The service commodity: lenders today should avoid solely competing with numbers and let their service quality shine.

THE SERVICE COMMODITY

Lenders today should avoid solely competing with numbers and let their service quality shine.

Open the yellow pages in any major city. Look under "mortgages." Make a few phone calls. In most metropolitan areas, 10 percent to 30 percent of all mortgage companies listed aren't around one year later. They've vanished. The main reason is price competition. Companies that continued to do things "the old way" watched profit margins sag. They couldn't change fast enough to cut overhead, raise capital or follow profitable marketing trends. Some who were tied to large branch networks perished. Others built many small branches and thrived because of their talent at direct mail marketing instead of employing commissioned loan officers. For the past four years in the mortgage marketplace, the watchword has been "adapt or die."

Lean survival

Even those who have survived have watched margins fall. The rule has been: every year you have to double your volume in order to make the same amount of profit as the year before. Every year, more players seem to compete for the same piece of marketshare pie. Why is it that even companies that seem to have successfully adapted to the new market environment are still caught in a downward earnings spiral?

Mortgage loans are viewed by many as a financial commodity. We securitize them, trade them, hedge them. This attitude towards mortgages, held by the most technically adept and influential members of the mortgage banking profession, has worked its way down to the marketing team in almost every company. Realtors call mortgage bankers to find out rate and points as if borrowers are auctioning off their mortgage to the banker with the lowest bid. Many loan officers are not salespeople at all. They are merely bidders, whose job it is to submit bids to borrowers and Realtors in the hope that their price will be low enough to successfully capture the business. In such an atmosphere, it is no wonder that profit margins are shrinking. If loan originators merely bid for mortgages instead of selling the lender's service, why have commissioned loan originators at all?

The average loan officer working for the typical mortgage banker has been given little in the way of a coherent selling strategy. The most powerful people in the company treat mortgages as a generic commodity product. The concept of service consists of promising to do everything possible to ensure the mortgage is processed in a hassle-free, timely manner. There is no detailed service program with clearly identifiable and defined benefits for the customer. Every company to whom the borrower is introduced promises excellent service. Because borrowers may only use mortgage services two or three times in a lifetime, they have few standards of comparison for service between companies. Because the service concept is vague, the customer returns to the only viable decision-making criteria--price.

This article deals with transcending the price/service trap in which the industry finds itself by proposing a sales and service strategy that can be sold to customers. By customers, we mean both borrowers and their referral sources (e.g., Realtors, builders, attorneys and other advisors.) Lenders must stop marketing mortgages as commodities that are merely auctioned off to borrowers; stop making vague, intangible promises about service. Communications and problem-solving programs must be made specific and tangible to customers. To do this, lenders should start paying attention to how mortgages are sold and develop a set of service products that fit into the sales strategy. Once and for all, lenders have to stop selling mortgages and start selling mortgage loan services.

Managing the sale of mortgage loan service

The sale of the mortgage loan service consists of two parts, the external sale and the internal sale. The external sale takes place when a loan officer persuades Realtors, builders, borrowers, or anyone outside of the mortgage company, to purchase mortgage services. The loan originator must have a plan that includes a targeted Realtor base and specific marketing strategies designed to help the loan officer sell himself, sell the company, and sell the product. Realtors, builders and other referral sources all want "service."

At most mortgage companies, service generally consists of attempting to be as nice as possible and making every effort to rush loans through production without getting anyone angry. This is a "crisis management approach" to service. But companies with sophisticated marketing programs define the services they offer precisely. A team effort is put together to sell these services because every time the Realtor or the builder comes in contact with anyone from the mortgage company, an opportunity exists to sell a service.

According to research with focus groups by Ann Arbor-based Washtenaw Mortgage Company, 70 to 80 percent of every borrower's decision-making begins by discussing price. The question that propels loan origination is, how do we take secondary concerns like communications, counseling and efficiency and build them up into primary concerns about service? How do we make services more tangible to the consumer? The answer is to instill a company-wide service ethic that can be sold by loan originators as an integral part of the mortgage loan product. This service product is then wrapped around a series of low payment fixed-rate loans that can be sold only by counseling the customer. Low payment fixed-rate loans require a loan officer to know how long the customer intends to be in the house. They save the customer cash over a five- to ten-year period. Thus, if a borrower is going to be in the house for that length of time, these products are actually less expensive for the borrower in many cases than 30-year fixed-rate loans. Providing access to money-saving, low-payment fixed-rate products is a counseling service that harkens back to the customer's central concern--price.

