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Fishing for refi business.

Lenders need to use the right bait to capture more of their own refinance business. A survey of borrowers isolates what matters most to consumers when they are deciding whether to stick with their lender or shop around for a refi.

Chances are your customers will consider other lenders when the time comes to refinance their mortgages. A customer's decision on whether to switch lenders usually is not triggered by poor service or problems, and is typically not related to a gap in your line of mortgage products. So why are they considering others? Even more important, what can you do to keep your organization at the top of their lists when it's time to refinance?

The Mortgage Bankers Association of America's (MBA) Mortgage Refinancing Practices and Decision-Making Dynamics" research study provided insight into why individuals in the United States have chosen to refinance the mortgages on their current homes or opted not to. The study also yielded information on why consumers decide to stay with their existing lenders or use new ones during the refinancing process. To pursue the study, R.S. Carmichael & Co., a marketing research and management consulting firm in White Plains, New York, interviewed 1,500 individuals nationwide in the spring of 1996 who were making payments on a home mortgage that was either originated or refinanced between January 1991 and March 1996.

The big picture

The study found that about 75 percent of homeowners will consider other lenders in addition to their current mortgage provider when they are ready to refinance. This decision to consider others is driven by the need to gain competitive rates.

While providing good service helps keep a current lender in the running, it is not the most important selection factor for mortgage customers. In fact, if two or more potential lenders offer an equally low rate, homeowners feel they are more likely to decide between them based on which has the lowest fees rather than the best service.

Even more troubling than knowing your customer is considering other lenders is the fact that you will soon face this prospect with nearly all of your customers. Our research uncovered that most homeowners who stay in their homes at least five years will refinance their mortgages, assuming that rates will vary from 1 percent to 2 percent. Factors such as age, education and household income have some influence on the ability and the need of the homeowner to decide to refinance, but it appears that nearly all, given stability in their homes and interest rate changes, will refinance.

The research found that only 10 to 15 percent of individuals in the group studied have never refinanced even though they have owned more than one home. Within this never-refinanced group, it is possible that a significant percentage did not own the property long enough to have the opportunity to refinance. If we follow that assumption, the true never-refinanced segment becomes even smaller.

The key, then, is to determine why and when the much larger majority of homeowners will refinance. Findings from this research show that the decision to refinance is clearly rate driven. This is the case for those who already refinanced during the 1991-96 period and for recent purchasers who were waiting for further rate movement before refinancing.

Targeting the change in interest rates as the trigger to refinancing, 43 percent feel that market rates (spring 1996) must decrease 1 percentage point below the rate they were paying before refinancing would take place; 36 percent feel that a 2 percent movement would be necessary. In other words, about 80 percent would refinance based on an up to 2 percent movement pegged from their spring 1996 rate.

Who's next?

Now that we know that most of your customers will refinance, how can we isolate who is more likely to be next? Start with those who had not refinanced by the time we interviewed them in the spring of 1996.

The group that had not refinanced had lived in their current homes for a shorter period of time, about three years or less, than those who had refinanced. In fact, three-quarters of the individuals who had not refinanced purchased their homes between 1993 and 1995.

Reflecting more recent purchase characteristics, homeowners who had yet to refinance their current mortgage had slightly higher property values at the time of purchase than those who had refinanced. Those who refinanced had an average property value of $126,516. Those who had not refinanced had an average property value of $133,769.

Those yet to refinance also made smaller down payments and less often paid points at closing than individuals who had already refinanced.

Based on the information provided to us by homeowners, this group of holdouts will likely refinance their mortgages by 1999 at the latest, given continued rate movement.

The refinancing majority

Almost three-quarters of those who re financed their mortgages did so between 1993 and 1996. More than 80 percent refinanced to gain a lower rate/monthly payment; other reasons cited by 10 percent or less included to take cash out, to gain a fixed-rate mortgage and to get cost savings over the life of the loan.

The survey indicates mortgage holders with higher annual household incomes and larger mortgages are more rate sensitive than other customers, while lower-income households focus more on getting cash out through a refinanced mortgage.

* More individuals with annual household incomes of $80,000 or greater (91 percent) refinance to gain a lower rate than those with incomes of $50,000 to $80,000 (83 percent) or less than $50,000 (80 percent). Likewise, as mortgage size increases, the desire to gain a lower rate also increases [ILLUSTRATION FOR FIGURE 1 OMITTED].

