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Putting Lending Under the Microscope


This piece originally appeared in the October 2021 edition of MReport magazine.

Depository institutions are struggling against declining market share even as the demand for mortgage loans remains strong. But if they focus on their strengths—customer relationships—and ensure that their technology can provide the digital speed and ease of applying, processing, and closing borrowers have come to expect, they can compete effectively, according to analysts.

In its August 2021 publication, Data Point: 2020 Mortgage Market Activity and Trends, the Consumer Financial Protection Bureau noted:

In 2020, a total of 4,475 financial institutions—banks, savings associations, credit unions, and non depository mortgage lenders—reported data on approximately 22.7 million applications and 14.5 million originations under HMDA. By contrast, in 2019, 5,508 financial institutions reported data on 15.1 million applications and 9.3 million originations under HMDA. Compared to 2019, the number of reporters decreased by 1,033, or about 18.8%, likely due primarily to the increase in the closed-end reporting threshold that was implemented by the 2020 HMDA rule.

Yet, though the number of reporting financial institutions dropped, the number of applications and originations increased by 7.5 million, or 50%, and 5.2 million, or 56%, respectively, the CFPB said.

The Changing Role of Depository Institutions

According to an industry report, U.S. non-depository institutions issued more than two thirds (68.1%) of all mortgages originated in 2020, up from 58.9%, the smallest market share on record for the depository institutions.

However, depository institutions can do a better job of holding on to their current market share if they refocus their efforts on marketing effectively to their current customer base, understand and leverage their margins on loans, and use the technology tools at their disposal to ensure the efficiencies of their mortgage lending process, according to industry experts.

“The independent mortgage bank market share tends to go up and down with interest rates and lending volume, particularly refinances,” said Craig Focardi, Senior Banking Analyst, Celent. “So, I think the depositories can compete in the current market by focusing their technology automation and their business strategies around the purchase market.”

Those that have already invested in that technology will hold their own as interest rates go up, as expected, while those that have yet to make those investments will struggle until they do, Focardi added.

Many of the challenges that lenders face, whether they be independent or a depository institution, are the same, said Tom Finnegan, Principal, STRATMOR Group. “The volume of mortgages that are going to be available is going to almost certainly shrink over the next couple of years versus where we’ve been in 2019 and 2020. We reached very high-volume levels in 2020. That’s continued so far in 2021 as rates have remained low.”

With more demand than capacity, mortgage companies and depository institutions were able to expand their pricing margins and revenue per loan higher than they typically have been able to, Finnegan added. “The challenge is that, at some point, margins are going to compress and volume is going to go down.”

The Labor Challenge

Declining volumes present a challenge to depository institutions because they tend to be a bit less nimble than the independent mortgage bankers, Finnegan said.

“The independent mortgage bankers operate with a lot less capital, so they have to be nimble to keep their costs in line. So, they’re more likely to quickly right-size themselves, if volume goes down. The banks have historically been less nimble in rightsizing when volumes go down.”

However, depository institutions see the coming downturn and are starting to get a better handle on their cost structures so they can respond accordingly, but there’s still more to do, according to Finnegan. “They need to continue to explore efficiencies by understanding their mortgage loan process, and the technologies that they’re employing to improve workflow and keep costs at a minimum.”

Finnegan also recommended that depository institution lenders look at their per-loan compensation levels to see if they should be reduced when volume drops to help with cost control.

Finnegan added that many depository institutions have seasoned sales forces, which can be an advantage. However, to compete effectively in the future, they will have to replace that pool of people.

Regulatory Concerns

While all mortgage lenders are subject to the basic fair lending rules, Mortgage Disclosure Act rules, etc., the depository institutions also need to report to their primary federal regulator, such as the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board (FRB), the Office of the Comptroller of the Currency (OCC), or the National Credit Union Administration (NCUA).

“The regulatory environment in the current political administration is changing and may be tightening up,” Finnegan said. “The uncertainty around the regulatory environment is another risk that banks (and credit unions) face that independent lenders don’t, at least not to the same degree.”

However, Austin Kilgore, Director of Digital Lending, Javelin & Research, sees little difference in the regulatory concerns between independent mortgage lenders and depository institutions outside of Community Reinvestment Act concerns.

