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Changing GEARS.

State-of-the-art portfolio retention efforts were built up to counter the frenzied runoff during the refi boom. Now those units are being retooled to serve as the backbone of a customer-for-life strategy for the most sophisticated servicers.


Lenders that struggled through the mortgage refinancing surge of 1998 and early 1999 must be feeling darn near immortal.

* When refinances as a percentage of originations approached the 60 percent mark during that period, the challenge for lenders was twofold: preserve the portfolio and maintain service levels. The Internet and telemarketers made it easy for borrowers to compare rates; one-eighth of a point or a waived appraisal fee and your "loyal customer" was history. Even if you could deliver on price or approve that refi in 60 seconds, there were so many loans sausaged into the pipeline that closings seemed to take an eternity. Not a shining moment for the mortgage industry.

* Many lenders supplemented existing-customer or portfolio-retention units with temporary staff and utilized outsource service providers to get them through the crunch. Now that refis have dropped to about one-fifth of originations, lenders have shed relationships and right-sized those units. They have also taken time to assess performance and reposition themselves for the next cycle.

They are poised to capture new purchase business, considered to be the next growth phase in mortgage lending. Initiatives include new loan products and services, expanded telemarketing efforts and Internet site growth.

A major initiative

Portfolio retention is a "major corporate initiative" for HomeSide Lending Inc., Jacksonville, Florida, according to Preston James Jr., HomeSide's senior vice president of Global Consumer Direct, responsible for all telephone and Internet-based direct lending to mortgage customers.

James explains that about three years ago, HomeSide decided to exit the traditional brick-and-mortar lending business and establish a consumer-direct business unit.

"The variable cost structure is very helpful, particularly in a cyclical business like mortgage banking, where you have booms and busts. Having central sales and operations gives us the capability to adapt," James says. "I don't think we had a crystal ball, but about nine months to a year after we set up the unit, the refi boom kicked in." During the whole period, HomeSide continued to grow its servicing portfolio, doubling it over a three-year period, to $145 billion.

"Obviously, it was a real challenge from a business standpoint," says James. "It certainly poses challenges in efficiently handling customers. We had growth in portfolio size itself, but also growth in the industry as a whole as a result of the refi boom. So, as a start-up channel, we were moving very quickly."

Like other lenders, HomeSide created products that enabled borrowers to refinance quickly. It also identified the importance of technology--the Internet and telemarketing systems--and set out to build its own front-end origination, processing, closing and postclosing system.

"We built the system entirely in-house," James says. "We looked at what was in the marketplace and we saw some really good processing systems and some really good telemarketing systems, but what we didn't see was a system that had both [and] could take us strategically where we needed to go on the Internet. We knew up front [that] we needed to get this process simplified, with the long vision of giving the customer the one-hour loan. It's worked out great for us."

Customers for life

As for portfolio retention, with 1.6 million customers, there is "a tremendous opportunity to continue to service their needs--we want to retain the customer for life," James says. The three key legs: branding, superior customer service and value proposition.

"On the branding side, the key is to broaden and enhance our relationships with customers. We want our customers to know us and enjoy doing business with HomeSide Lending," James says, by offering products such as insurance and home-related services.

"On the service leg, everyone talks about delivering great customer service--and that's important, but the Internet is changing that dynamic, where not only must you deliver great service, [but] you almost have to anticipate what your customer service needs are," James says.

As for value proposition, "branding and service are great ... but all for naught if you don't have products customers need when they need [them]. In particular, as the Internet continues to grow and mature, the customer is going to view the value proposition as the whole process," James says.

What the Internet will allow large lenders and servicers to do, according to James, is provide customer service in real time--old-fashioned service in a technology-driven era.

Preventing prepayments

"The key to success for the mortgage banking business in the future is effective customer retention," says Larry Washington, senior vice president of Products and Risk Management for First Nationwide Mortgage Corporation, Frederick, Maryland. "As an industry, we have paid out a substantial amount of premiums to buy loan servicing, which is now being consolidated into [the hands of] fewer and fewer servicers. Prepayments are important to anyone in the mortgage business."

One successful portfolio protection strategy for First Nationwide has been a loan product that carries with it a penalty should the borrower refinance before a specified period.

"We began in December 1996, and it has been about 80 percent of our production," Washington says. "It is a refi penalty, not a prepayment penalty. It is not enforceable if the loan is paid off because the home is sold." The rate of refis has dropped 55 percent to 70 percent on loans with a prepayment penalty, as compared with similar loans without a prepayment penalty and the same coupon rate, according to Washington.

At the height of the refi boom, First Nationwide's portfolio-retention unit was unable to process some streamlined government products and outsourced that work. Now, it has "bifurcated into East and West Coast units, with most of our loans in the Western region. Those units have been using primarily, the streamlined refi products of agencies [Fannie Mae, Freddie Mac, FHA and VA]," Washington says. New phone technologies, including highly successful direct transfer, have made it easier and faster for borrowers to reach a customer service representative and refi their loans, according to Washington.

Also, First Nationwide has originated many 3/1, 5/1 and 7/1 (intermediate-term) adjustable-rate mortgage loans for its parent, San Francisco--based California Federal Bank, CalFed has now authorized what Washington calls an "aggressive modification program" of these ARMs into fixed-rate loans, which will assist in customer retention, he says.

"That's key as we go forward," says Washington. "We've got to make our customers think of us first when they refi a loan, and to make it easy and quick for them to receive a rate reduction." First Nationwide also plans to introduce its own loan product that will give borrowers a refi option.

