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A loan with a twist.

About a year and a half ago, the management at Goldome Realty Credit Corporation, Buffalo, New York, decided to get back to basics. Just how basic, you ask? About as basic as coach Vince Lombardi when he said to the Green Bay Packers, "Gentlemen, this is a football."

Asking basic questions such as "what do we sell, what makes us different and why do (or don't) consumers come to us?" can be a painful experience. Other questions can be equally perplexing, such as "What are consumers really looking for in a mortgage? Do consumers consider all mortgage products alike? Are we caught up in a vicious cycle, selling on the basis of rate?"

At Goldome, we believed there was a good chance that the answers to these questions would give our sales and marketing strategy regarding loan production a sound basis. However, in order to make such a strategic fact-finding effort worthwhile, there were a number of hurdles to clear first. Most important, all preconceived notions as to what consumers look for in mortgage products had to be discarded. Further, entrenched notions about what consumers think of products and services and what product attributes are most important to them also had to be tossed out. We realized that only a fresh and unbiased look at the mortgage market could lead to a defined consumer marketing strategy.

With the rapid pace of change taking place in the economy, simply relying on past trends and consumer behavior will not necessarily provide proper guidance for decision making going into the future. Prompted by this belief, Goldome started on a road that led not only to a new residential lending strategy but to a new product as well. Ron Leet, president of Goldome Realty Credit Corporation, focused the company's management on his idea of introducing a new mortgage product that would be the catalyst to implementing the company's new strategy.

Analyzing the mortgage customer

Clearly, each geographic market has its own particular characteristics that influence consumer behavior. The seasonal homebuying patterns that Goldome's St. Petersburg, Florida office sees certainly are not the same ones that prevail in the Buffalo, New York market. The demographics of these two markets also differ considerably.

While market differences tied to geographic location are recognizable and very important, these differences are more important in determining sales and marketing tactics rather than developing a focused, overall marketing strategy. Therefore, our first step in finding answers to the basic questions we had posed was to avoid getting bogged down with differences between various geographic markets. Rather, we went after the tougher issues related to the needs, attitudes, desires and the general "psyche" shared by all consumers looking for a mortgage.

The "science" of marketing

While many view marketing as closer to art than science, marketers rely on a method using a focus group to gather data about consumers' attittudes. The technique encourages a group of consumers to discuss their feelings, attitudes and perceptions about a topic. While focus-group findings cannot be extrapolated to the general population, they are extremely useful in gaining an understanding of the customer.

Goldome held focus-group sessions with consumers who were in the market for a new home. The information Goldome uncovered shed some light on attitudes of homebuying consumers, and in particular, cast doubt on the commonly held belief that the mortgage rate is the most important factor to people shopping for a home loan. Consumers ranked attributes of a mortgage loan as follows:

Affordable monthly payment, not rate--was the most important issue to potential homebuyers. The interest rate made a difference only to the extent that it affected the affordability of their monthly payment. The interest rate itself was viewed only as a shopping guide. Monthly payment was the bottom line.

Down paument--was ranked as the second most important issue to potential homebuyers. This was especially true of first-time buyers.

Payment stability--was important to all consumers tested; however, each individual had a varying degree of tolerance to a change in payment. Even those who initially responded that a fixed-payment mortgage was the only product type that they would ever consider, showed interest in concepts that normally are associated with adjustable-rate mortgages when the payment variability was limited.

Understandable products--were important. While consumers exhibited different levels of knowledge regarding the variety of mortgage products available in the market, a common belief shared by all was the mortgage products need to be understandable. There was confusion about the number and type of mortgage products available in the market. This finding became very important in our thinking as we continued our campaign to return to the basics.

Customer profiles

The focus groups demonstrated that different demographic segments expressed different views. But the information obtained could not be relied upon to portray the entire homebuying population--another step was needed.

The typical mortgage applicant supplies as much or more information to the lender as almost any research questionnaire. The key is to collect, categorize and analyze this information to help determine marketing strategy. Information on income, lifestyle, age, education, employ- ment, savings, debt, source of down payment, average loan amount and average home purchase price is available from the mortgage application. In most cases, however, this important data is used for only one thing--underwriting. Usually afterward, the loan file is neatly tucked away, never to be used again.

Goldome took the "next step" it needed by setting up an automated system to capture this critical marketing information on a monthly basis, in order to generate a profile of our customer base. Again, there were some surprising results.

In one of Goldome's geographic markets, for example, the information showed that 45 percent of our customers were first-time homebuyers. We also found that this group's average age was 36 years old and that the majority were high-school educated. These first-time buyers' average income was $34,117, and they had average savings of $11,426. We further learned that 52 percent of this group was in the "young, full nest" group (under 40 years old with children), 32 percent were "young, empty nest" (under 40 years old with no children), 5 percent were "older, full nest" (over 40 years old with children), and 11 percent of first-time buyers were "older, empty nest" (over 40 years old with no children). Interestingly, 66 percent of Goldome's mortgage customers in this market were married, while 34 percent were single.

