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Getting an edge.


Mortgage companies need to set themselves apart in the eyes of the marketplace. There are several ways to do it, but doing it is critical to survival.

Mortgages are commodities. This leaves very little opportunity to differentiate one mortgage company's products from another. Therefore, the only factor that really matters is price. And, the intensity of competition will naturally force prices down to commodity-like margins.

Is this really true? Are mortgages necessarily commodity products? Is the industry relegated over the long term to severe price competition because that's the only way to win busness? We certainly tend to behave that way as an industry today.

The business dynamics of pure commodity-like competition that we exhibit today are clearly not healthy. Even with the shake-out of the last three years, there is fragmented competition, competing principally on price. The result is low margins that are no longer offset by high values for servicing rights. More importantly, there is very little perceived differentiation among lenders at the company or institutional level. Whatever marketing differentiation Realtors and borrowers perceive among different lending organizations is ascribed to the individual originator. Consequently, not only are the company's products perceived to have very little differential value other than price, but also the mortgage company doesn't have very much marketing leverage with its clients. This marketing edge among mortgage customers is controlled instead by the individual originator. What we have just described is a fundamentally bad business deal. As academicians would ask, "Where is your value-added? What are you going to be paid for?" Their admonition would be that we must create, either perceived or real, a differentiation in our products over time, or we will cease to make an economic (i.e. acceptable) return from the business.

The movement toward a large segment of the business going to wholesaler-broker operations and ultimately direct wholesaler-Realtor relationships is a natural outgrowth of the lack of differentiation/value-added features. Many retail mortgage banks have evolved toward wholesaling because of their lack of value added at the branch level. They now rely principally upon their value-added contribution through their secondary marketing abilities.

On the mortgage broker side, this value-added marketing edge comes chiefly from years of established relationships with individual Realtors or their differential skills as marketers. As we are all too aware, most of these successful mortgage brokers are former originators for integrated mortgage companies. This exodus of originators was an outgrowth of the fact that these producers also recognized that their companies were not a very significant factor in their success. They, therefore, asked "why should they continue to share origination revenues with their firms when the mortgage companies brought very little to the party that the originators couldn't obtain elsewhere for free (i.e. loan programs and lock-in protection)?"

Without developing some perceived distinctive added value attributed to its operations, the integrated retail mortgage bank will no longer be paid for its expensive delivery system and overhead. It's time the retail mortgage banker seriously examine just how it can differentiate itself in the marketplace. Without clear answers to this question and effective implementation of the answers, the long-term viability of the business is in serious doubt.

Not unique

Mortgage bankers are certainly not alone in facing the problem of marketplace differentiation. Ask any consumer-goods or service provider. Stripped of the brand images and advertising influence, most consumer goods and services have very little technical differentiation. Yet, consumer products firms work mightily to create even a little edge, either perceived or real, in their products or services. The expense profile of a consumer goods producer typically shows heavy expenditures in research and development and marketing, in continuing attempts to find and defend edges over the competition.

That's nice, but you can't really differentiate financial services. Tell that to American Express, a firm that has been able to extract premium fees and continue to grow, despite having an otherwise undifferentiated credit product. Anyone who has dealt with American Express can tell you why he/she retains their card, however. The product is differentiated by the quality of service one receives any time one needs to have contact with American Express.

Indeed, the fundamental game in any industry is to attempt to create some uniqueness or qualities in a product or service for which the consumer is 1) willing to select your product over others and 2) willing to pay somewhat more than for a raw, generic commodity product. Very few competitors in any industry have shown the capability to survive as purely commodity providers. Price competition as the only means of differentiation is almost certainly a losing long-term proposition.

Creating differentiation that works

There is normally a four-step process for creating a differentiated position in the marketplace that works both competitively and economically; that is, the net revenue position is considerably better after the investment in differentiation. These four steps are:

* Define the real product and your

target market(s)--understand that the

product is not just the mortgage loan

itself. Specifically identify the

segments of the market you want to win. * Select the basis on which you are

going to differentiate your firm. * Build an entire delivery system that

is consistent with the definition of

the product, the target markets and

the differentiation you want to

market and develop. * Pay for the differentiation by

altering the cost equation of the

business. If the differentiation is merely

an added cost without both revenue

increases and cost

replacement/savings elsewhere, the strategy to

make yourself special is a hollow

one--one that must ultimately fail

the test of economics.

Let us probe the various ways to create this differentiation next and address the other steps in the process later.

