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Refi Sugar High: How to balance your lending diet

Stay in the purchase game even during the refi boom

As the Fed pulls out all the stops to stimulate economic activity, mortgage rates have reached record lows. In light of rampant uncertainty and economic hardship, homeowners are leaping at the opportunity to save thousands in annual payments, and the refi market is booming. This sounds like great news for lenders, for whom millions of newly refi-eligible mortgages means a lot of new business coming in.

But just as we saw in the early 2000s, a boom is just that — a short-term rise, which will inevitably be followed by a drop. It’s like a sugar high: for about a half hour, you get a rush of energy, and then you crash. Of course, no one knows when the refi sugar high will end, but we know it eventually will. When it does, will you be prepared for its potential shortcomings?

To help prepare, the industry experts at TMS have compiled a list of proactive steps to take to make sure that, when refi sweets are less abundant, your business will already be nutritious. You are what you eat, after all.

Tip #1: Balance your diet

In all likelihood, the boom has given you more conventional refi volume than you can handle, and you’re devoting the lion’s share of your resources to processing them. You’ve probably staffed up on loan officers equipped to handle this influx, and you may be shunning riskier, less immediately gratifying business.

But, as mentioned, history has demonstrated that refis go up and down in dramatic swings. The early-2000s peak lasted for a while, but when it ended, lenders had to scramble to get back to their bread and butter: purchases. Unlike refis, home purchases remain fairly steady on an annual basis, always hovering around 5 million per year.

If one lesson should be learned from the turn-of-the-millennium refi boom, it’s that when rates rise and refis drop, it’s not easy to shift back to purchases on the fly. Those who don’t learn from the past are doomed to repeat it. TMS’s advice: Stay in the purchase game.

Certainly, devote resources to expanding your refi capacity, but also devote smaller teams to tougher loan types — first-time homebuyers, for example. Don’t alienate your referral sources — those relationships take a long time to build but just a moment of disloyalty to tarnish. When the sugar high is gone, they’ll be your anchor for bringing in traditional business.

TMS has maintained all of its products and programs. They are specialists when it comes to buying and servicing government loans. They continue to purchase all loan types, not just the ones that are most reliable in this unusual — and fleeting — environment. And they have kept turn times well below market average.

Don’t just let your company eat cake. Throw in a few vegetables, too.

Tip #2: Prepare your culture for the long term

Since March, your internal culture has gone through some rapid changes. You’ve brought on processors, underwriters and loan officers to accommodate the rise in refi volume, and perhaps that includes some wild incentive plans based on how much they can handle. Probably, your bolstered staff is getting refi processing down to a science, and they’re making your bottom line look very tidy.

At the end of the refi boom, when rates go back up, how will this impact your culture? The same bonus strategies won’t apply. Will the people you’ve brought on to deal with this short-term swell be able to handle other types of business? Will they be able to convert leads to purchases? Will they be able to help borrowers construct FHA loans — which have been among those hit the hardest by COVID-19?

Most importantly: Will you be able to retain them?

Those new recruits are human beings and their happiness has everything to do with the state of your culture. Right now, while things are good, invest in cross-training your staff. Diversify their skillsets so that when the market eventually shifts, they’ll be able to accommodate it and keep your business growing.

Maintaining a healthy culture has long been central to TMS’s mission. Their overarching goal is to help grow happiness — for customers, for clients and for their staff. People take pride in their work when they believe that their leaders are invested in them as people — not just as tools to help them reap short-term rewards. That’s how TMS sees it, and their partners are the beneficiaries. They deliver a different kind of expertise, founded on a culture of happiness.

Tip #3: Start marketing now

It may seem counterintuitive to look for ways to grow your business when your business is seemingly growing on its own. But brand recognition doesn’t develop overnight. It takes a long time to build, and it’s much easier to start when times are good, rather than scrambling when the well dries up.

Reinvesting in your culture will make your staff more equipped to handle a broader range of business; ramping up marketing will help ensure that there’s more business for them to handle.

Many have viewed COVID-19 as a time to tighten marketing budgets. Take this as an opportunity to think and plan differently. Generate concepts for new marketing campaigns that will keep your brand top of mind — whether that’s through digital applications or social media. If you’ve partnered with a subservicer, go the extra mile to make sure your brand messages are strong. Think ahead to when refi slows, and orient your concepts toward purchases.

Unlike most investors, TMS offers co-branding, so that even after you’ve sold them your loan, your brand will remain top-of-mind for customers. When customers receive TMS’s industry-leading customer service, they’ll see your imprint and think of you. TMS is not competing with you — they’re making it more likely that, when it comes time to get another loan, customers will go back to the source of their happiness.

Live in the moment, but plan for the future

No one knows when it will happen, but we know exactly what will happen: Refis are going away and purchases will be here to stay. Be proactive now about balancing your lending diet, equipping your staff to handle a range of responsibilities and solidifying your brand’s presence in the marketplace. When winter comes and your competition is hibernating to sleep off the sugar crash, you’ll be running smoothly.

One last thing to consider (and you won’t hear this from many investors): In this topsy-turvy time, mortgage companies are raking in money and turning huge profits. This is great, on one level — but could have damaging tax implications.

If you’re a lender that can retain servicing, to avoid taking a huge hit during tax season, think about retaining your loans — not selling them. It will reduce the amount of profit on which you’re being taxed, and in the long run it will let you retain more of the revenue those loans generate.

Of course, this means you’ll have to rely on excellent servicing while the loans are retained. If you’re putting the future of those loans in the hands of a servicer or subservicer, make sure they’re as good as TMS.

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