These demographics in the selected market were compared to those of the overall residential market as defined by an independent research firm. This comparison gave Goldome, a good understanding of what market segments it had captured and the segments where it was missing the mark.

More information was obtained on the product side. Customer were identified as having chosen 30-year fixed-rate mortgages (separated by the method of documentation), government mortgages, 15-year fixed-rate mortgages, ARMs, 7/23 mortgages and other types. Statistics were generated for the move-up homebuyer and the refinancing borrower as well.

We now had pulled together accuracy rate demographic information that could be matched to the attitudes, perceptions and opinions of homebuying consumers expressed in the focus groups, allowing us to answer the basic questions that we had asked ourselves at the beginning of our mission. It was this information that led us to a new marketing strategy and to a new consumer-oriented product.

Answring the basics

Gathering market research information only has value if it is used to make decisions that result in bottom-line profits. Therefore, the consumer data Goldome collected had to answer some basic, yet tough, questions that would map out our future sales and marketing strategy.

What are we selling? The data now told us that we sold a wide variety of products to different consumer segments. For instance, young, single mothers tended to choose fixed-rate conventional or FHA mortgages, had an average loan-to-value of 83 percent, paid one-and-a-half points and often had the help of a gift to be used as a part of their down payment. Married couples had a different profile, showing more of a propensity for adjustable rates because they were looking for lower payments and more house. Older customers had yet another unique profile and displayed more desire to shop for rates and lock in to a fixed-rate product. Thus, young, married couples perceived homebuying and mortgage financing from a far different perspective than either the older, empty-nest couple or the single mother.

Goldome had begun to answer the question of what mortgage products it sold to which particular consumer segments. Yet, were these products truly filling the needs of those customers? Or was the consumer merely limited to choosing from the same general laundry list of products stocked like uniform commodities by everyone in the industry? Goldome found that it was merely selling products-- not necessarily tailored financing solutions to customers' needs.

Thus, it became increasingly clear that the products Goldome sells to its customers are really home-purchasing solutions. Next, the company looked at corporate and product differentiation. Did Goldome offer unique solutions that were perceived as being better than its competition? Or, as is believed by many in the industry, is the market driven strictly by rate?

It would be naive to believe that a mortgage lender that prices two or three points below the prevailing market will not attract a large share of originations. However, as we learned from our focus groups, in rational pricing markets where rates do not vary that substantially, factors in addition to rate are important. Yet, unless a mortgage company can set itself apart in the market, there is no obious reason for a consumer to choose one over another.

When shopping for a mortgage, consumers may be inclined to go to the institution where they have other financial relationships. Indeed, Goldome's customer profile data showed that 25 percent of its retail mortgages were from customers who had at least one other relationship with its parent banking organization. Yet, if lenders can offer mortgage products that possess distict customer benefits, they should be able to attract market share regardless of the size of the parent company's other financial services operations or its current penetration in the market.

Building a solution

Goldome's objective was to develop a marketing strategy that satisfied the needs of consumers, Realtors, builders and the secondary market, while differentiating Goldome as a mortgage lender. The data gathered in the market-research phase of this effort gave us plenty of insight into the needs of our consumers. But in order to gain a well-rounded understanding of Realtor's and builders' needs, we invited representatives from those industries to meet with us. These groups told us that they are seeing the number of home sales decline at the same time that the number of mortgage options for their customers is increasing. Generally, they said, Realtor and builder communities have come to view mortgage loans as commodity-like products without much differentiation.

In building a winning consumer strategy, we also had to keep in mind secondary market considerations. The needs of consumers, Realtors and builders, however, are different from those of the secondary market. Obviously, as mortgage bankers, any product or program we developed to meet consumer and Realtor/builder needs also had to be structured within secondary market guidelines and required yields.

In order to accomplish our objective, it was decided that a whole new sales and marketing culture was needed. This new culture would be based on the concepts of single-product imaging, lifestyle lending and personalized service. Single-product imaging means that Goldome, in essence, would now offer only one conventional mortgage loan product in order to eliminate consumer confusion and to differentiate Goldome among mortgage lenders. The idea of moving toward lifestyle lending means shifting the sales focus from rate and underwriting guidelines to customer needs. Personalized service would be accomplished by developing new automation systems that instantly allow customers to analyze monthly payment options, review refinance options, purchase price options and apply for a mortgage at their convenience.

Single-product imaging

The introduction of a new mortgage product, then, would be the linchpin to the company's new strategy. Essentially, customers would be offered a single product, but, under that loan program, borrowers could select from payment options that ranged from 100 percent adjustable payments--or a blended combination.

The product would need to be structured to meet several different needs: the customer's need to have affordable monthly payments, payment stability and understandability; the Realtor's desire to give the customer the ability to purchase; more house; and the need to meet the yield and underwriting guidelines of secondary market investors. Meeting these multiple design requirements was not an easy task.

