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Marketing evolution.

The outmoded mortgage banking dinosaur is stepping into a new age.

Marketing Evolution

The "traditional," independent mortgage company is becoming an endangered species. Fierce competition, overcapacity, interest rate volatility and lean profits are slowly driving full-service mortgage lenders out of the industry. Alternatively, those remaining in business must re-examine their identity by asking the question: "who are we--and what do we do best?"

Since 1979, the steady rise in production costs compared to origination income has resulted in net losses to mortgage companies. In 1987, according to Mortgage Bankers Association statistics, loan origination income averaged $1,039 per loan, while expenses averaged $2,004. Therefore, mortgage companies lost almost $1,000 on each loan. Along with the narrowing profit margins in servicing, this scenario has recently caused many mortgage bankers to re-evaluate their loan origination strategies.

To thrive in the current lending environment, the organizational structure of the mortgage banking business must change. Traditional mortgage lending operations, with layers of indecision and tangled lines of authority, is obsolete. In the past, mortgage lenders have tried to be all things to all people. Now, while the rest of the business world is developing adaptable, responsive, high-quality services targeted for specialized market niches, our industry is simply out of step. The traditional mortgage banking dinosaur is quickly becoming extinct.

The marketplace and the consumers of our products don't care how companies are structured. They are simply looking for a mortgage at a competitive price and a loan application process that is quick and painless. Today's lending executives face a myriad of challenges, managing lending institutions with unclear mission statements, outdated service values, confused ownership, and one seemingly insurmountable problem--no authority to affect the outcome. Most mortgage executives are presented with the title to run their organizations, but aren't given the hammer to make decisions that create change.

Mortgage bankers face a future full of challenges. They manage a network of loan production, hedge pipeline risk, limit contingent liabilities, maintain employee morale, develop and introduce competitive products and train and retain staff. In addition, they must run a distribution system that supplies superior products at a fair price, and in the shortest time possible. Sound Herculean? It is. But they also must design, build and differentiate their companies so they are suited for the highly competitive environment of the 1990s.

Taking action

San Jose, California-based First Franklin Financial Corporation is a "full-service," independent mortgage banker--an industry dinosaure. It had no niche, no competitive advantage, no uniqueness. If it didn't offer the best price, the company didn't obtain the loan. After watching the industry get caught up in production volume--while losing money on each loan originated--the company knew it had to take action. In 1987, amidst intense price competition, dramatic swings in prices and production volume, a highly volatile secondary market, and a price-driven ARMs market, First Franklin changed its business plan and management style. These changes had to be made to survive.

First Franklin had one strong competitive advantage not available to most lenders. Ironically, it was once thought to be First Franklin's biggest weakness: it was an independent firm. Therefore, the company used its flexibility, market adaptability, control cost measures, and the ability to compete solely on quality of service to become a surviving species in the 1990s. First Franklin's motto became, "niche or be niched." It developed a strategy to change its origination structure to wholesale only, and to manage toward profitability.

The fastest growing, most well-positioned lenders control strong niches in specialized markets. Countrywide Funding Corporation, Pasadena, has its niche as a low-cost, small office, direct originator. They have more than 90 offices in 49 states, and the company is profitable. Countrywide also purchases servicing on a flow basis as well as in bulk. In Santa Rosa, California, IMCO Realty Services, Inc., is predominately a wholesaler. Another California firm, ARCS Mortgage, Inc. in Calabasas, (a subsidiary of Bank of New York), acts as a direct originator in several states. They possess more than 50 branches and have many account executives in each location. All three companies achieve successful results with different marketing niche strategies. Compare these successes to many lending institutions that fail to view the market as fragmented, and have no clear-cut strategy. Those companies perform lending with the traditional, mass marketing-volume approach.

Finding a niche

How can a company reorganize in this rapidly changing environment? Where does it start? A sound plan begins with understanding the current position of the firm. The company must then create a marketing focus, which in turn, is communicated and integrated into a company philosophy. Probably the most important step in designing a firm's niche is to amplify management's message to the staff. Generally, management is only a filter of information rather than a megaphone. Communication is everything. The organization needs to believe in the plan, understand the commitment, and be willing to change rapidly. Mortgage lending is one of the most competitive industries in the world; it must continually innovate and deliver quality products at the lowest prices possible. To succeed, it must excel at being a flexible, adaptive, people-oriented industry.

First Franklin began by changing its market share mentality. Formerly, the firm focused on established markets. It then tried to carve out a piece of the market, or to enhance its market penetration. This strategy was aimed at winning market share from other lenders that weren't similar to the firm. It is impossible to compete with Citicorp in terms of rate and fee.

In this fast-changing industry, however, marketers need a new approach. First Franklin's approach was called "The Kurt Rambis Marketing Strategy." Rambis is a power forward for the Los Angeles Lakers. Unfortunately, Rambis can't leap, has a jump-shot like a brick, a touch like an elephant, and is slow as molasses up and down the court. How did he ever start for the Lakers, and help them win several NBA World Championships? He worked harder, practiced longer, hustled more and developed a unique basketball strategy. Rather than take a bigger slice of the pie from Magic Johnson or Kareem Addul Jabaar, Rambis baked a new pie and the strategy allowed the Lakers to dominate their league.

