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A new product formula.


Creating loan products that fit the needs of tomorrow's customers is not an exact science - but finding the right synthesis of elements that appeal to borrowers is one of the key challenges that lie ahead.

There's no doubt about it - the explosive era of the 1980s' real estate market is gone. Our industry is back to a slow and gradual "modest growth" era. From now on, plenty of research and development, smart marketing and solid, well-planned products offered to consumers will be the order of the day. Mortgage bankers are seeing unprecedented growth opportunities, vast changes in product offerings, a growing market waiting to be tapped and a consumer demand for quality service.

In response, the mortgage banking industry will stay on its financial toes, be mindful of the socioeconomic/demographic heartbeat of local communities and position itself as a proactive force - rather than a reactive one. And all the time, as part of this juggling act, mortgage banking scientists are going to be working overtime to create loan products that attract customers - by convincing them that the products have been designed with their specific needs in mind.

There are three population segments mortgage bankers will have to target in the 1990s - segments that will be looking for increasing services. They are younger, first-time homebuyers; older, homeowning seniors; and the exploding ethnic market. All have specific needs that mortgage lenders must fill. In the past few months and years, more progressive mortgage bankers have already begun to respond to these markets with certain products, and experience already proves that we as an industry should be looking at developing every possible program to make ourselves even more attractive to these groups.

Target practice

Let's face it, it's tough out there for renters trying to save for a home. The top management at ARCS Mortgage, Inc., Calabasas, California, is seeing a lot of people who are having to wait longer to buy a home because it's difficult for them to save up enough cash for a down payment. Often, that state of affairs isn't due to poor money management, but rather to the increasing percentage of income that must go toward shelter. Young people are spending more for housing expenses than secondary marketing qualifying ratios permit. It's a problem that's not going to go away. We have to figure out how to adjust our products for people who, by necessity, use more than 30 percent of their income on housing.

Fannie Mae is setting a good example of how one can be proactive on this front. Recognizing the problem, the secondary market agency came up with a new program designed specifically for those buyers who find it extremely difficult to save the money needed for a standard down payment. Called the Community Home Buyer's Program (CHBP), it provides financing for buyers who represent good credit risks but who might not qualify for home financing based on traditional underwriting and down-payment criteria. ARCS Mortgage's CHBP efforts have had terrific response so far. That's a good indication of the type of program mortgage bankers should be looking for in the near future - and the kind of new thinking it's going to take to be successful in offering mortgage products.

The aging market

On the other hand, the status, the incomes, the concerns and the lifestyles of seniors are requiring the mortgage banking industry to become responsive to the needs of the senior market as well. If lenders are not anticipating these changes by developing products for this market segment, they'll be missing the boat. This segment of the population is living longer and spending more years in retirement, with retirement income failing to keep pace with inflation. This potential market of consumers is really twofold - those planning for retirement who don't want to worry about a 30-year mortgage payment and those already sitting on a great deal of home equity that is offering them little financial freedom. And, as the aging population segment grows and social security funds dry up, the situation will only get worse.

For the first group, anticipating retirement within 10 to 15 years, building equity rapidly is critical, and shorter term mortgages can be presented as a means to a secure future. The other senior segment needs ways to tap into its equity - without dipping into debt - and reverse mortgages facilitate that need.

One day, reverse mortgages will more than fill the same bucket that they're only a drop in now. But today, reverse mortgages are still a relatively new product. They are being marketed to the generation that lived through the Depression; who see their homes as hard-won, tangible security that should never be put at "risk." They consider it the deepest taboo to touch the equity in those homes.

So - with admittedly more of an eye on the future than the present - ARCS is currently offering a selection of reverse mortgages. While we're pleased with the performance of these mortgages, demand could be stronger. And it will be - it's just a matter of time. ARCS' management tries to think of the reverse mortgage as the home equity loan of yesterday. Our grandparents looked askance upon home equity loans - today they're widely accepted. As people become more aware and comfortable with the idea of using their home equity to help them enjoy retirement, the management at ARCS is convinced that reverse mortgages will become one of the more popular products mortgage bankers can offer.

The ethnic mosaic

As the world changes and as we move increasingly toward becoming one global community, an enormous new part of mortgage banking's business dealings will be with diversified ethnic communities eager to become homeowners. But these groups won't necessarily come to us. We will have to seek them out, learn their languages and adjust our thinking to accommodate them.