* A somewhat larger share of homeowners with household incomes of less than $50,000 (12 percent) refinance in order to get cash out than those with incomes greater than $80,000 (4 percent).

* More fixed-rate customers (85 percent) refinance to gain a lower rate/monthly payment than ARM holders (75 percent).

The vast majority of customers who refinance choose fixed-rate mortgages. Nearly 90 percent of the people who refinanced between 1991 and 1996 now have fixed-rate mortgages. Only about 10 percent of those surveyed currently hold adjustable-rate mortgages.

This period of refinancing also saw a pickup in the use of 15-year mortgages, as homeowners who refinanced during this time commonly had 15-year (43 percent) or 30-year (40 percent) mortgages. Prior to refinancing, most homeowners among the survey group had 30-year mortgages (70 percent); 15-year mortgages (15 percent) were not nearly as common prior to the 1991-1996 refinancing period.

Nearly two-thirds of homeowners who refinanced said they had a mortgage interest rate between 6.6 percent and 8.0 percent as of spring 1996. More than one-half of these homeowners refinanced out of a mortgage with an interest rate between 9.1 percent and 10.5 percent. More than 15 percent refinanced out of a mortgage carrying a rate of more than 10.5 percent, while nearly 20 percent refinanced out of a mortgage with a rate of less than 9.1 percent.

Among those who anticipated savings over the long term, homeowners expected to save an average of nearly $20,000 over the life of the mortgage by refinancing. As for those who considered annual savings, on average, homeowners expected to save more than $1,600 a year by refinancing.

Though few feel it is a key to refinancing, about one-third took out a larger mortgage than their outstanding balance. Nearly one-half used the extra cash they took out of their mortgages by refinancing for home improvement.

Considering their options

The study found nearly three-quarters of homeowners overall would consider another lender than their current one for a new home, property or refinancing. Most of these homeowners would consider other lenders primarily to compare rates and fees, as noted earlier. Within this large group of homeowners, some are more likely than others to consider different lenders. For instance:

* More ARM borrowers (82 percent) are likely to consider other lenders when refinancing than borrowers with fixed-rate mortgages (71 percent).

* More individuals (about 80 percent) with larger mortgages (greater than $150,000) would consider a different lender in the future than those with mortgages of less than $50,000 (approximately 65 percent), or between $50,000 and $100,000 (about 70 percent) and $100,000 and $150,000 (nearly 75 percent).

Among individuals who refinanced their mortgage between 1991 and 1996, slightly more consumers with household incomes greater than $50,000 (87 percent) consider other lenders in order to compare rates/fees than those with incomes of less than $50,000 (79 percent).

But rather than venture completely into the unknown, nearly 60 percent of those who said they would consider other lenders had obtained a mortgage previously from one of the other lenders they would shop. Though they are more likely to consider other lenders, a greater share of individuals with higher household incomes (more than $80,000) than those with annual incomes of $50,000 to $80,000 or less than $50,000 have obtained a mortgage previously from other lenders that they would consider.

Staying put

Among the minority of homeowners who said they would not shop other lenders, most would stay put primarily because they currently get good service (55 percent). Other reasons cited include the personal nature (17 percent) of the current service provided and the belief that their lenders offer competitive rates and fees (15 percent).

Return to lender

If the past is a predictor of the future, there is clearly some hope that lenders can hold on to their customers when it's time to refinance.

Nearly one-half of homeowners who refinanced their mortgages between 1991 and 1996 refinanced with their existing lenders. Among customers who refinanced, three groups are notable for their loyalty to existing lenders:

* Significantly more individuals who did not use a mortgage broker (52 percent) refinanced their mortgage through existing lenders than those who used a mortgage broker (31 percent).

* More fixed-rate mortgage customers (49 percent) refinanced through their existing lenders than adjustable-rate mortgage holders (34 percent).

* More homeowners with household incomes greater than $80,000 (51 percent) refinanced their mortgage through their existing lenders than those with incomes of $50,000 to $80,000 (44 percent) or less than $50,000 (42 percent).