The internal sale consists of persuading the operations staff in the back office to meet and, if possible, exceed the expectations of the customer. Everyone expects the corporate sales strategy to define the company's approach with respect to the sale of services to Realtors and borrowers. But seldom is any thought given as to how office staff will react to the wide variety of needs and problems that accompany loan production.

The processing and closing staff must understand the service product that the company is selling, and policies must be developed that support that sale. Office staff must understand that their reputation for efficient processing, their skill in dealing with difficult customers on the phone and their insightful use of interim status reports are a large part of the service product.

Without the support of back office staff, there is no service to sell--only a price-driven, generic commodity. The sales manager supervises the loan officers who make the external sale. But the sales manager also has to sell the loan officer's program to his management peers in operations. Unless that sale is made, there is no way to ensure the wholehearted support of the processing and closing staff.

The external sale

The loan officer must sell three things in order to sell the mortgage loan service. He must sell himself, the company, and the product. If customers only cared about price, then brand X mortgage and discount mortgage would be the two largest mortgage companies. Clearly, this is not the case. It is evident, then, that mortgage customers demand intangible benefits. In reality, borrowers behave as though simply purchasing the mortgage loan itself is not enough--they also want to purchase financial advice, good communications, fast service, security, comfort and professionalism.

Loan officers find it hard to market to borrowers directly. It is generally agreed by several companies' market research that only 5 percent or less of people who potentially need a mortgage are in the market to apply for one at any particular time. Thus, mortgage companies spend most of their resources marketing to referral sources. Marketing messages can be focused very efficiently on individuals who refer mortgage customers.

The retail mortgage market is an inefficient market. Some customers shop around extensively for the best price, but according to Washtenaw Mortgage's research, most call no more than three lenders. Information about the slight differences among prices is not readily available to retail customers. In general it is likely, then, that mortgage loans are not made by the particular mortgage company in town that happens to have the lowest price on a given day. Interestingly, while retail customers are heavily focused on price, referrals are often obtained from Realtors, attorneys, and others who are also looking at service and have long-standing relationships with high-quality loan originators and companies.

The principal task of the commissioned loan originator is to persuade these referral sources that the service of XYZ company is the best available and that the price of mortgage money at the XYZ company is competitive with other companies offering services on a comparable level. This process of selling the mortgage loan service to a referral source is thought of as a complex sale, because two or more individuals have input into the buying decision. That is to say, before a borrower will agree to place his application with XYZ company, his referral source must be sold on the idea that XYZ company will make his client happy. Often, even more people are involved in the buying decision, such as a spouse, a friend or a relative acting as an advisor. Thus both the borrower and his advisors must be sold on the idea that the XYZ company is the best choice. All of these parties, technically speaking, are "customers" of the mortgage company. Each one has slightly different priorities and concerns that must be addressed by the loan officer.

Selling yourself

A mortgage loan officer sells himself. He should be professionally dressed, likable, a good teacher, warm, empathetic, and have the ability to develop personal relationships with borrowers and adapt readily to a variety of social styles. The loan officer who has these qualities, however, has no real advantage with respect to borrowers over his competitors. Occasionally one meets a salesperson with an exceptional sense of humor or wit who stands out in this regard, but these kinds of personality factors are not usually decisive in the borrower's decision to purchase mortgage services. Selling yourself to Realtors and builders who represent referral sources and parties to the complex sale is another matter. These individuals focus heavily on your personal reputation and on your company's track record for service. Unlike the borrower, who has no standard for comparison among different mortgage companies, Realtors enjoy the perspective of looking back over many transactions. Their judgements about you are shaped by repeated experience. Ask Realtors what they want out of a mortgage loan officer and they usually reply "excellent service."

After much fieldwork we have isolated three components of the Realtor's service concept--professionalism, affection and marginal loans. How a mortgage company meets these needs will vary. Some companies will meet the first two criteria but decline to do B- and C-rated credit loans. They find that working with bad credit and marginal properties damages their company's image and credibility. Other companies learn to work with difficult buyers and still protect their professional reputation. Banks and S&Ls that handle marginal credit by putting such borrowers on ARMs and placing those loans in portfolio enjoy a distinct marketing advantage over non-portfolio lenders. These loans are often subject to loan-to-value, amortization, and other restrictions intended to offset the loan's inadequacies. By definition, loans with inferior credit and property standards must ultimately have higher reject and delinquency ratios. Therefore, by accepting marginal loans, a company sets itself up for having a higher rejection rate and, therefore, must always impact, to some degree, a company's reputation for "always getting the job done."