“More regulation creates burdens for small lenders—additional cost, need for additional expertise to navigate the rules, etc.,” said James Post, COO, Credit Union of Texas. “As a result, cost of oversight and the impact on revenues will continue to be a concern moving forward.

Relationships Can Offer Advantages

Despite the regulatory and staffing challenges, depository institutions have several advantages over independent mortgage bankers, Finnegan said.

“They need to focus on those competitive strengths.” Those would include that they are well-capitalized, that they have a low cost of funds, they can hold loans in their portfolio, as part of their overall mortgage strategy. They are not just bound to selling loans into the secondary market as independent mortgage bankers are.

“If they can take all those advantages as well as their referral sources, and bring those to bear in terms of serving customers, they can hold their market share in lower volume times," Finnegan said.

“The other big successful banks do is focus on marketing. One difference between the independent mortgage lenders and banks has been that the independents are better and more intense, with all of their marketing emphasis on mortgages.”

Banks and credit unions typically don’t tell their story well, and really target market to their customer base, and to people in their surrounding communities as well as some of the independent lenders do, Finnegan added.

Rocket Mortgage, loanDepot, and other independent mortgage lenders are very aggressive with their television advertising, Finnegan said. While depository institutions, even large national ones like Bank of America or JPMorgan Chase, are unlikely to match the television campaigns, they can instead focus on marketing to their own customer base for mortgages, emphasizing how they can serve their customers better.

“Depository certainly have a strong advantage over nonbanks when it comes to the opportunity to provide mortgages to their existing customers,” Kilgore agreed. “Consumers will often go to their primary financial institution to at least apply for a mortgage and get a rate quote, if not go through the loan process from end to end. The big opportunity there is that you have that touchpoint of that existing relationship.”

“That’s particularly true of credit unions, which have tight memberships,” Finnegan said. “Many of them do a very good job in marketing to their customers in this area.”

Whereas the large national mortgage lenders can make large investments in marketing, such as Super Bowl ads, that smaller depository lenders can’t, smaller marketing budgets also mean that these lenders can pass along the savings to customers in the form of lower rates, Post added.

“Members may be more likely to pay a marginally higher rate for the service and convenience of working with their credit union; however, members are also very rate sensitive in the current market due to the amount of rate information and marketing saturation being delivered,” Post said. “Members expect their credit union to be the best and offer rates at, or better, than their competitors.”

Product diversity is also a key driver for credit union members, with flexibility to tailor solutions to meet their individual needs—and based on their relationship. The credit union offer solutions for them that “the big guys” can’t, Post added. “There are opportunities to offer unique portfolio product options such as bank statement or stated income programs for self-employed members. Product diversity is also a key driver for credit union members, with flexibility to tailor solutions to meet their individual needs—and based on their relationship.”

“They can always do a better job leveraging their existing relationships to improve the borrower experience,” Kilgore added. “That’s a goal that is never going away and can always be improved upon. It’s not an opportunity that they’re necessarily maximizing on as an entire sector.”

A more focused marketing strategy could also help depository lenders, Finnegan noted. The independent lenders focus their marketing efforts strictly on their mortgage products. Depository institutions, on the other hand, have focused more on institutional advertising, featuring the variety of services they can offer to their customers.

“Banks have to have a more focused marketing strategy to defend their market share,” Finnegan said.

However, Post sees the idea of being a one-stop-shop for a member’s financial needs as a benefit.

“Members are literally vested in the credit union as member-owners, and vice versa. A member is not just a number; they have a relationship with us. In many cases, this allows us to offer unique services, such as portfolio exceptions or unique products such as jumbo loans to 90% without PMI, or 100% financing options.”

Another way to help defend market share is to retain the servicing after selling the loan into the secondary market. Doing so enables the bank to have a monthly “touch” with the customer, Finnegan explained. “That monthly touch with the customer base can be an important part of their marketing strategy on an ongoing basis. They need to take advantage of the inherent strengths that they have.”

The successful banks and credit unions are those that can execute on all those strategies effectively and that know their costs well, understanding their profits and losses on different types of mortgages, Finnegan added. “We do find banks that are not as in touch with their cost structure and their profitability for mortgage, and we try to help them with that. But the successful banks know their profit and loss on mortgages very discreetly, and again, can bring to bear those capabilities that they have. For example, some banks have expertise with construction lending for single-family homes. As more homes get built, they need to capitalize on that expertise.”

