Current refi market a strong opportunity for bank mortgage lenders
The end of 2019 opened a roller coaster run of mortgage refinancing activity in this country. Numbers that hit a three-year high in August — pointing upwards 0.4% from the previous quarter — dropped 20% during December thanks to a rise in the average 30-year fixed rate.
Mortgage rates then hit an all-time low to start 2020, hinting that the ride is not over yet and suggesting that banks and credit unions could carve out an opportunity by refinancing mortgages from larger financial institutions, especially in light of changing economic conditions associated with the COVID-19 virus. There are, however, hurdles to overcome as consumer preferences for swift and easy refinancing options require all new digital capabilities.
The crazy rollercoaster ride
As interest rates dropped on a three-week run to open 2020, mortgage origination activity remained paused, despite a 73% year-over-year increase in refinancing activity, according to the National Association of Home Builders' Eye on Housing report. It was, however, the calm before the storm.
After a rate increase in October 2019, Federal Reserve Chairman Jerome Powell made it clear that only a drastic change in economic factors would spur further rate changes in 2020. That drastic change came in early 2020 in the form of COVID-19.
As the novel new coronavirus strained the U.S. economy, investors took safety in the long-term bond market in early March, driving down mortgage rates to a new record low. The average of 3.29% on a 30-year fixed mortgage was the lowest ever recorded by Freddie Mac.
As a result, an outright storm of refinancing activity seized mortgage lenders, outpacing resources as homeowners sought a safe harbor against the economic implications of the coronavirus pandemic. Investors reacted by pulling back on mortgage-backed bonds. As a result, mortgage rates immediately rose 50 basis points to reach January highs, closing out the second full week of March in worrying territory.
In a move designed to offset rising rates and prop up the economy, the Fed then slashed interest rates to zero on March 15 and announced that it would begin buying $200 billion of mortgage-backed bonds to stabilize mortgage rates. The move is expected to drive rates back down again as the U.S. heads deeper into the COVID-19 pandemic.
As the housing market watches to see how COVID-19 will impact home buying, mortgage lenders are working on the deluge of refinancing applications. According to the Mortgage Bankers Association, by March 6, the refinance index had jumped to 79%, the highest level since April of 2009. As a result, the group is nearly doubling its refinance originations forecast to $1.2 trillion for the year 2020, up 37% from 2019 predictions.
Taking on the 2020 refinancing market
When it comes to capitalizing on the current demand for refinancing, community banks and credit unions are strong contenders. Their local connections easily put them on the map for homeowners looking to make a change.
However, consumer preferences are evolving, making it unlikely that customers or members are going to stop in at a branch to check on refinancing rates. Instead, consumers are hitting the internet at an astonishing rate.
According to PwC, nearly 75% of homeowners prefer to research refinancing rates online. More than half want to apply for a loan through the same channel.
While the number of financial institutions offering these capabilities has increased dramatically over the last few years, many are still behind the customer expectation curve, falling ever farther behind as preferences continue to evolve.
According to PwC's annual Home Lending Experience Radar surveys, the lines between channels are blurring, and consumers expect differentiated digital experiences that blend seamlessly with other channels, while financial institutions remain heavily invested in providing tools and capabilities that meet only first-mover qualifications.
To grab a share of the refinancing boom and keep pace with rising demand, community banks and credit unions need to act more as innovators, using digital in a way that raises the bar on the customer experience while streamlining the origination lifecycle. Three big priorities emerge in consideration.
Big data analytics: What consumers want changes across age groups and demographics, and while banks and credit unions have an incredible amount of data at their disposal, too few are using it to define customer preferences. Big data analytics puts the power of insight behind each and every decision, providing detailed information to support targeted messaging for client segments.
Beyond building a refinancing experience that attracts customers, analytics can provide financial institutions with deeper insights that reduce risk and encourage long-term relationships. The use of nontraditional forms of credit to establish worthiness and the ability to flag questionable inputs to reduce fraud are just a few of the examples.
Seamless omni-channel experience: Since more than half of consumers prefer to use online channels for mortgage originations, an end-to-end digital process is essential to attracting refinancing customers, including an online portal providing real-time access to loan details. However, for many, the preference for more personal interactions increases as they move further into the process, making seamless channel integration a priority to maintain customer and member relationships. And do not forget full support for mobile. Currently, 16% of consumers completed a mortgage application on a mobile device.
A seamless omni-channel environment also helps lenders deal with record numbers of refinancing applications by allowing borrowers to self-serve many interactions, such as checking on the status of a loan, thereby freeing loan officers to concentrate on higher-value tasks.
Look ahead: Consumer preferences are always changing, and in the world of digital, changing fast. Over half of consumers aged 18 to 35 would like to use voice assistance at some point during the mortgage process. Likewise, emerging capabilities in artificial intelligence and robotic process automation are making it possible for banks and credit unions to increase back-office efficiencies, while meeting customer and member experience standards.
When it comes to making the most of the refinancing boom or attracting new mortgage customers, the priorities are the same. Banks and credit unions should seek solutions that put them at the forefront of digital capabilities, rather than settling for the status quo.