Selling your company

Selling your company is largely a question of selling its service ethic to the Realtor. It helps to have this service ethic clearly stated in writing. Avoid vague formulations like, "We'll do our very best," or "Our turnaround time is the best in the city." Rather say to the Realtor: "Our turnaround time is 45 days. That's firm. You can ask anyone in the city whether or not we deliver on this promise or not." In order to accomplish this, an operations staff must commit to a service standard and they must do "whatever it takes" to make this promise a reality. Some staffs are prepared to work nights, Saturdays and Sundays, if necessary, to keep this promise. The thought of "doing whatever it takes" may sound like a big commitment to your operations staff. But a mortgage company is not in business to push papers across the desk eight hours per day. It must keep promises to customers. As one experienced head of operations has noted, "Our paycheck is signed by the customer." The hard news, however, is that operations must make unambiguous promises and keep them. Therefore, loan originators must be careful to sell only those promises that the company's operations staff is firmly committed to keeping.

The most important service that a mortgage company can offer is a prequalification and precommitment program. Prequalification gives a company a chance to demonstrate all its services, status reports, quality communications and telephone accessibility. To sell mortgage services, you must have a visible, functioning service program that literally "screams" excellence and stands head and shoulders above the ordinary competition.

Prequalification and precommitment also builds Realtor relationships and cuts back drastically on rejected loans. Loan officers should adopt the policy of prequalifying every borrower. Realtors who fail to use this service should be reminded of the risks they run and the tragedies that can ensue when unwelcome surprises turn up in a real estate sale. Through proper prequalification, it is possible for a loan officer to maintain a reject rate that is virtually zero.

If you are a lender generating primarily government and conventional conforming loans, the two most visible and effective mortgage services to provide are a company-wide policy for returning phone calls and a prequalification and precommitment service that is second to none.

Selling value-added product

Products present interesting sales opportunities for loan officers. A borrower will be very interested in a new product if it will save him money. On the face of it, Realtors should be less interested than borrowers in different mortgage products. However, most Realtors are cost-conscious, and will sell cost savings to their buyers as one of their service products; a part of their company's total real estate services.

Thorough product knowledge of the various types of loans, buydown options and low fee options is critical for the loan officer. Buydowns and other low payment niche products, in particular, offer the customer the opportunity to save money over the time period the borrower is actually in the home. The successful loan officer must understand the difference between simply looking less expensive in terms of rate and points and saving the buyer money in terms of the actual dollars spent over the life of the loan. Explain to the customer: "A mortgage is not a set of abstract concepts such as rate and points. A mortgage is a monthly payment in dollars. And it is how those dollars add up with time that determines if you are saving money or losing money on a loan." This understanding of the product spells the difference between getting caught in the profit-destroying cycle of rate/point competition and transcending that competition by showing the customer cash savings. (See Mortgage Banking November 1989 "Transcending Price Competition.") A mastery of the different forms of break-even analysis can often make or break a sale both to the Realtor and the borrower.

During the average life of a loan (12 years for 30-year mortgages), there are few cost differences among companies' 30-year fixed-rate mortgage products. But when one compares a 30-year fixed-rate loan with 2 points to a 1-0 buydown of a 30-year loan over a period of five years, the cash difference to the customer in the first year is always hundreds of dollars. But customers rarely plan to live in a house for 12 years, moreover, customers today no longer expect to have a loan for eight or twelve years even if they actually plan to live in the house that long. Furthermore, the financial hardship of raising extra cash in the first year imposed on borrowers in order for them to get the least expensive 30-year fixed-rate loan with 2 points may be too great. If ARMs with teaser rates proved anything, it was that 50 percent of all mortgage customers have an outlook of two to four years into the future, according to Washtenaw Mortgage's focus group research. All of these customers are candidates for buydowns and other low payment, fixed-rate niche products. These products have APRs nearly identical to comparable fixed-rate loans but offer added value to the borrower because the initial low payments fit short-term needs.

