Black Knight: Servicing Retention at 13-Year Low

Black Knight, Jacksonville, Fla., reported the share of borrowers who remain with their prior servicer post-refinance reached record lows, creating possible challenges in an ever more competitive marketplace.

The company’s monthly Mortgage Monitor said just 18% of borrowers remaining with the same servicer post-refi in the first quarter, the first time that datum fell below 20% since Black Knight began tracking the metric in 2005.

Black Knight Data & Analytics Division President Ben Graboske said the already volatile refi market and fluctuating mortgage rates are dramatically affecting the refi-eligible population–those who could benefit by refinancing their mortgages. The report noted a recent drop in the 30-year fixed rate to 4.06% increased the sizer of the refiable population by 1.6 million in a single week to 4.9 million. A subsequent increase in rates (to 4.14%) “knocked 1 million of those folks right out of the running.”

“There are currently 3.9 million borrowers who could save 75BPS on their current rate by, and likely qualify for, refinancing,” the report said. “That population could dramatically increase if rates hit 4%, and largely evaporate if rates rise above 4.25%.”

Graboske said customer retention has become increasingly difficult for mortgage servicers as a volatile refinance market with greater rate sensitivity has constrained the number of remaining refi candidates, further heightening competition. He noted the market has shifted dramatically away from rate/term refinances–for which servicers have historically seen good retention rates–to cash-outs and home sales, areas in which retention has been low.

“In Q1 2019, fewer than one in five homeowners remained with their prior mortgage servicer after refinancing their first lien,” Graboske said. “Anyone in this industry can tell you that customer retention is key–not only to success, but to survival. The challenge is that everyone is competing for a piece of a shrinking refinance market, the size of which is incredibly rate-sensitive, and therefore volatile in its make-up.”

Graboske said rate volatility is critical, because refinances driven by a homeowner seeking to reduce their rate or term have always been servicers’ “bread and butter” for customer retention.

“Offering lower rates to qualified existing customers is a good, and relatively simple, way to retain their business,” Graboske said. “Unfortunately, the market has shifted dramatically away from such rate/term refinances. In fact, nearly 80% of 2018 refinances involved the customer pulling equity out of their home–and more than two-thirds of those raised their interest rate to do so. Retention battles are no longer won–or lost–based on interest rates alone. A simple ‘in the money analysis’ doesn’t provide the insight necessary to retain customers and can’t take the place of accurately identifying borrowers who are likely to refinance and offering them the correct product. Rather, understanding equity position–and the willingness to utilize that equity–is key to accurately identifying attrition risk and reaching out to retain that business.”

The report noted in 2018, 72% of FHA/VA borrowers in peak cash-out refi vintages (2012/2013) refinanced into a conventional loan product to pull equity from their home; just 28% ended up with an FHA/VA product. “This suggests that borrowers may be looking to shed mortgage insurance while simultaneously taking advantage of equity,” Black Knight said.

An “astonishing” 93% of those same borrowers raised their interest rate to do so, Black Knight said. On the other hand, those with GSE loans tended to remain in GSE products post-refinance–61% remained, while 32% shifted to loans held in bank portfolios.

“It could be that rising home prices are pushing that second segment into non-conforming, jumbo products,” the report said. It’s also worth noting that fewer GSE borrowers, as compared to FHA/VA, are increasing their interest rate in order to tap equity.”