Servicers intensify retention efforts as the rate of success declines
An old adage states that it is cheaper to retain an existing customer than to source a new one. For years, mortgage servicers have tried to do a better job of retaining borrowers in their portfolio, but lately for many, the efforts have been futile.
Only 18% of borrowers that refinanced in the second quarter stayed with their current servicer, according to Black Knight. For rate and term refinancers alone, the retention rate is 22%. And with cash-out refis, the retention rate is 13%.
While pricing is certainly important, Black Knight Data & Analytics President Ben Graboske pointed out that the rate differences between retained and lost borrowers are marginal.
The high credit borrowers that converted a rate/term refi into a new conforming mortgage in the second quarter received an interest rate only 7 basis points lower on average than borrowers who were retained, Black Knight found.
The small difference in pricing suggests that proactively identifying and marketing to those that are at high risk of prepaying may be key to increasing the retention rates, Graboske said.
The second quarter's refi retention rate was the second lowest since 2005 and just slightly better than the first quarter's 17%. On the other hand, the highest was in the first quarter of 2011 at 48%, during the housing bust. Black Knight doesn't track purchase retentions.
But with Fannie Mae predicting $3.4 trillion in originations for this year — the most since 2003 — and $2.5 trillion for next year, mortgage lenders are more at risk of losing much of their MSR investment.
The plan of attack
Some are taking steps to be more proactive in customer retention. During its second quarter earnings call, New Residential CEO Michael Neurenberg said the company is increasing its emphasis on retaining existing customers through the direct-to-consumer channel, he said, noting the company's goal of $4.6 billion in quarterly volume by the third quarter and $6 billion by the end of the year.
Toward that end, it entered into an agreement with Salesforce to connect the origination, servicing and marketing functions and boost production.
Michael Dubeck has made retention the focus of Planet Home Lending's servicing rights acquisition policy ever since he joined its parent company Planet Financial, as president and CEO in 2013.
"It was really to reinvent the company," said Dubeck. "It was a servicer-only model and the original business plan was bulk MSR acquisitions."
If Planet Home was going to own MSRs, it also needed to have a call center and a customer retention unit to protect its economic investment, Dubeck decreed. The company also created a business intelligence unit to aid in targeting its marketing efforts.
Planet Home portions its $22 billion servicing portfolio into 35 to 40 segments with each having a specific marketing strategy around its products.
"Some segments are being called, some segments are getting email campaigns, some segments are getting mailers followed by calls; it's all very scientific and strategic at the end of the day," Dubeck said.
To properly route its inbound calls, Planet Home offers separate call centers: one for clients looking for their next loan and one for forbearances and other issues involving the servicing function.
The loan officers in Planet Home's retail branch also play a role in the company's retention strategy, in that they get the first shot at creating the next loan for the organic business it brought in.
Planet Home also has a subservicing business, and it helps those MSR owners with customer retention; however the next loan must be subserviced by Planet Home, Dubeck added.
"We made a big investment in the platform, we've stayed committed to it," Dubeck said. "It really pays off in spades in producing revenue and retaining book value."
Quicken Loans/Rocket Mortgage also places a high emphasis on customer retention when acquiring MSRs. During parent Rocket's second-quarter earnings call, Chief Financial Officer Julie Booth said 46% of the industry-leading $72.3 billion it originated in the second quarter came from its servicing book.
"These repeat transactions with existing clients come with little to no client acquisition costs, leading to substantial incremental profitability," said Booth.
Rocket looks at MSR acquisitions not just for the current cash flow, but for the future income stream when the customers refinances or buys another home.
"Our ability to monetize those surpasses most of our competitors, but it really is a key differentiator and you're seeing that in a lot of our results now," added Bob Walters, Rocket's president and chief operating officer.
Tools for retention
Fintechs like Home Captian, meanwhile, are developing tools to assist servicers in their retention efforts.
"The dominant tool that most servicers use for recapture are really just autodialers and direct mail, outdated and unsophisticated means that do not work in the Super Bowl of refinance booms of which we're in right now," said CEO Grant Moon.
The firm just released Home Captain Hub, which Moon described as a conversion optimization system.
Home Captain Hub is a white label platform for lenders, which provides discounted listing options, nationwide home search, an automated valuation model and artificial intelligence engagement for buyers, sellers, and refinancers. The platform promises to provide this information to servicers before an MLS trigger is reported to them.
Home Captain Hub's alerts, which also include notifications when credit reports are pulled, are information that their competitors can also buy. Some servicers aren't aware the client has applied elsewhere until the next lender sends a payoff demand request prior to closing.
Jornaya is able to take the information it has gathered on the consumer home search side to let its servicer clients know well in advance of any notifications that a borrower has gotten loan elsewhere, said Mike Eshelman, its head of consumer finance.
Servicers can only get information from Jornaya on the activity from the borrowers in their own portfolio.
The traditional triggers, he said, are better suited to identifying refi candidates, but they don't "really say when a consumer is in market for a new home purchase."
With Jornaya's datasets, "we're seeing consumers show these online shopping behaviors some 100 days prior to a credit trigger or an MLS listing alert," Eshelman said.
The most important step, Eshelman said, is properly handling those clients when they make that inbound call.
"It's prioritizing the consumers. If you start thinking about the inbound call queue and the outbound call queue with the servicers, in March when rates were low, they had a ton of people calling in," Eshelman said. "When the word forbearance got thrown out there, even more people started calling in and it was bogging down the call queues."
Wait times were very high right after the coronavirus relief package was passed. Those looking for their next loan likely gave up after being on hold for a long time and went to the next lender. Even as wait times have improved, servicers still have problems properly routing callers to the function they seek, Eshelman said.
"If servicers were able to understand which consumers were most likely in the market to transact, which ones were most likely to be asking about forbearance … now all of sudden you're segmenting, you're not bogging down a loan officer's time with forbearance questions," Eshelman said.
Home Captain is seeing more urgency from existing and new clients, Moon said. For the new business, it finds it is getting through their vendor management checks a lot quicker and the implementation time has been quicker.
Servicers need more information, especially generated earlier in the process, in order to be proactive in keeping their current customers, Jornaya's Eshelman said.
"The more data you have, especially the data your competitors don't have, you can leverage that to make better marketing decisions, better prioritization decisions," he said. "The world's changed; there's a ton of consumers going online shopping for a mortgage, engaging with lenders, it has to advance their knowledge of their current customer if they want to win that battle."