Here's a terrifying problem in the mortgage business:
Retaining customers is at an 18-year low for loan servicers, and only 18% of customers in early 2019 remained with the same lender post refinance.
This is the first time customer retention has dropped below 20% since Black Knight began tracking the metric back in 2005, and first-half 2019 stats will shape up similarly.
This is not just a refi problem, and we can turn this terror into opportunity if we understand the long game on customer engagement, so let's dig in.
In this article we’ll cover loan payoffs from the customer perspective, how to rethink retention marketing, and the secret weapon: purchase retention.
CUSTOMER RETENTION IS A MARKETING PROBLEM, NOT A MARKET PROBLEM
When a loan in your servicing portfolio pays off, you don't just lose the interest income.
If you're a bank, you also lose deposits when customers refinance with competitors — because they’ll be offered a lower loan rate for opening a checking account from which to auto-debit monthly loan payments.
If you're a mortgage-only lender, you lose your ability to engage on future purchases or refis. And since mortgage is your core product, solving this is a matter of survival.
The rate of loan payoffs has doubled over the past four months according to Black Knight, and too many focus on short-term market justifications, like: “This happened because rates dropped.”
But this isn’t quite right. Prepayments spike during spring home-buying season each year, and Black Knight says March prepay rates rose an average of 21% month-over-month in 18 of the past 19 years.
Also, it ignores the long game on customer engagement and retention.
The Mortgage Bankers Association says the mortgage market will be 75% purchase loans in 2020 and 2021.
And the National Association of Realtors says the average 2018 seller was in their home nine years, up from a long-running pre-crisis average of six years.
So, over the long haul, customers don’t leave you because of rate dips. They leave you because their housing needs change every six to nine years, and they get picked off by more relevant marketing and engagement.
So, let’s solve for retention based on where the market is headed, and use your customer data to engage them with offers they actually want.
SOLVE FOR RETENTION USING PURCHASE LOANS
We do granular retention analysis for banks and lenders every day, and here’s a simplified example to illustrate how purchase loan retention grows net income.
Let's say your servicing portfolio is 500,000 loans. About 2.5% of these loans per year will pay off because customers are selling their home.
This means you’re losing 12,500 loans per year as customers sell homes.
And NAR tells us that 49% of those sellers are simultaneously buying a new home.
Based on servicer-retention norms today, you’d only retain about 252 of these loans by doing the purchase loan when that seller buys a new home.
But by marketing your own home purchase platform and powering your customers’ new home searches, you can drastically increase retained purchase loans from about 252 to about 996.
More on how to do this in a moment, but first let’s finish the ROI math.
Last year, sellers simultaneously buying new homes averaged 89% financing on a median $250,000 purchase price.
So if you retain 996 customers per year with new average purchase loans of $222,500, it increases your volume by $221.5 million, revenue by $7.7 million (using 350 basis points) and net income by $553,820 (using 25 basis points).
Now let’s look at how to do it.
HOW TO CREATE A ONE-STOP SHOP FOR HOME SELLING, BUYING AND FINANCING
In fairness to customers, why would they think of their loan servicer when it comes time to sell their home and buy a new one?
Unless you give them the right support, they’ll connect with a local Realtor first. Then that Realtor will refer your customer to their own lender.
But instead, what if you could:
- Let customers use your tools to watch their home’s value and make informed decisions.
- Give customers their own home search linked to real-time MLS listings in all 50 states.
- Introduce customers to a vetted, rated Realtor in their target area.
- Keep each customer connected to that Realtor and your loan officer, and remain RESPA compliant.
Then you’d be a one-stop shop for them to sell their home and get pre-approved and close on buying a new home.
The customer wins, and you solve your portfolio-retention problem.
3 STEPS TO SETTING UP A ONE-STOP SHOP
It works like this:
- Home Captain gives you a nationwide network of 32,000 Realtors who sign up to get pre-approved borrowers from you. We continually select and rate these Realtors for customer service excellence and responsiveness.
- Then we deploy home search and home valuation tools branded to your company and connected to every MLS in the U.S. so you can let customers analyze their options, and send them custom home sale scenarios.
- And finally, we help you adjust your existing marketing spend to make custom home purchase pre-approval offers, as well as introduce customers to your home-search portal and local Realtors before they’ve listed their home.
Once those connections are made, that Realtor is your customer retention and conversion partner as a customer sells their home and buys/finances a new one.
NEXT, WE’LL SOLVE FOR PURCHASE LOAN CONVERSION
This low-cost approach accomplishes a few goals:
- Solves your retention problem.
- Gives you confidence to buy more MSRs knowing you can retain those customers.
- Helps you create top-of-funnel purchase opportunities.
But it still takes four to five months for your purchase customers to find homes.
In a future article, we’ll dive deep on keeping purchase customers during this long shopping period. Because in a market that’s 75% purchase, your survival depends on this.