the borrower’s long-term financial goals.
Just as they always have, first-time homebuyers, in particular, will need extra help in understanding how to structure their loans, access down payment assistance programs and explore various loan scenarios. They may have questions about which government-sponsored loan programs are now available that may not have been in the past.
Lenders should be prepared to discuss not only basic loan product distinctions with borrowers, but also help them incorporate their long-term goals into their home purchase decisions. Offering more products with more options enables lenders to better optimize loan structures to fit their borrowers’ needs.
Technology at the center of relationships and convenience
The mortgage industry is shifting, and will continue to shift, toward an increasingly digital environment. Technology has already had a major impact on the industry by changing not only how we process and originate loans, but also how lenders actively engage with borrowers.
Regardless of the specific technologies employed, the goal of any modernization must be to make the borrower’s experience simpler and more efficient. This has already happened in the document verification process, for example, which has been streamlined to the benefit of both borrower and lender.
Research has shown that borrowers (particularly first-time homebuyers) want to work with a mortgage expert who understands their unique financial needs as well as the specifics of any loans they are considering. Despite increasing reliance on technology, however, as a group they still crave face-to-face interaction. It is becoming increasingly clear that technology is not here to replace the human-to-human connection between lenders and borrowers – it’s here to enhance it.
While there will continue to be a subset of individuals interested solely in a fully digital mortgage, the majority of the population is looking for the right advice from a loan officer as they make their decisions. Every borrower wants a convenient process to see those decisions to completion and when executed properly, it is this combination that will lead to lasting relationships with borrowers, and of course, referrals.
Technology has already changed how loan officers engage and work with borrowers. Lenders need to start actively exploring how technology can be utilized to improve not only the overall borrower experience, but also how it can enhance the borrower-lender relationship. This is particularly true when it comes to providing borrowers with tools that can help improve their search for the right home, not just the right mortgage.
Market opportunity is going to increasingly exist at the intersection of relationship and convenience, and it is important that lenders not be distracted from that goal.
Prioritizing partner relationships
Finally, a major part of lender operations will likely be focused on building stronger partner relationships with local businesses, the real estate community and other industry partners.
This will, of course, require some effort on the lender’s part in order to see a significant impact, but reaching out to related and local businesses can allow a lender to expand their network and identify new leads. After all, the employees of local businesses are oftentimes the lender’s customers themselves. Whether it’s hosting monthly or quarterly workshops or a flyer on a bulletin board, such efforts can pay dividends down the road as closer community ties and a more public profile allow lenders to engage with a diverse range of borrowers.
Likewise, lenders next year will also want to expand their relationships with financial advisers, consultants and, of course, real estate professionals. This means fostering a true relationship in every sense of the word as the two organizations work together to not only share leads, but also give back to the communities they serve.
These relationships with other participants in the lending process can also bring the benefit of enhancing the borrower experience. A lender’s connections with other businesses can add value to the borrowers they serve, particularly as they look to receive a range of insight and advice into an effort as complex as their mortgage. And, as we have seen, lenders who want to survive — and thrive — in the current and coming market must focus on providing more value to their borrowers.
While some of the trends anticipated for the coming year do not point to increasing loan volume for most lenders, there are changes lenders can make in their operations now that will protect their businesses.
There are also many opportunities for lenders to increase their service levels and meet future borrower expectations. By identifying multiple areas, such as the ones discussed, where lenders can make marginal enhancements, they can better combat margin compression and see growth overall.