Jim Paolino of Mortgage Sentinel: It’s Time for Lenders to Start Planning for a Changing Market
Jim Paolino is co-founder and Managing Partner of Mortgage Sentinel, a secret shopper service that empowers mortgage lending companies and banks to ensure their loan officers are delivering compliant, effective service to potential borrowers. He has more than a decade of experience within the mortgage and title insurance space, where he also founded successful technology provider LodeStar Software Solutions. He has been awarded with National Mortgage Professional’s “40 Under 40” honor three times, most recently in 2021. He speaks frequently on compliance, operational efficiency and sales growth at industry trade conferences, and has been published in numerous trade publications, including MBA NewsLink, National Mortgage News, Housing Wire and MReport. He can be reached at jpaolino@mortgagesentinel.net.
The mortgage industry is risk-averse, and with good reason. The financial services universe, in general, is built upon generating revenue by taking measured risks. When outcomes can be better predicted through past performance, so much the better. That’s why mortgage lenders stick with what has worked for years or decades.
But what happens when the underlying conditions that support how we measure those risks begin to change?
The mortgage industry, as well as the entire American economy, may well be at a historical crossroads. As we emerge from a historic pandemic, questions abound as to what happens next in the economy. Our own space is transitioning from a historic event as well. We may never again see the refinance volume that resulted from multiple unusual factors coming together in 2020. With the likelihood of change abounding, it’s also time for the mortgage industry to consider the changing demographic landscape in America. It’s becoming evident that the traditional target demographic lenders have long considered low risk may be shrinking, while other less-traditional markets are growing. It’s also possible that the means by which we’ve measured risk are less applicable to non-traditional markets. If, indeed, that proves to be true, it may be time for lenders to rethink their marketing and product strategies.
Changing demographics—who will be seeking mortgages in 10 years?
It would be impossible to adequately analyze all of the major American market segments and demographics here. However we can, at least, start with one great example that the market is changing dramatically. A recent MBA webinar pointed out three stark facts that should raise a traditional banker’s eyebrows. First, single women now outnumber men two-to-one as the second largest cohort of homebuyers. Second, we’ve seen a 30% increase over the past five years in married women making the household’s financial decisions. And finally—this one is no surprise, but it is relevant—the typical American woman’s life expectancy exceeds that of an American man by five years. While not an airtight case, these facts would indicate that American women could well be a growing segment of the homebuying/borrowing market. (Source: MBA, CONVERGENCE: The Future is Female: How Women are Shaping the Future of Housing, Recorded May 26, 2021)
It would be trite to base a wholesale narrative on a few facts or examples. But it does beg a question or two. Does the traditional mortgage lending marketing model really account for the demonstrably growing share of women entering the market? Do mortgage lenders do enough to appeal to a woman considering her or her family’s options in terms of mortgage product and provider?
It’s not overreach to suggest that the face of the American population—thus, the demographics of potential borrowers and homebuyers—is changing, too. For example, we know that those identifying as Black Americans grew from 36.2 million in 2000 grew to 46.8 million in 2019. That rate is 13% greater than that of the White population over the same period, but less than the growth rate of Asian and Hispanic populations (89% and 72% respectively). Source: Pew Research Center (“Key Findings About Black America,” Christine Tamir, March 25, 2021).
None of these developments or trends are shocking or new. But they all point towards impending and significant market changes. That, in turn, must lead one to ask whether lenders are preparing to adapt to serve that changing market.
The search for the “credit invisible.” Will we see alternative credit models eventually?
If the market for mortgages is about to undergo a sea change, it’s appropriate to ask whether the models currently used to assess risk and potential need to change as well. Traditional credit score modeling has come under fire in recent years, although it appears unlikely that lawmakers, regulators and the secondary market are ready to overhaul them in the immediate future. And yet, a CFPB report from 2019 does indicate the issue is not completely closed.
The CFPB commissioned a study that reviewed the use of one alternative credit model from 2017 – 2019. (Disclaimer: the model used was applied to more than just mortgage loans). The findings, while not globally conclusive, were interesting. For example, the model approved 27% more loan applicants than traditional credit models and yielded lower annual percentage rates for 16% of applicants. The report also suggested that the model showed no bias across race, ethnicity or sex (each category saw increased approval rates of 23 to 29%). “Near prime” borrowers (those with FICO scores between 620 – 660) were approved almost twice as frequently. And all of this lead the CFPB, without endorsing the model, to suggest more research does need to be done to address the more than 25 million Americans who are currently “credit invisible” to traditional credit models because they are unable to access credit now.
Do the examples selected here prove our industry needs to immediately adopt new credit models or throw out the way it has evaluated credit worthiness for decades? Of course not. But if we accept that the demographics of our target markets are changing, and we accept that there is at least a possibility that the way we’ve been qualifying the risk inherent to mortgage lending, then we would have to accept the reality that we may not yet know how much or exactly how, but the way we bring lending products to market (and perhaps, even the nature of some of our lending products) may need to adapt as well.
Planning for change…
So what can mortgage lenders do to adapt to a fundamentally changing market? While making significant changes to the way a lender goes to market starts with strategy, its success will depend in equal part in execution at the point of contact with the prospect. Branding is much more than a logo and tagline. It’s how a prospect or client perceives the entity doing the marketing. That includes customer service and interaction with numerous elements of the company, not just its advertising.
It is time for mortgage lending companies and banks to find ways to better review and oversee the manner in which frontline employees (account representatives, loan officers) who make first contact with potential borrowers go about what they do. That would be true even if the market were not positioned for change, even if just for the sake of compliance. It could also result in leaving less “money on the table” where poor technique or failure to cross-sell drive potential applicants to competitors.
A number of questions should be asked. How well-trained are our frontline staffers? Are they not only familiar with the product mix, but willing and able to cross-sell at the point of contact, instead of pushing the “product of the month” and turning away any who may not want it or qualify for it? In fact, does the existing product mix truly serve the needs of your market? That would appear to be a fundamental question for any business planning its marketing, so perhaps the more accurate question would be “do we really understand who our target market is and what they truly need?”
It’s also time for mortgage companies to be sure their employee rosters reflect the demographics of their changing clients. Right or wrong, consumers tend to prefer to work with or buy from people with whom they share similarities. This is a great example of alignment between doing the right thing and doing what’s best for business.
Lenders should also commit totally to the customer experience (starting with the prospects). Frontline interactions can make or break the possibility of a loan. Are frontline representatives comfortable working with people from any demographic? Are they listening as well as talking? Are they trying to find products that fit the prospect’s needs rather than sorting them into two buckets: “Qualified” and “Unqualified?”
Of course, setting a course based upon a more diverse product mix and better training at the point of sale also requires oversight and monitoring. That’s not just a compliance requirement. Many times, executives and decision-makers for mortgage businesses are stunned when they stumble across an example of poor training or unprofessional conduct in their ranks. The first response is usually some iteration of “That’s not how we trained them!” Perhaps not. But active oversight is necessary to ensure that the training is effective.
Finally, as heavily regulated as our industry is, it’s time to think beyond the here and now. It’s true to say that, currently, any lender seeking to sell a mortgage onto the secondary market is bound by traditional requirements, such as FICO. That doesn’t mean a lender cannot start examining alternative credit models or other potential changes to the way we do business—even if just theoretically.
Change is one of the few constants in this world, and business—including mortgage lending—is no exception. We know the way we go about mortgage lending in 2021 will eventually change, even if we don’t know when. So wouldn’t now be the time to start laying the groundwork to adapt to that change?
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)