What makes a company or a product special? What creates a meaningful differentiation for a mortgage lender? If we surveyed Realtors and builders today, we would likely get very weak answers relative to mortgage lenders, with those positive responses received usually relating just to an individual originator or processor. Rarely would the Realtor or builder perceive the mortgage company itself as the source of the preference for using a certain mortgage lending operation. The basis for the differentiation that is perceived in individual originators and/or processors is usually service and responsiveness--"I have confidence he/she will not let me down."

There is no real mystery to what might constitute differentiation--the secret is usually in the execution of the differentiation strategy. Because we do not produce products that can have either technological or engineering differences, the differences we project in mortgage banking must be more judgmental, more subtle. The variables we have to work with are well known to all of us. They are:

* Price; * Program/product design or special

features; * Convenience; * Technical knowledge/top-notch

professionalism; * Service; * Flexibility, as in underwriting or

documentation flexibility; * Time/speed; * Brand image.

Which of these variables we choose to concentrate on and how we choose to combine them into a fully consistent delivery system depends upon the market segments we target. The basis for differentiation must be consistent with what the target markets view as high-priority product characteristics.

Differentiation variables

Most non-affiliated mortgage bankers have traditionally ceded the low-LTV, minimum documentation market to the major thrifts. Why? Because over the years, these thrifts, either explicitly or as a result of circumstances, have developed an entire marketing posture that is attractive to this market segment. The thrifts are flexible in their underwriting (not necessarily careless--their loss ratios would suggest otherwise), require only modest "papering" of the application, and close quickly. For the Realtor, this creates certainty which leads to confidence. For the borrower, it means respect for this usually upscale applicant and a minimum of hassle. These thrifts typically have not competed on price (excepting, of course, those thrifts that were dying and executing last-ditch strategies) or product features. Reliance on price or product features was not necessary, having conditioned the marketplace to speed, flexibility and convenience.

Some mortgage bankers, particularly in California, have differentiated themselves in the builder market through technical, tract development know-how, combined with consistent, intensive service at the tract level. For these firms, tract business becomes a semi-insulated, volume-based niche specialty.

Unfortunately, most of the brand-name examples of great differentiation efforts are not found in mortgage banking. We must look elsewhere for our lessons and attempt to apply them to mortgage banking.

Selecting the proper basis for differentiation requires concentrated study. It is not as easy as it appears to be--if you truly want to develop a point of differentiation people will respond to. Price is the variable we have all fallen back on by default. But this is not a long-term winning basis, unless the competitor has some unique cost advantage. Similarly, product/program features tend not to be sustainable points of differentiation.

That leaves us with the softer variables such as knowledge, service, convenience, time and brand image. Creating a branded product is a central focus of most consumer marketers. Citicorp is currently attempting to create a national brand recognition for its credit card, with a hoped-for carryover to its mortgage products. It's a massive, expensive effort, and the jury is still out on the results. For virtually the rest of the mortgage banking industry, creating a branded product with consumers is not a feasible option.


Knowledge, service, convenience and/or time, however, are viable options. Ultimately, the most important of these may prove to be speed. Other industries are awakening to the importance of speed as a basis of competition. The mortgage banking industry has grown accustomed to, and its clients have accepted, 30 to 60 days to close a loan. It is highly likely that the first competitor in the market to be able to offer--on a consistent basis--five-day, full approval on full documentation, conventional loans, will develop an enviable position in the market. Impossible, you say? Not at all. In fact, the 15- to 30-minute loans subject only to verification and appraisal will become the norm in five years. Adding verification and appraisal in five days should not be an unmanageable task.

Speed addresses a very core issue with mortgage clients--uncertainty. Uncertainty over approval for the borrower, uncertainty over closing the deal for the Realtor. While very few loans need to close, or will be closed, in five days, the certainty factor will create a differentiating edge that will move portions of the market. Although actually very few loans will close in five days, the Realtor will likely bring a majority of her/his business to the speed-oriented mortgage banker as a matter of course.

Speed turns out to be a major benefit to the mortgage bank as well. Pipeline exposure and/or costs are minimized, and processor case loads dynamics are developed, also, as the focus on speed increases. A sense of urgency, and hence, customer service, is established; needless processing steps are eliminated; work intensity and satisfaction rise; and turnover declines accordingly. Speed is a dynamic tool for product differentiation.