A good example of this is the current underwriting requirement that a borrower's cash be "in the bank." Our branch managers are begging to have this issue studied and to have alternate verification methods tried, because many of their potential customers don't trust, use or believe in banking, or what we consider traditional money management. Mortgage bankers and investors have to adjust to accommodate these borrowers, or we won't be doing much business with this segment of the growing population.

A glance around the bend

What mortgage bankers come up with to offer future borrowers will determine who is going to buy homes and how they're going to do it. Homebuying isn't the same game it was even 10 years ago. People are making more money - but homes cost a lot more. People are saving less - and living more on credit. Households are spending a tremendous percentage of their income on housing - but looking for a quality lifestyle.

Corporate-assistance programs will help. In areas of the country where housing is priced sky-high (instead of just skycraper-high) it's our view that employers will have to begin offering housing assistance as part of their traditional benefits packages. The management at ARCS is just in the early stages of exploring employer-assisted homebuying programs, but we are convinced that before too long, this segment of the business will become a new division of the company.

This will be particularly applicable in metropolitan areas, where most larger corporations are based and where the affordability gap is only going to increase. As an increasing number of people find it difficult to buy homes, it will also be more difficult for employers to entice new employees. It will become necessary, and expected, for companies to assist their employees in homebuying - just as health insurance is expected today. But corporations shouldn't have to face this challenge alone - mortgage lenders can become their partners in solving the problems of employee homeownership. That assistance may take several forms. For example, ARCS management has been talking with corporations about subsidizing monthly payments, instituting specific savings plans to be used for a down payment or perhaps carrying second trust deeds.

The top management at ARCS also sees cities stepping in to control their own destinies by attracting new, young homebuyers with community bond programs. Some bond programs are already in effect, but for them to become truly viable, individual government entities must make an effort to work together to standardize the documentation and reporting requirements. Currently, bond programs are often pushed ahead without the proper support or organization. There should be some sort of coordination among cities and counties that will make bond-program funds regularly available to homebuyers in most communities. This demands that mortgage bankers take on a whole new role at the community level.

Thus, it is evident that while mortgage bankers are working on products to satisfy the specific needs they know exist in the marketplace, there are always other needs waiting to be identified. Constant review of socio-economic trends and the demands of the growing American homebuying market will give us the edge to look to the future and plan now for tomorrow.

For example, ARCS Mortgage may begin directly targeting future homebuyers. How could we work with renters to help them save to buy a home? Could we offer them some sort of mortgage incentive when they do save for and buy that first house? Our branches are working on targeting this audience - one which requires specific market response from our industry.

ARCS also believes longer term financing will become necessary. What about a 30-year mortgage with a balloon? Or how about even longer terms? There would have to be built-in buffers to protect the lenders, but these ideas might warrant serious consideration. Maybe the mortgage industry needs to think about developing a portable mortgage. The idea is for a borrower to get just one mortgage and take it from one home to the next, moving up a step at a time. Although this isn't exactly a new idea, it has never been fully explored.

Finally, refinances are excessively expensive and simply require too much paperwork, especially considering that the borrower has already qualified for the loan and has a proven track record. Eventually, the mortgage banking industry will have to further streamline and simplify the process.

Research, respond, repeat

The future of mortgage banking depends on being able to anticipate the needs of customers. If we don't know what they want and need, we might as well close our doors. That is why ARCS' senior vice president is on the road about 30 percent of the time, visiting branches, shopping the competitors, talking to Realtors and making sales calls. We have conference calls with our regional managers once a week and sales meetings once a month. We let them talk, and we listen.

This direct contact with customers has resulted in several of our most successful programs. For example, one of ARCS' branch managers reported standing-room-only crowds when she began holding town hall meetings to educate potential borrowers about the New York Sony Mae, a low down-payment, low interest-rate program being offered regionally. ARCS corporate management sat up and took notice of this branch's efforts and quickly expanded this type of consumer educational effort. Therefore, ARCS was thrilled when Fannie Mae began offering its Community Home Buyer's Program and needed similar grass-roots educational support.

In another case, we expanded our ethnic marketing programs and goals after one of our branches - working on its own - took out some advertising on a local Spanish-language radio station. The response was overwhelming, and ARCS realized that it, like many mortgage banking firms, had a huge untapped market out there. ARCS is now planning branches in an array of diverse ethnic communities and is in the process of setting up an automated phone system that responds to queries in the caller's choice of five languages.