Payment flexibility was structured by combining features of a fixed payment and adjustable payment into a single mortgage product. Goldome ruled out negative amortization mortgages and scond mortgages attached to a first mortgage based on the results of the market research. Therefore, we undertook to develop a single-not product, which entailed significant research. After considerable work by Goldome's secondary marketing group, a single-note product called "MaxiMiser" was developed, required yields were determined, and an investor was secured. The new single-note product accomplished the desired objectives of product understandability and flexibility, and it created the opportunity for Goldome to promote a single-jproduct image, which would give the company the edge to differentiate itself in the mortgage lending marketplace.

Lifestyle lending

In addition to offering traditional 100 percent fixed-payment and 100 percent variable-payment alternatives, the MaxiMiser offers a variety of blended payment options. The product allows Goldome's loan officers to examine customers' needs and tailor specific mortgages for them. Customers, on the other hand, can structure the mortgage that best fits their size of home, monthly payment and payment stability.

An example will show how a typical customer can choose from a variety of MaxiMiser options. In this first example (see Chart 1), the customer's objective is to purchase the most house that he or she can afford. This homebuyer has annual income of $45,000 ($3,750 a month), revolving debt of $200 per month and monthly installment debt of $325. Property taxes on the new home are $2,100 per year, and insurance is $300 per year. The MaxiMiser gives this customer the ability to purchase a house that costs as much as $99,600. That is approximately 32 percent more than what the consumer could buy if the financing were coming from a typical 100 percent fixed-payment mortgage.

The second example portrays that same customer--this time with a different motivation (see Chart 2). This time, the customer wants to pay no more than $800 per month (principal, interest, taxes and insurance). In this case, the customer may choose a MaxiMiser option that ranges in purchasing power from $72,600 to $91,400. The 25 percent fixed/75 percent adjustable option thus gives the customer the greatest amount of purchasing power based on the $800 monthly payment objective.

Personalized service

Personalized service will be a critical way for mortgage lenders to differentiate themselves in the marketplace in the 1990s. Those who have the ability to provide cost effective service will thrive. After single-product imaging and lifestyle lending, the third leg of our sales and marketing strategy is offering customized service. To do this, Goldome developed proprietary software that allows the salesperson to prequalify the customer and demonstrate various "what-if" scenarios in a simplified manner. Goldome's sales representatives can take a loan application at the customer's convenience, because the software was installed on laptop computers. Current rates are obtained from the mainframe via a modem.

The MaxiMiser product is ideally suited to this type of automated system. With a variety of options available to the consumer, the system's software allows each option to be custom tailored to the borrower's objectives and printed on the spot (the laptops also have portable bubble-jet printers). In less than five minutes, the customer can have his options presented in a clear and concise manner.

The software also allows the customer to see a historical example of monthly payment changes if the customer had chosen a particular option four years ago. Based on the actual changes in the one-year Treasury bill index, the customer can examine the payment stability that the MaxiMiser offers during a certain period of time. Further, the customer can receive a detailed listing of settlement costs on the spot.

Implementing the solution

The best of plans will not succeed without proper implementation. Before Goldome's new product was made available to the public, months of internal sales training, collateral production, advertising development, automation training and public relations steps were taken.

On March 1, 1991, the MaxiMiser product was officially introduced. In the first few weeks of the program, consumers, Realtors and builders responded with enthusiasm beyond Goldome's expectations. Our typical application amount increased by 27 percent, yet all consumer segments were interested as shown by the range of loan amounts. MaxiMiser applications were received ranging from $52,000 to $172,000. Applications have also been received for each blended payment option offered, ranging from 75 percent fixed/25 percent adjustable to 25 percent adjustable/75 percent fixed. We have attracted both first-time buyers and move-up buyers.

Local television coverage highlighted the initial success with Goldome's mortgage applicants. One customer was reviewing his MaxiMiser options with the loan officer in the comfort of his home, via the new automation. The customer spoke to the reporter about what he previously had expected--namely a long, stressful and confusing application process. Instead, the customer had a printed report of all his mortgage options in hand within minutes, and said he had found ways to reduce his monthly payments. Further, he said he discovered that he could afford more house than he expected.

The MaxiMiser has been well received both publicly and within Goldome's own staff. By beginning with a fresh outlook on who our mortgage customers are and what they really want, we were able to create a product that they, literally, asked for. Goldome's new product has thus become a mortgage finance solution for the many tastes of our customers as well as a means of differentiating ourselves from the crowd.

Pete Eimer is the sales and marketing manager at Goldome Realty Credit Corportion in Buffalo, New York. He is a former CPA with Peat Marwick Mitchell & Company and holds an MBA from the University of Pittsburgh.
COPYRIGHT 1991 Mortgage Bankers Association of America
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:residential loans
Author:Eimer, Pete
Publication:Mortgage Banking
Article Type:Cover Story
Date:May 1, 1991
Previous Article:Under new management.
Next Article:Building business.

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