Service is always available to any firm as a basis for differentiation. It's given much lip service, but, in point of fact, little is actually done about it on a consistent basis. Good service has become oriented to individual processors or originators, not institutions. The test of whether or not something has become an institutionalized goal is easy. Things that aren't measured/tracked aren't being managed, at least not on a regular basis. How many mortgage banks can we count that actually measure in various, consistent ways, their level of customer service? And how many use this information to make changes or decisions? Very few.

Creating differentiation through uncommonly superior service is a very real concept, certainly conceptually doable. Tom Peters' best selling book, In Search of Excellence and other similar texts, are full of examples of institutionalized, uncommon levels of service that translate into phenomenal market success. But the common thread for all of these success stories is that service is an institutionalized religion, not just part of the CEO's yearly speech.

Service as a basis for setting yourself apart in the marketplace requires a special breed of leader, one who engenders in his or her company a zealousness for caring for the customer, almost regardless of cost. It takes a commitment of time and creativity that is well beyond what normal firms demonstrate--but it can be well worth it, economically and psychologically.


Most mortgage bankers would ask, "What about technology? Isn't it a basis for differentiation?" The answer is simple and straightforward. Technology is an enabling tool, not an end in itself. It is becoming an essential component that enables these other bases of differentiation to become realities. But it is not an end in itself. As trite as it sounds, technology, however sophisticated and well developed, without knowledgeable, motivated application by human beings, becomes just a cost-saving tool, not a tool for being something special.

A word of encouragement is in order. It's impossible to crisply communicate differentiation concepts effectively in a few pages, or even many pages. Developing and implementing truly effective differentiation strategies is not an exercise most of us in mortgage banking understand well. Historically, we haven't had to do it. As a result, using an outside catalyst to stimulate, channel and shape your thinking on this subject would, in most cases, be a worthwhile investment.

What's the product?

All right, so we accept the need to differentiate. But, how do we accomplish it? And, how do we rationalize the necessary investments that must be made before differentiation begins to pay off, when margins are already tight and the economic environment threatening at best? Fair questions, but not unsolvable. However, the solutions require time, lots of it, and intensity, consistency and pervasive commitment.

The first step in the differentiation process is to define clearly what the product is. This seemingly simple issue, however, may not be as simple as it first appears. The product is not just the mortgage loan program itself, despite the surface emphasis on price and features. One of the most astute consultants in the financial services industry, Ed Furash, has correctly insisted that in financial services, the product the customer is buying is not just the product itself, but the whole delivery system--that is, not just the product, but how, where and when it is delivered.

Location, technical sales knowledge, ease of process, customer service and follow-up support are all part of the product package the consumer buys, or the Realtor recommends. Unfortunately, all too often, our industry has fallen down in its overall delivery system; leaving raw product price as the sole differentiation.

Redefining the product as the entire delivery system is not to say that price is unimportant, or that with a superlative delivery system, we can extract substantial price premiums from the market. In fact we probably can't obtain substantial premiums. But, if lessons from other industries hold true for mortgage banking, we can 1) obtain modest price premiums (i.e. 25 to 50 basis points higher fees or an absence of having to meet every low-ball price that competitors post) and 2) insulate ourselves from competition--we take away reasons for customers to look elsewhere.

Differentiation costs money

"Okay," you say, "I buy the fact that I need to concentrate on the entire delivery system when I think about differentiation, but actually developing a materially better delivery system costs money. How do I pay for it? I can't afford to reduce my margins further."

Fair question. But, solvable also, over time. Think about the current distribution of costs in most mortgage banks today: heavy commitments to brick and mortar (branches) and salespeople, very little investment in technology, marketing, training or research and development. This cost mix is one that just evolved historically, with little pressure for change, since it seemed to work well enough. As with all consolidating industries, however, the relative investment in various factors of production changes as the structure of competition changes.

Mortgage banking will change its mix of cost factors. Investment in technology, marketing and training will increase dramatically. These investments will (and must) be paid for by reducing the per-unit investments in salespeople support and bricks and mortar along the lines as outlined.

The idealized comparison of the current and future cost structure of a retail branch illustrates what must happen to pay for the investments in technology, marketing and training (TMT), and indeed, to lower the overall unit cost of branch-based production from, say, 180 basis points to a more acceptable 150 basis points (125 basis points in direct cost plus technology costs):

The cost for salespeople drops by 30 basis points, from as much as 70 basis points (including benefits, car, entertainment, etc.) to 40 basis points. This does not mean that the compensation for the better salespeople will decline. In fact, it may increase. However, commission rates will decline, offset by more business being handled more easily by fewer salespeople as technology and marketing make the sales process a higher hit-rate effort. Secondly, the cost incurred from high turnover of salespeople and ineffective sales efforts will diminish.

