Mortgage lending and the interest rate environment

Patrick Houghton-Brown Patrick Houghton-Brown September 18th, 2019
Marketing Insights

Anyone tracking mortgage interest rate activity this year has been on a roller coaster ride. After rising in April, they began their decline in May, and they’re still low. While forecasts predict steady growth in the housing market, a quick glance at the latest housing data shows some of the volatility and challenges facing mortgage lenders. After an extended period of low rates, refinance activity began the year off 40% from the start of 2018. Despite this, analysts are forecasting a full-year increase of 20% over 2018.

What does it all mean? We entered the summer in a surprise low-rate environment. But given the sudden and volatile path to where we are now, many lenders aren’t staffed to capitalize on a rate-and-term environment. Against this backdrop, lenders need tools to help them protect and grow their portfolio; maintain a healthy, balanced pipeline and prioritize their prospects.

We wanted to do a deep dive into this situation, so we explored the current environment in our recent whitepaper, How to Drive Mortgage Originations Despite the Challenging Lending Environment. It looks at how financial institutions can seize market share through strategic marketing that leverages data segmentation, expertise and targeting to turn prospects into clients—despite market challenges.

Here, we’re giving you a two-part preview of what you’ll find in the whitepaper. This article, Part 1, looks at the state of the industry. In Part 2, we outline some ways marketing can address it.

State of the mortgage industry

The demand for refinance mortgages is shifting from cash-out to Rate and Term, and competition from retail banks for purchase and equity loans has steadily increased. According to the Housing Finance Policy Center’s Housing Finance at a Glance: A Monthly Chartbook March 2019, the non-bank share of originations has been steadily rising for Freddie Mac, Fannie Mae and Ginnie Mae since 2013.

While the HFPC found that the non-bank share of purchase originations sits at 61%, non-banks hold an even greater percentage of refinance originations, coming in at 66%, with a majority of that share coming from Ginnie Mae. For banks and non-banks alike, the key to gaining market share will come from knowing how to properly leverage their respective strengths.

Depository institutions got hit hard with regulations following the financial crisis, so they tend to take a cautious approach to purchase loans. But their strength lies in their ongoing relationships with customers, giving them the opportunity to cross-sell as trusted advisors. Non-banks, on the other hand, jumped into mortgage lending without the baggage of legacy tech or processes and have quickly pioneered the digital mortgage. According to the same HFPC research, non-banks played a key role in opening up access to credit, with non-banks consistently lending to borrowers with lower average FICO scores compared to retail banks.

Whichever advantages they currently have, both kinds of lenders are dealing with historically high costs to originate, reducing the profit margins on home purchase loans even while they have to fight harder to win that business. The Mortgage Bankers Association’s Quarterly Mortgage Bankers Performance Report found that independent mortgage banks and mortgage subsidiaries of chartered banks reported a net loss of $200 for each loan they originated in the fourth quarter of 2018. This is only the third time that mortgage originators have ever reported a loss per loan. Playing a large role in this, the cost to originate a loan increased to $8,611 per loan in the fourth quarter, up from $8,174 per loan in the third quarter. This was all as total mortgage origination volume decreased, which added up to serious headwinds for lenders.

This is where marketing can step up to the plate and hit a home run. Depository banks and non-banks alike have the opportunity to captivate potential homebuyers if they know how to properly go to market. A quick diagnosis of the market shows some interesting facts:

  • Non-bank lenders spend more on marketing than banks, with banks not doing enough to sell mortgages to existing customers.
  • For direct lenders, it costs an average of $1,000 in marketing per loan to acquire a new customer, but less than $400 in marketing costs to cross-sell or retain an existing customer.
  • Despite the ups and downs of the market, 45,962 homes go up for sale every week.
  • 725,314 people refinance or buy a home per week.
  • The National Association of Realtors’ existing-home sales report for March stated that total housing inventory at the end of March sat at 1.68 million, and completed transactions that include single-family homes, townhomes, condominiums and co-ops hit a seasonally adjusted annual rate of 5.21 million in March.
  • All of this demand leads up to an average of 103,616 in-the-market consumers every day. That’s 103,616 potential borrowers to capture.

How can marketing hit that home run? Read Part 2 in our series to find out. And download the full whitepaper, How to Drive Mortgage Originations Despite the Challenging Lending Environment to find out more.

This content is accurate at the time of publication and may not be updated.