We’re halfway through 2015, and many lenders are still holding their breath waiting for the TILA-RESPA Integrated Disclosure rule (TRID) to go into effect. We all fear the unknown, but lenders can take rational steps to get ready for TRID by adjusting their lending, their lending strategies and improving existing processes. We make adjustments today to prepare for tomorrow.
I’ve traveled to a dozen industry events, listened in on the latest the CFPB has to say, and tuned in to how lenders are reacting to TRID. While many in the industry may want to close their doors and hunker down in preparation for TRID, the world around us does not stop because of an impending regulatory change. Many regions and cities continue to enjoy a robust real estate market and recovery, and with interest rates low but trending upward, many borrowers are actively in the market for a home. Instead of worrying about TRID, lenders should be turning their focus to ways to reaching the emerging Millennials market.
People, process, and technology remain the key to business success, but while this may be true at the most basic level, we all know that nothing about the mortgage industry has been simple or straightforward for many years. The recipe for success in today’s all-digital age is much more complex. Our industry faces uncharted territory; we are still transitioning from the all-time high of the refinance boom to the current reality of purchase lending and higher costs to close. This new lending environment presents us with new opportunities.
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One of the biggest opportunities is the arrival of the Millennials to the housing marketplace. Millennials are the next first-time homebuyers and the new face of lending. There are 86 million of them in the US, and they now represent the largest generation in the workforce. They cannot be ignored; rather, they should be cultivated. We see five key ingredients in the recipe for successful lending to Millennials:
Defined Goals. You must define measurable goals to achieve your future vision. Your goals should be unique to your target market and the strategy of the organization. This, along with any number of factors, will help you define and adjust your goals. Goals, such as increasing the number of loans made to Millennials, should be measurable and bucketed in near-term (1-2 years) and long-term (3-6 years) categories. If you cannot measure the goal, it’s a vision. Your vision belongs in another area of your plan — not under goals.
Measure your goals monthly, quarterly and annually. Consider: Cost-to-Originate, Cost-to-Close, and Gain-on-Sale (GOS) Leakage. GOS Leakage is the difference between the expected gain and actual gain on sales. A CMB colleague once explained to me that most lenders are unaware of this issue. Many mortgage lenders don’t know they have a problem because they don’t closely monitor changes in Gain On Sale. Often times this occurs when the investor’s lock price and margin are altered in a company’s loan origination system after the loan is purchased, often without a date- and time-stamp. In essence, someone changes the original lock price and GOS to match the figures on the purchase advice. If this occurs, there is no way to measure the difference. Pre-purchase or delivery issues can also cause delays in the loan purchase, which can result in extension fees or even having to resell the loan to another investor at a loss. There are several other sources of GOS leakage that result in a reduction of revenues. The key is to monitor each loan to ensure there is little or no difference in the expected and actual GOS.
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Strategy. Your strategy should be based on meeting your goals for the future. As mentioned, the industry we see before us is not at all like the industry we have known. The refinance boom we saw over the last few years appears to be a thing of the past. With new regulations in place and a rebounding purchase market, identifying the impact this has on your strategy is crucial.
As the industry changes, so may your strategy. Just like an endurance race, the key to winning typically isn’t in making broad, sweeping changes, but rather in careful preparation, making small corrections along the way, and tenacity. Consider and measure your market penetration. Whether you’ve reached saturation or are still expanding, home buying behaviors will change over the next couple of years.
The borrower experience throughout the process — whether digital, face-to-face, or over the phone — must be highly personalized to meet the needs of tomorrow’s consumers: Millennials and minority buyers. How will you get there? Mobility, integrating apps, and cloud systems could be an answer. A simple first step could be changing your website flow to make it more intuitive and adding online mortgage applications.
People. The foundation of any successful company, I would argue, begins with great leadership and the right people. Hire smart people that are culturally aligned with your organization and demonstrate the ability and desire to learn, and you’re on your way.
How do you measure or anticipate future performance to meet the needs of your business and lending strategy? You must ask yourself if you have the right people for the changing environment. Can they help you achieve your lending strategy? If the answer is yes, take steps to increase their knowledge and test it, and take actions to regularly demonstrate how “they” and “their role” are critical to the success of the department and organization. The Mortgage Bankers Association recently launched MortgageBankingBound.com to help educate college students about the mortgage banking industry. Education and testing like this is a good place to start. Remember, Millennials aren’t only your soon-to-be customers, they are your current and future employees.
Cost-to-Close. As mentioned above, cost-to-close is simply the sum of mortgage labor costs, direct mortgage costs, indirect mortgage costs and mortgage technology costs divided by the number of closed loans. We all know what we want out of this. The lower the cost-to-close, the more profitable and competitive the lender will be. Study after study tells us the technology cost component is by far the smallest expense in the equation. Labor, in contrast, is always the largest. Lowering costs is a matter of leveraging the former, which, if done properly, reduces the latter, thereby lowering the cost of lending.
Market trends have a great impact on this measurement. Cost-to-close, for most lenders, is up this year over last year, due to the switch from a heavy refinance focus to a focus on the purchase market. Purchases are inevitably more complex and time-consuming. So how can lenders lower this measurement? High performance lending is dependent upon productivity. Add a new market — for example, by working more closely with first-time buyers — or gain new market share without adding staff, and your productivity will go up. Also, take a look at your internal efficiencies. Is your team inputting the same data multiple times due to disparate systems or redundant processes? Many redundancies can be found in manual compliance checks, imaging, and document production areas of the loan manufacturing process.
Technology. Technology is the great unifier. Mortgage lending has undergone a remarkable transformation over just the past decade. Mortgage lending has traditionally been a disjointed process, requiring interactions with multiple systems to close just a single mortgage. Lenders are now realizing these methods are antiquated. In order to see their cost-to-close go down, lenders need a system capable of getting borrowers to the closing table faster. Online is now where it’s at – especially as it relates to the all-digital Millennial borrower. Lenders not online are bound to miss out.
Lenders should make every effort to meet Millennial borrowers where they spend their time — on their phones, tablets, and computers. These lenders should be connected and innovative, finding technology that positions them for the upcoming all-digital mortgage revolution. Some mobile technologies can combine spending/saving psychology, behavioral science, location data, and other services (such as debit card and payments). This offers Millennial consumers real-time, context-based feedback on their daily spending levels and options for saving money, thus engaging them in a more compelling way. Buying behaviors are changing; the lender’s goals, strategy, and technology must also change to stay relevant in tomorrow’s all-digital mortgage lending environment.
I’ve spent nearly my entire career in the mortgage industry. One thing it has taught me is to expect and embrace change. We need consistent ingredients and careful measurements to benchmark our business success. No matter the ups and downs we may face in the years ahead, tracking to definable processes and measurements will allow lenders to know when something is working and when it is time to move in a new direction. Taking the right steps today positions lenders for success tomorrow.
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