The Kurt Rambis marketing strategy as applied to mortgage lending has three guiding premises: it specializes the firm in low-cost/high-quality originations, differentiates the firm from other lenders through value-added product and services, and it blurs the consumer's distinction between price and service. The strategy's overall message is that if you don't have the lowest price, then you must have top quality responsiveness in the eyes of your customer.

Market philosophy

First Franklin originates and services home loans for investors, but we are anything but traditional. Some niches we serve grew out of company commitments and slogans. They are summarized as follows:

* There is no limit to the contribution

of a well-trained, supported and

committed employee. * We are loyal to our customers,

investors and staff. * Authority for decision-making is on

the regional office firing line. * We are a wholesaler and not a direct

originator of loans. * We don't use correspondent

networks to originate loans. * We don't pay for loan servicing. * We price to market conditions. * We demand quality products. * We strive to create new market

niches via new products and services.

We specialize in wholesale lending at First Franklin. There are thousands of wholesalers, all with rates equal to or better than ours. Our new marketing strategy enabled us to create uniqueness in the firm in two ways: by creating a new product niche and by restructuring our organization to provide superior services and responsiveness to mortgage brokers at point-of-loan submission. When customers receive an answer, whether it is yes or no, on a loan at the initial point of contact, they perceive top quality service. Sometimes, lenders diffuse authority within their organizations to such an extreme that service becomes weak and diluted, and a loan file seems lost instead of nurtured. First Franklin realized that if it could add more value to its products and services, it could attain true differentiation and dominate the wholesale market.

To initiate its market niche operationally, First Franklin began its "CHOICE" department. CHOICE stands for "Common sense Home loans with Options for Income, Credit and Equity problems." This market niche now provides a much needed service to brokers and borrowers while providing common sense, high yielding, low loan-to-value loans to our investors. Like Kurt Rambis, the strategy baked a new pie. Instead of contending with other lenders in the highly competitive lender-eat-lender "A" wholesale market, we carved out a niche in the "B" market. The result was dramatic. In 1988, the "B" market gained First Franklin more than $1 million in profits. Each wholesale loan netted approximately 2 points plus administration fees, compared to conventional wholesale "A" loans which originated at par or less.


We fundamentally changed our wholesale approval process to release decision-making authority to each regional branch office. Currently, the goal is to produce $25-$40 million per month from each regional center. At the heart of the process is the loan account manager. The account manager is responsible for each loan, cradle to grave, (submitted by their target accounts). The account manager also becomes the liaison with each broker to facilitate approval mechanisms within the firm. The account managers are decision-makers--if they say the loan is made, the entire organization works to make the loan. They replace highly-paid outside wholesale account executives who are interested only in production, and adversarial to the process. The money saved by not having outside account representatives is passed along to the people who do the work. Underwriters work within our loan approval process to condition files, ensure loans meet secondary guidelines, and audit account managers. First Franklin adds value to service by bestowing each branch vice president with underwriting and approval authority. This further ensures each loan will be handled with care and any problems will be resolved expediently. The result: brokers perceive the company's service as superior, employees are more loyal because they have responsibility and authority for their performance, profitability is enhanced, and the goal of becoming a low-cost originator is attained.

The distribution niche

Mortgage bankers are not lenders or investors. We are distribution firms. The sooner we accept this and shape support systems around becoming successful mortgage distributors, the sooner we will create a higher value for service instead of price from the customer's vantage point. In turn, this will create the ultimate niche--total customer responsiveness. Once this happens, loan volume will transcend interest rate swings, management will become easier, and you will be in control of your organization instead of it controlling you. How can management shape a successful mortgage distribution firm? First Franklin started with the following goals:

* constantly communicate with the

customers; * respond immediately to the

customer's desires; * give brokers an answer upon loan

submission; * eliminate all document and system

errors; * give account managers authority; * use self-managing branches with

autonomy; * strive to close loans fast.

Sorting out this business is increasingly difficult for mortgage lenders. The old axiom, "Money makes all the rules," is dead and buried. In reality, big portfolio lenders will be battling about price, small mortgage brokers will be surviving as rebels, and the rest will be caught in the middle. The worst situation in this industry, however, is to get caught in the middle. Mortgage lenders must strive to achieve a unique identity. On the other hand, an in-between or stuck-in-the-middle strategy based on lowest rate will likely prove disastrous.

To create your firm's niche, ask yourself, "What is so special about my firm?" "How are we different from other lenders?" "What is our unique product or service in the marketplace?" In other words, don't just stand there--carve out a niche and be something.

William D. Dallas is the chief executive officer, chairman of the board and co-founder of First Franklin Financial Corporation, one of California's largest, privately owned mortgage banking firms.
COPYRIGHT 1990 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Title Annotation:mortgage banking
Author:Dallas, William D.
Publication:Mortgage Banking
Date:Jun 1, 1990
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