* Funding for investment in TMT

must also come from greatly

reduced processing and support costs

per loan. The combination of better

technology, reconfiguration of

branch networks (more hub-and-spoke

design), better training and

lower turnover must reduce the cost

of processing and support at least

25 basis points. * Stand-alone, small branches will no

longer be economic in most cases

(but not all) in the future.

Rationalizing the branch network and

management of it, must contribute

another 20 basis points to the

"investment fund."

These savings collectively should more than fund the necessary investments in technology, marketing and training. Investment in technology (including communications) will need to increase dramatically, from less than $10 per loan to perhaps as much as $30 to $40 per loan. Substantial marketing investment must be made also, starting in many firms from almost ground zero. The investment, however, is not just in media; in fact, significant mass media investment may not be effective. Investment will take the form of such things as more grass roots cooperative marketing with builders and Realtors, direct mail and list management, market planning and intensive tracking, as well as an investment in the infrastructure of a marketing department.

The investments in technology and marketing, however, will not pay off significantly unless there is a commensurate investment in continuous, intensive training of the entire staff. We simply can no longer rely upon on-the-job training efforts or tolerate high turnover caused at least in part by lack of development of our human resources, if we are to build sophisticated delivery systems. Sophisticated delivery without knowledgeable staff to deliver it is wasted effort.

Retail delivery reconfiguration is not the only way to change the economics and create some differentiation. There is also the opportunity to add or change the channels of distribution. Retail branches are only one way to reach consumers and perhaps not the most efficient for significant segments of the market. But, discussion of alternative channels of distribution is a topic requiring much more space than a few lines. Therefore, this discussion will concentrate only on differentiation through retail branches.

Clearly, differentiation requires investment in more sophisticated tools of competing, and the only way to pay for this investment is through changing the cost mix of the business.

Mass media

The easy conclusion one may come to with respect to marketing, particularly since we have compared mortgage banking to other consumer goods industries, is that mortgage bankers need to advertise more heavily to build awareness and image and to establish brand names. While awareness, image and brand names are important characteristics of most consumer goods marketing, a word of caution is in order.

A direct analogy between marketing, say, soap and mortgages is inappropriate. It is not the relative size of the purchase or the relative importance of the purchase. It is the frequency of purchase that is the critical distinction. High mass media expenditures tend to be most cost-effective where the consumer must purchase the product regularly. In such cases, the producer is trying to condition the consumer's buying habits. Consumers don't buy mortgages every week, or every year. Attempting to establish a brand image and awareness in consumers' minds so that they will reach for a particular mortgage bank is likely an expensive and futile exercise. It costs too much to establish and retain the brand awareness between purchases (this may be less true for financial institutions that can spread the cost of establishing brand awareness across a number of products).

The second major characteristic of mortgage lending marketing that diminishes mass media effectiveness is that mortgage bankers' primary market is typically made up of intermediaries, not the end consumer. We have relied traditionally on builders and Realtors to direct business to us, rather than marketing directly to borrowers. As a result, our target market for communications are these intermediaries, for which mass media approaches are not particularly efficient.

The marketing challenge in mortgage banking, therefore, is much broader than just advertising. It necessarily encompasses all aspects of the consumer marketing strategy development and execution, and it focuses particularly (today at least) on the less well-understood art of marketing through intermediaries. As one considers other channels of distribution, even more marketing expertise is required, particularly the development of efficient, yet effective direct marketing--direct mail and telemarketing efforts.

Getting going

Making your firm something clearly special is perhaps the most critical survival strategy you can adopt. It's time we, as an industry, separated the survivors from those that won't make it. Each of us must identify and establish some basis upon which we can economically justify our reason for being. Technology, marketing and training are the key tools that are going to be used. Speed and service are the likely bases of differentiation to which these tools will be applied. The steps that must be taken are tough, but straightforward:

* Define your target market niches

and its needs; * Define your necessary delivery

system, probably with outside help; * Make the necessary investments

now, even if it hurts; * Manage the implementation and

execution of the investments.

Fred Portner is executive vice president of Directors Mortgage Loan Corporation, Riverside, California.
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:how mortgage companies can set themselves apart in the marketplace
Author:Portner, Fred
Publication:Mortgage Banking
Date:Jan 1, 1991
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