Customer service

How can mortgage bankers qualify a borrower more quickly? How can we answer a particular question better? If we don't keep our customers more than just happy, all our great product offerings won't do any good. All mortgage bankers realize that and are all working like gangbusters to be faster than speeding bullets and offer super-human service.

For example, this August, the "Ask ARCS Hotline" went into effect. It's a 24-hour voice-response telephone system that allows customers to ask simple questions about their loans by using a touch-tone telephone. At the touch of a finger, customers may obtain information about their mortgage loans, including the principal loan balance, the amount of monthly mortgage payment being applied to principal, interest, taxes and insurance, the current interest rate, the escrow account balance - and an array of other statistics.

ARCS also just signed up for a "mystery shopper" program. The company anticipates it will be a positive way for it to find both the strengths and weaknesses in its individual branches. The way it works is that unidentified people are sent out to the branches posing as customers. ARCS plans to award its employees cash prices for outstanding performances and to quickly correct any weaknesses the "mystery shopper" helps to uncover.

ARCS borrowers will get a tangible sense of our commitment, too. The company has started to offer performance guarantees, assuring customers that every letter they write to ARCS will get a response within 48 hours. And every phone call will be returned within three hours. If ARCS fails to meet its own deadlines, the borrower will receive a cash payment.

These are just some of the services ARCS, like many other progressive firms, is instituting now. Customers are going to demand even more in the future, and the mortgage banking industry will have to accommodate them.

Mortgage machines

Computerization has already changed much of the way mortgage banking is done - and the net effect is only now being felt and analyzed. Computers have cut down the time it takes a borrower to qualify for a loan and, in our view, within five years, borrowers will expect fifteen-minute approvals. Two-way, direct-link communications with Realtors will be a necessity. They'll punch in all the pertinent borrower information, and the money will be on its way. If that sounds a little like wishful thinking, consider the services that automated teller machines are already accomplishing.

Computerization will also mean price decreases, as the loan process becomes more efficient. Less human effort will mean less costs to process loan applications. And the savings, when passed on to customers, will encourage increased homebuying. For instance, if closing costs were cut by, for instance, $3,000, as a result of decreased front-end costs - (an additional cash requirement for a borrower that isn't financeable) mortgage bankers would surely see a positive impact on the market.

Regulatory changes

Not only must mortgage bankers stay abreast of trends and developing products, but we must clearly understand and know how to adapt to increasing regulatory demands. Recently, under the Home Mortgage Disclosure Act (HMDA), mortgage bankers have been required to disclose certain data pertaining to the business. Right now this information is used for statistical purposes only, but there's no question in my mind it will be used in the not-too-distant future to develop and impose increased regulations on mortgage banking. Is this good or bad? It's certainly inevitable, and any sort of regulation is always a bitter pill to swallow. New regulations, while unfortunate, will, in the long run, have little or no effect on those of us who have been anticipating the future in our operations and will have the desired effect on those who have been doing a little dancing in the shadows.

Open minds, endless horizons

For anyone reading this at the Mortgage Bankers Association of America's (MBA) convention, take a look around. Five years from now, based upon the dramatic consolidation of the industry, chances are that 30 percent or so of our associates probably will not be in attendance. That's because they will have failed to: keep up with advances in technology; recognize the need to provide no-holds-barred customer satisfaction; and target new and growing groups of customers by developing innovative market-responsive products.

It will only get tougher - there's no doubt about it. The next decade will be the "survival of the fittest," and to thrive in the 1990s, mortgage bankers will have to - like never before - be market smart and anticipate what the challenges are before they rise up to meet us. We must carefully target market segments, set out to give customers the best possible service and follow through on promises by creating concrete products tailored to those markets - as diverse and different as they may be.

The mortgage banking industry will see new products developed and new product possibilities on the horizon. With the consolidation of the traditional savings and loans, the role of mortgage bankers will expand and increase, giving us a larger niche in the market-place and a greater responsibility. These opportunities demand that we be creative, not fixed, in our thinking; that we open ourselves to every new idea. We'll see changes, more changes and even more changes. What those precise changes will be, who can really say? That they will be all-encompassing, there's no doubt. That they'll require mortgage banking to take bold steps, is assured. That they'll be exciting, is absolutely certain.
COPYRIGHT 1991 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:planning loan products to fit clients' needs
Author:Levine, Howard J.
Publication:Mortgage Banking
Date:Oct 1, 1991
Previous Article:Myths revisited.
Next Article:Lending a helping hand.

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