Giving borrowers options

"I believe Wall Street can price anything," Washington says. "In our industry, it is in our best interest to create a loan that gives the borrower the option to refi, gives the lender the opportunity to lower the borrower's rate and protects the industry."

An Internet presence is also vital, according to Washington. A key component is a connection to a telemarketing staff. "At some time the borrower has to talk to somebody," says Washington of the online mortgage process. "It is a very complicated financial transaction, and it is helpful for the borrower to have someone to talk to, answer the few questions they might have, talk about the options.

"Today's telemarketing people get their leads from customer service units, off of direct-mail pieces or inserts that went into borrowers' statements if they met specified criteria. The telesales people take inbound calls, then take a streamlined application online and that application can be underwritten in a matter of minutes," says Washington.

First Nationwide has nearly 1 million loans in portfolio. It is predominantly a third-party lender, with about 80 percent of its production coming from wholesale and correspondent channels.

Riding out rates

Success is "keeping customers no matter what the rate environment," says Andy Bielanski, managing director for Countrywide Home Loans Inc., Calabasas, California. That means delivering the products and services borrowers want and need.

Two and a half years ago, Countrywide switched from quarterly coupons to monthly statements in an attempt to brand Countrywide's name with its customers, particularly the two-thirds that come through its correspondent and wholesale channels.

"We started the monthly statement process, and from that time on have had good success with the effort," says Bielanski. "It's very costly, but we feel we more than made that [cost] up through cross-selling and in terms of keeping customers." The statement includes a newsletter that is segmented according to the customer and the cross-sell opportunities--that's 2.4 million customers and 124 segments.

Countrywide followed up with its "Home Field Advantage" concept, which makes it beneficial for a borrower to stay with the lender rather than refinance elsewhere. Last fall, it pioneered a product called eEasy Rate Reduction [Plan.sup.SM], which eliminates the back-end need for the refi application process.

Melding processes

"Like all lenders, about three or four years ago, we saw an opportunity to bolster the whole customer-retention concept," Bielanski says. That meant merging the functions of loan servicing and loan production, with their different reward systems and ways of going about business, into a seamless rather than competing process. But it has truly been the Internet that has enabled Countrywide, like other lenders, to unite its production and servicing operations into a single customer-retention strategy.

"The Internet makes it easy to meld those things," says Bielanski. "From a marketing perspective, the Internet is a terrific and much-improved way to market...and ifs cost-effective marketing."

Last October 1, the lender introduced e-statements, making it possible for borrowers to make payments online. Within two months, with little promotion, it had 15,000 users. Countrywide is working on an improved customer service site in an effort to draw in the nearly half of its customer base that it knows has Internet access.

"There's nothing like the Web to give us instant access and instant interactiveness," Bielanski says. Countrywide's goal is to treat the user as a customer from the time he or she first visits the site.

Power of the people

GMAC Mortgage Corporation, Horsham, Pennsylvania, is another lender that understands the power of the Internet.

"What better time to convey important, customized messaging [whether it's just to thank them, solicit feedback or to advertise a new loan product] to our customer than when they sign onto the GMAC Mortgage platform?" asks Ed Hughes, senior vice president, GMAC Residential Servicing Administration.

This is coupled with a new customer service initiative that includes a customer relationship team (CRT) within GMAC Mortgage's servicing group, trained to be a single point of contact for customer issues.

"The nature of these calls are standard inquiries such as account balances and escrow payments. In many cases, by listening closely to customers' needs, a customer service representative can learn about new or additional lending opportunities of interest to the customer," Hughes says. "During this exchange, the GMAC Mortgage representative resolves a customer issue in an expeditious and professional manner, while reinforcing the message that the customer is valued and the company will be available for their financial needs in the future."

Hughes says that good service, products and price, bundled with "loyalty incentives," will have a major impact on customer retention, particularly as new purchase business is pursued.

"We know [that] when customers are seeking to refinance, as compared to buying a new home, they are times more likely to select their existing mortgage provider. Today's market is highly concentrated in the purchase segment, and retention is much more challenging," Hughes says.

Unlocking the brakes

Still, for all the speed of loan origination and the power the Internet delivers, the big slowdown in the mortgage process comes after the loan is approved. This, lenders say, is an issue that must be addressed soon, before another refi boom hits.

GMAC's Hughes thinks getting a mortgage should be as easy as getting an auto loan. He says the existing refi process is inefficient and costly to both lenders and borrowers. "If we give the customer what they are really looking for--a reduced interest rate or payment--with the existing loan they have, we'd eliminate the peaks and valleys that plague this industry and reduce much of the waste," says Hughes.

A road block to progress remains on Capitol Hill, points out HomeSide's James. "All the settlement regulations, the compliance documents and the like that need to be generated in paper form [are] really holding back the industry as a whole," he says. "We [the mortgage industry] can envision a far simpler process for the consumer. Congress is a little reluctant to give up the security of the old paper world; it's headed in the right direction, [and] our hope is we'll see some breakthrough."

"Our business has spent a lot of time streamlining the application process, but not enough time streamlining the closing function," says First Nationwide's Washington, who predicts the change will come about this year [2000].

"I liken it to the highway people," he explains. "They go out and take a two-lane highway and make it into eight lanes that dump into a two-lane highway. We've gotten loans [approved] much quicker, but they get caught up in the traffic jam of closing."

Ruth G. Fields is a freelance writer based in Woodbury, Connecticut. She is the former executive editor of Servicing Management, Secondary Marketing Executive and Commercial Mortgage Insight magazines.
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Publication:Mortgage Banking
Geographic Code:1USA
Date:Feb 1, 2000
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