In the last decade, community lenders—those credit unions, community banks, and independent mortgage banks who serve their local markets—have grown to own the market. Now, with 2021 leaning back to purchase-driven volume, they are positioned to accelerate that market dominance.
Federal policies to stimulate first-time homebuyer incentives, more widespread COVID-19 vaccination and historically low interest rates combined with socioeconomic tailwinds will ensure a strong purchase market for years to come. Lenders are wisely planning to capture the opportunities that come with these market conditions. While all well-prepared lenders can benefit from purchase demand, there are a few reasons the small-to-midsize community lender is uniquely situated to profit.
The community lending segment has experienced impressive growth over the last 10 years. From 2010 to 2016, for instance, the top five depositories saw mortgage origination fall from 64% to 25%, a loss of ~$500 billion in originations.
Independent mortgage bankers, meanwhile, increased their market share from 8% to 32%, and small lenders outside of the top 40 grew from 7% to 35%. Community lenders owe this success to multiple factors, including local knowledge and relationships, which strengthen their customer acquisition funnels. They excel at creating personal touches throughout the loan process. As a result, these lenders are more likely to foster a customer base that generates repeat business and referrals.
Community-based relationships are a primary reason small to midsize lenders will likely thrive in this new purchase market. In the race to acquire borrower business, big banks often struggle with local relevance—even large marketing budgets can’t replicate organic relationships and trust formed over time with prospective customers. Especially in rural communities, where around a quarter of the U.S. population resides, community banks and credit unions hold a large market share, providing much-needed access to credit. In fact, community banks represent the only banking presence in almost one out of every five counties in the U.S., while big banks have consistently scaled back their presence outside of urban centers. The physical presence of these institutions in communities across America makes them the obvious choice for many of the nearly 74 million people living in rural areas.
Traditionally, small to midsize lenders have struggled to offer cutting-edge technology, achieve economies of scale, and hire the talent needed to meet demanding market cycles. Community lenders were left behind when it came to tech-forward, cost-effective digital platforms, and especially among today’s millennial homebuyers, a modern, streamlined borrower experience is a necessity.
Today, that issue has been solved through partnerships with tech companies like Maxwell and its digital mortgage platform, empowering community lending teams with mobile-first, accessible technology that delights borrowers and increases loan officer productivity. Along with outsourced fulfillment solutions that provide flexible operations capacity, these technologies allow community lenders to compete for—and win—millennial business. At over 72 million strong, millennials represent today’s largest homebuying cohort. With a tech-forward experience, smaller lenders hold an advantage with this massive demographic they haven’t had in years past.
Community lenders also have a strong opportunity to grab market share this year by providing financial education and insight into the lending process. While younger homebuyers continue to flood the market, many hesitate to pursue a mortgage with a large institution because they simply don’t understand it. In fact, according to Cultural Outreach’s NextGen Homebuyer Report, one out of five millennial homebuyers isn’t confident they understand any step of the homebuying process. To complicate matters, millennials lack financial certainty, with 60% citing a down payment as the biggest hurdle to home buying and only 25% being aware of down payment assistance programs.
Even though large banks could educate these potential buyers, community lenders are especially well equipped to take on this job. Why? Millennials, who experienced financial institutions’ failings firsthand during the 2008 housing crisis, tend to distrust large banks and prefer to choose businesses based on a trusted recommendation. Plus, despite being digital natives, they favor an element of personal interaction, including advice on what to expect during home buying.
“This segment needs a lot more education. Financial literacy is an area that lenders can use as a branding strategy, with the potential for big impact,” said Kristin Messerli, VP of Mortgage Sales at Experience.com and Founder of Cultural Outreach, on a recent Clear to Close podcast episode.
With their strength in forming relationships, educating borrowers, and creating a personal experience from application to closing, community lenders are in an ideal position to connect with anxious millennial customers.
Powered by technology and fulfillment partnerships, community lenders are poised to continue their growth path in 2021. By adopting technology once only available to big banks and capitalizing on their natural strengths, this segment can hope to acquire a sizable share of this year’s strong homebuyer cohort. Over four million millennials are slated to reach peak home buying age in 2021. Community lenders can capture that opportunity like no one else in the market. And with the correct strategies, they can translate those customers into ongoing, lasting referral business for years to come.