Garth Graham from STRATMOR Group: Why a Refi Wave Won’t Save Every Lender

Garth Graham is a senior partner with mortgage advisory firm STRATMOR Group. He manages STRATMOR Group’s company’s mergers and acquisitions activities, providing strategies for some of the largest Independent and Bank-owned mortgage lenders. He also leads the marketing strategy and execution practice, which focuses on lead generation and lead management methods and practices primarily for the consumer direct and retail mortgage origination channels.

Living as I do so close to the Florida shoreline, I’ve seen firsthand what a rising tide does to all boats. I have never seen a rising tide fail to raise all boats on the water—not that anyone has ever doubted this bit of wisdom. And that’s a problem because it doesn’t always work. At least not when the adage is applied to our industry. In fact, over the past year, I’ve talked with many lenders who believe that as soon as the next wave of refinances hits the business, all their problems will go away. But that isn’t guaranteed.

Four Reasons the Next Refi Wave Will Be Different

The tide will eventually come in. When it does, it will bring more refinance business, but it won’t lift all the lenders in the market.

Here are the reasons I believe this to be true:

Servicing Portfolios Defeat Trigger Leads

Lenders who rely on buying credit trigger leads may be in for a rude awakening in the next cycle. There is a trend to prevent lenders from buying non-customer trigger leads so the recapture opportunities are more likely to go to the existing servicer or bank that has an established relationship with the customer.

Of course, there are some strong retail originators that also retained servicing, and if they provided high satisfaction on the origination AND during the period of servicing, they also have a major opportunity to retain that customer if they choose to refinance.

Capacity Is No Longer a Problem

In the LAST refi boom (2020-2022), the rate of refinance opportunities captured by the large servicers was not as high as it could have been, often because they could barely keep up with the high demand, which created more opportunities for other originators to capture these refinances. But let’s examine why that was, and why it’s not likely to be as much of a factor this time.

About half of all new refinance loans written during the COVID runup went to Consumer Direct (CD) shops – sometimes the servicers or centralized or internet lenders who had strong lead conversion capabilities. 

Capacity problems will not send prospective borrowers trickling down to smaller lenders this time. The lenders further downstream won’t even see the business. These big CD lenders are staffed, mostly idle, have built out marketing programs, and even have built out major “big data” or AI approaches to finding the most likely refinance customer to respond.

These CD lenders understand how to build call centers, staff them appropriately, and scale them quickly. I expect more than 60% of all refis in the next wave will go into these direct channels. 

Tripped Up by Traditional Compensation Plans

Traditional compensation plans are serious impediments to any lender who wants to be competitive in the next refinance wave. On the other hand, lenders who have taken the downturn as an opportunity to tune up their compensation plans have an advantage.

The average Retail IMB is still paying 100 basis points in average compensation, although it has dropped slightly since 2018. The average bank Retail averages roughly 70 basis points, and the average CD lender is well under 40 basis points in compensation. So, the Retail lender has roughly a 30-60 basis point disadvantage in compensation and that typically shows up in a disadvantage in pricing to the consumer.

Lenders who cling to the 100-basis-point model will find it very difficult to compete with the big call centers that pay dramatically lower compensation per loan. And they also may find it hard to compete with banks who also pay less and have some ability to cross sell mortgages to their depository customers.

The Payoff for a Lender’s CX Work

Many lenders have streamlined their processes with an informed focus to optimize the consumer’s experience throughout the lending process. As a result, these lenders increased efficiency, reduced costs, and delighted their borrowers. These outcomes enabled them to offer better deals and a better experience to homeowners.

The lenders who consistently do this work and can now offer borrowers a much better experience will win the business when the refis return. Those who expect to operate the same way they always have will be left out at sea.

All of this adds up to a much more competitive environment that will put more refinance business into lender shops that are well-prepared to receive it. Those not prepared, or ill-prepared, will find it difficult to catch up to their competition. But there are things they can do now to keep their businesses afloat.

Prepare to Compete for Every Loan

It’s time now for lenders to prepare for the changes that are coming. Standing still, or treading water, is not a good option.

Here is what I recommend lenders do now:

Step 1: Make Sure You’re in the Right Channels

The next wave of refinance business will skew heavily toward lenders that have either strong, tightly integrated Retail or Consumer Direct channels, or both. Note, you don’t HAVE to have a big call center to compete, but you need to leverage the techniques of direct marketing, lead generation, lead follow-up, and an integrated sales process.

Step 2: Tune Up Your Lead Generation

Lenders with a servicing operation can tap into those portfolios in search of new business. Lenders without those relationships will need to step up their marketing to attract refinances. They can’t out-advertise the giant lender shops, so they must find a better way of creating awareness when homeowners see rates start to fall.

Step 3: Build a Better, More Streamlined Process

Today’s consumers won’t wait around for a lender that can’t move the refinance process through in a streamlined fashion. Our data shows that the originator who ultimately wins the business often does so because they offer a good deal AND a good experience.

Step 4: Fix Your Compensation

When homeowners come back to the table, they’re going to want every bit of rate improvement they can get. If your current compensation plan makes that difficult or impossible, you won’t win the business.

By taking these steps, lenders can position themselves to capture a larger share of the next refinance wave.

(Views expressed in this article do not necessarily reflect policies 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 Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)