The key reason for loyalty remains rates: About one-half refinanced through their existing lenders because rates and fees were competitive. Current fixed-rate mortgage customers and higher-income households are more rate sensitive than others.

* About one-half of fixed-rate mortgage customers remained with their existing lenders because rates and fees are competitive in comparison with about one-third of ARM holders. Interestingly, the survey found more ARM customers than fixed-rate mortgage holders felt their previous lenders "did not appear to want my business."

* More individuals with household incomes greater than $80,000 (56 percent) cite competitive rates/fees as the motivating factor for using existing lenders than those with incomes of $50,000 to $80,000 (46 percent) and less than $50,000 (37 percent).

Though important, the quality of service a borrower receives appears secondary to rate/fee considerations in selecting a refinancing lender. The survey found one-third used existing lenders because they received good service from them in the past.

Those who did not refinance through lenders used in the past cite high rates and fees as their primary reason for not doing so. Far less often mentioned as reasons are poor service from previous lenders and the customer's desire to shop around and try other lenders.

Buying influences

A major influence cited by one-quarter of respondents in choosing a lender for refinancing is a positive relationship with their existing lender or a referral to the lender by an adviser or friend.

Wherever their influences take them, a low interest rate remains the most important factor when choosing a specific lender for refinancing a mortgage, according to about 80 percent of homeowners surveyed. Other selection factors mentioned by one-third to nearly one-half of homeowners include low fees, the reputation of the lender and the lender's reliability.

Underscoring the financial importance of this decision to consumers, if rates between potential lenders are equal, the deciding factor among more than one-third of homeowners would be low fees, followed by reliability of the lender and the lender's reputation. Again, higher-income individuals (greater than $80,000) more often cite low fees as the deciding factor than those with incomes of $50,000 to $80,000 or less than $50,000.

Individuals who did not refinance

About one-half had not considered refinancing because interest rates up to the spring of 1996 had not been low enough. Another 20 percent said that refinancing was not an important issue. Seven percent were not considering refinancing because they had just bought or moved into their house. More fixed-rate mortgage customers than ARM holders had not considered refinancing because rates were not low enough.

Over three-quarters said that if they had access to lower rates than what was currently available, they would consider refinancing their mortgages. About 10 percent said they would consider refinancing if they were charged low or no up-front costs.

Nearly 80 percent reported that the spring 1996 market rate must change 1 to 2 percentage points from their current rate to encourage them to refinance. About 10 percent said that the market rate must change 3 to 4 points from their current rate while another 10 percent believe, that it must change more than 4 points from their current rate.

About three-quarters of those who did not refinance their mortgages between January 1991 and March 1996 had fixed-rate mortgages, while only 20 percent had ARMs. Almost three-quarters have 30-year mortgages.

Two-thirds held a mortgage with a spring 1996 interest rate between 6.6 percent and 8.5 percent. About 10 percent had mortgages with an interest rate greater than 8.5 percent, while another 10 percent held mortgages with an interest rate less than 6.6 percent. Thirty percent of ARM customers held mortgages with rates of 7 percent or less compared with 18 percent of fixed-rate mortgage customers; nearly one-half of fixed-rate customers surveyed had mortgages of 7.1 percent to 8.0 percent.

About three-quarters of those who had not re financed at the time of the research also had not considered refinancing their current mortgage to that point. Slightly less than 20 percent had recently considered refinancing prior to the research, while only 9 percent were considering refinancing at the time of our interviews. More ARM customers than fixed-rate mortgage holders were considering or had recently considered refinancing.

Perceptions of refinancing

Consider this: By the spring of 1996, 55 percent of all homeowners who purchased a home between January 1991 and March 1996 had already refinanced their mortgages. These individuals tend to be older and have greater household income than those who did not refinance.

Excluding first-time homeowners who had not refinanced up to the time the study's research was conducted (21 percent of total), nearly 90 percent of all remaining interviewed homeowners have refinanced a mortgage at least once in their lifetimes.

Reflecting a more knowledgeable and mortgage-savvy customer, more than two-thirds of all those interviewed felt that it is very or somewhat easy to refinance. Only about 20 percent perceived refinancing to be somewhat or very difficult.

Not surprisingly, more homeowners who had refinanced (about 75 percent) perceived the process to be very or somewhat easy than those who had not refinanced (about 60 percent). Similarly, experienced homeowners more often than first-time home buyers felt that refinancing is very or somewhat easy.