The most neglected opportunity to sell value-added services to borrowers is in the field of opportunity costs. When loan officers try to talk about opportunity costs with customers, they generally get flustered because they lack a clear definition of what an opportunity cost is. It can be explained simply as: "Opportunity costs are whatever it is you can't do with your money because you gave it to me." Borrowers can understand this definition. But opportunity costs are intangible and subjective until the borrower himself places a dollar price on them.

Let's say that your borrower is considering taking a $100,000, 10.25 percent, 30-year fixed-rate mortgage with 2 percent in loan fees from your competitor. Your company is offering a 10.5 percent, 30-year fixed-rate mortgage with no loan fees. The APRs are approximately the same. To describe the advantages of the zero loan fee product, ask the customer what he would do if someone gave him $2,000 right now. Would he spend it, save it, have fun, give it to charity--what would he do? Would he buy furniture with it, landscape his new home? Prompt the customer to have fun choosing and to imagine his dream. After he has chosen, ask him to set a value on not being able to do whatever it is that he said he would do. Once the customer has given it a value, the loan officer has developed a cost advantage over his competitor. If a competitor is working with a 30-year fixed-rate loan with 2 points and your company is offering a 1-0 buydown with zero in loan origination fees, the APR will be approximately the same and the customer will be attempting to value nearly $3,000 in savings the first year. Offsetting this will be the higher monthly payment. But this will be easy to explain because borrowers who take loans with zero in loan fees rarely have them more than a few years anyway. If recent history serves as a guide, your company will be calling him within two years to refinance his loan at a lower rate.

It simply goes against the grain of most American consumers to pay $2,000 in loan fees now when they are going to receive no savings for the first five years. In addition, loan fees present a barrier to future refinancing, hence an additional risk to the borrower. Creative loan originators have explained loan fees in terms of a reverse VISA card. Instead of bringing home a purchase today and enjoying it while you pay for it with time, mortgage loan fees are like paying for a benefit now and then waiting five years to begin to receive the benefit. If you refinance your loan before five years are up, you forfeit your benefit and lose the balance of you investment. To most customers, this sounds like a nonsensical way to do business. The only reason why most conventional mortgage loans are closed with 2 percent in loan fees is that no one bothers to explain the real pros and cons of this situation to the customer.

The internal sale

When a loan officer sells mortgage loan services to Realtors and builders, it is like selling a package of communications and problem-solving services. How is the phone answered when you call the company? Will operations staff help you solve a problem or get information immediately when you call, or is it almost always necessary to leave a message and wait for someone to get back to you.

Companies that have a policy of answering Realtors' and borrowers' questions immediately have a higher investment in personnel, equipment and training. But the availability of information or problem-solving capability is a product that the loan officer sells. Therefore, companies that aspire to excellent service need to determine precisely what level of service will be offered to customers. The process of formulating a written service policy, a service ethic, and obtaining consensus from the operations staff with respect to implementing this policy is called the internal sale.

In sales, much depends on attitude. Operations managers usually see attitude as one variable affecting employee performance. But much of what goes on in operations can be quantitatively measured. How many mistakes were made in the last 10 closing packages? Out of the last 20 loans submitted to underwriting, how many were approved without conditions? Implementing a service policy is slightly more difficult. On one hand, in the office people sit at desks and can usually be overheard. An ineffective clerical employee can be spotted, reviewed, corrected, and if necessary, discharged. But you will not foster better service attitudes, enthusiasm, or team work with this approach.

The best results can only be achieved by positive reinforcement, that is, through incentives, positive thinking, and by fostering a team spirit. In other words the policy must be "sold" to staff employees, and they must buy into the idea as something they want to do because they see it as more profitable, rewarding, and enjoyable. The operations staff has to want to be a hero to the customer. The sales manager can't make this sale alone. He must have the cooperation of the other managers. But the sales manager is the one who brings back feedback from customers telling operations what new services might be offered and how existing services are perceived. It is the sales manager who has experience in the kind of goal-setting and behavior modification necessary to build a sales force. And to some extent, promoting a service ethic within your company entails teaching your operations staff sales skills.

Mortgage companies that define their corporate mission in terms of making a greater volume of mortgage at better spreads end up auctioning off their product to the lowest bidder. As lenders contemplate their company's policies regarding the internal sale, they approach the central question for mortgage companies in the 1990s. Are we selling mortgages, generic financial products, or are we selling mortgage services--a financial product bundled with communications, counseling and problem-solving services?

Richard Greene is vice president of marketing at The Washtenaw Mortgage Company based in Ann Arbor, Michigan.