It’s easier for depository institutions to hold these construction loans on their balance sheets than it is for independent mortgage lenders, Finnegan said.

Technology Considerations

Depository institutions shouldn’t look to compete on rates, but rather focus on relationships with customers, improving the ease of the mortgage application and closing process, as well as other factors, Focardi said. Even if a consumer is seeking a jumbo mortgage, the difference of five or 10 basis points is unlikely to prompt the search for another lender. Twenty-five basis points or more, however, might prompt the potential borrower to look elsewhere.

Focardi pointed to automation as the key to bringing in more leads at the top of the sales funnel; driving those leads to loan officers who use a combination of technology and their own knowledge to advise customers on loan products and to engage them in real-time and for efficient loan application and

Today’s borrowers tend to be millennials or members of Gen X who are fairly adept at digital technology, so they expect the same level of tech-savviness from their lenders, something the more successful depositor lenders understand, Focardi noted. “Converting leads into loan applications and processing them are the highest priorities among financial institutions.”

Kilgore added that some independent mortgage lenders, like their depository institution counterparts, still need to add or improve upon their digital mortgage lending technology.

“What Rocket Mortgage has done in some ways is inflated the sense of ease of getting a mortgage,” said Paul Katz, Managing Director of Bank Relations, Promontory Mortgage Path. “With the mortgage process, it’s not just press button, get mortgage. But when you’re advertising at Super Bowls, and you’re saying that, basically, you hit the easy button and get a mortgage, that’s creating a challenge for all the other players in the space to be able to provide a seamless and user-friendly experience.”

Focardi said that depository institutions need to use technology that decreases the end-to-end cost for the institution while enhancing customer satisfaction. While the investments in these technologies does result in higher costs for depository lenders, the availability of these technologies also means higher customer satisfaction.

Among the technologies that depository institutions should invest in if they don’t already have them, according to Focardi, are ones that provide:

  • eSignatures for applications and disclosures
  • Digital verification checks
  • Online loan status checks
  • Point of sale/loan origination system integration
  • Digital process transparency for the customer
  • Digital eClosing

Remote online notarization as another key technology for mortgage lenders, Kilgore added. “It’s a really useful tool for efficiency and borrower empowerment.”

“Lenders need to provide a digital mortgage shopping and buying experience similar to online mobile/retail,” Focardi said. The area where depository lenders lag the most is with closing technologies, he added.

“Keep borrowers engaged with the loan process by conveying a sense of accomplishment once the application is submitted,” Kilgore advised. “The goal is to demonstrate that progress is being made on the application, even if a lender’s digital process doesn’t include automated loan pricing and other tasks that accelerate the speed of the application. This can be achieved by automatically assigning the loan file to a lender employee or providing interactive tools in the borrower portal with consumer education and other relevant content.”

However, it’s not necessary for depository institutions have the latest and greatest mortgage technology, Finnegan said. “Technology is important, especially in terms of how the interface with customers works, an easy online application, but bleeding-edge technology isn’t a make-or-break differentiator for banks and credit unions. They just need to be current and be able to execute well on the technology that they have.”

Some depository institutions are behind in adopting that technology, though, Finnegan said. “They have to have easy-to-use technology, a local presence, and someone to talk to at the bank [or credit union]. Oftentimes, they can tailor products to a particular customer’s needs, and that’s harder for larger mortgage lenders to offer, that’s where depository institutions can oftentimes set themselves apart in terms of competing.”

The marketing, regulatory, and other challenges will persist, analysts agree. However, depository institutions that stay committed to mortgages and commit to the technologies to compete with the independent lenders can compete effectively going forward, as Katz noted. “I think the ease of entry or re-entry, and ability to stay in that game with agile and strategic partnerships, will enable them to draw the line and if not, grow, on a micro-level, grow their business. But that’s easier said than done. It feels like those that are innovators want to stay in it, or want to grow. We’re a whole host of conversations with those that want to re-enter the business.”

However, any market share discussion would be skewed negatively if a large depository institution decided to exit the mortgage business, Katz cautioned.

About Author: Phil Britt

Britt started covering mortgages and other financial services matters for a suburban Chicago newspaper in the mid-1980s before joining Savings Institutions magazine in 1992. When the publication moved its offices to Washington, D.C., in 1993, he started his own editorial services room and continued to cover mortgages, other financial services subjects, and technology for a variety of websites and publications. 

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