However, experience with the refinancing process only goes so far in terms of increasing the perception that refinancing is easy. Among all homeowners who had refinanced, the perception that refinancing is very easy or somewhat easy did not increase among homeowners who have refinanced more often than others.

Among homeowners who felt that refinancing is easy, typically the ease of the refinancing process was attributed to good service from mortgage banks/brokers, understanding the process and simple paperwork. Each of these factors was mentioned by about one-quarter to one-third of homeowners.

In contrast, nearly one-half of those homeowners who feel that the refinancing process was difficult complained that there is too much paperwork. Other reasons mentioned by about one-fifth of these homeowners include confusing procedures and poor service provided by mortgage lenders. The perception that too much paperwork is involved is the leading negative perception of both those who had refinanced and those who had not.

ARM customers more often cited difficulties than fixed-rate mortgage holders regarding too much paperwork (62 percent vs. 49 percent) and confusing terms/rates (15 percent vs. 6 percent); in contrast, fixed-rate mortgage customers more often focus on poor service by mortgage banks/brokers (22 percent vs. 8 percent) than ARM customers.

Given the perception that paperwork is the problem, it should not be surprising to learn that homeowners felt that the refinancing process could be made easier by reducing paperwork (34 percent), streamlining procedures (25 percent), and simplifying term/rate information (16 percent).

But should customer perceptions of the refinancing process really matter to lenders? Yes, absolutely. We find that more homeowners who consider the refinancing process difficult (about 80 percent) would consider other lenders than those who feel the refinancing process is easy (about 70 percent). More important, more homeowners who feel the process is easy are repeat customers of their lenders (65 percent) than those who view the refinancing process as difficult (53 percent) [ILLUSTRATION FOR FIGURE 2 OMITTED].

Improving the odds of keeping customers

Perhaps then, in addition to offering low rates and low or no fees, lenders should consider a broader spectrum of methods that customers can use to refinance. While it should not be surprising that nearly every homeowner is comfortable applying for a mortgage face-to-face with a lender's representative, other alternatives also connect with customers.

In a significant acknowledgment of the appeal of corporate and affinity mortgage programs, nearly two-thirds of all homeowners reported being comfortable applying for mortgages through work or membership affiliations. Applying by phone, home computer and mail were considered comfortable methods for applying by about one-quarter of homeowners.

Alternative methods may be most appropriate for higher-income customers. A larger share of individuals with household incomes greater than $80,000 than those with incomes of $50,000 to $80,000 and less than $50,000 said they were comfortable applying for mortgages via mail, telephone, home computer and work/affiliation.

Interestingly, consistently more ARM borrowers than fixed-rate borrowers were comfortable applying for a mortgage through the mail (32 percent vs. 26 percent, respectively), by telephone (34 percent vs. 28 percent), via home computer (37 percent vs. 28 percent), and through an employee/group affiliation (67 percent vs. 62 percent).

Perhaps, in addition to alternative application channels, an alternative mortgage product would help strengthen customer retention efforts. For instance, about 20 percent of homeowners would consider refinancing to a mortgage that had below-market rates but placed restrictions on their ability to prepay in the future. This new product variation, which has already entered the market, seems to run in greater favor with first-time homeowners more than experienced buyers.

The research confirms most observations that a substantial segment of homeowners have become more knowledgeable about the refinancing process and the level of service they expect to receive. Household decision-makers are more likely to shop lenders when they feel it is time to refinance, and as a result, mortgage servicers must move to maintain their customers.

To promote maximum business development and customer retention, lenders should increase marketing and communication efforts aimed at customer segments by such factors as income, product type and length of relationship.

Particularly in customer retention efforts, lenders need to commit to competitive rates and fees, improved levels of customer service, alternative application channels and mortgage products, and a simplified refinancing process.

Terrence S. Aloise is managing director at R. S. Carmichael & Co., Inc., in White Plains, New York.
COPYRIGHT 1997 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1997 Gale, Cengage Learning. All rights reserved.

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Title Annotation:mortgage refinancing
Author:Aloise, Terrence S.
Publication:Mortgage Banking
Date:Apr 1, 1997
Words:3340
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