To build profits, create an automated mortgage lending operation
Mortgage profitability hit an all-time low last year, with lenders reporting an average net loss of $200 for each loan they originated in the fourth quarter of 2018. Many financial institutions could have avoided those losses and come out ahead if they'd been willing to make changes before it was too late.
The problem isn't the housing market. According to the Mortgage Bankers Association, residential investment is forecast to improve from a negative to a positive. Sales of new and existing homes are trending up. Consumer prices and employment rates are stable, which means the potential for inflation is low. Barring a change to the state of the economy, the climate for the mortgage industry is sunny.
The real story behind those headline-making losses is revealed in the statistics around pretax production income divided by loan volume. Financial institutions can reduce expenses around regulatory requirements, MLO compensation, and fixed costs in a number of ways, but there is one clear path to increasing volume: self-service mortgage products that give borrowers the control, speed, and convenience they desire.
Studies show borrowers spend six hours online doing research before they buy a home. And this is true for Gen X and boomers as well as millennials. Credit unions and community banks need to have an attractive and functional online presence to serve these prospects or risk losing them to a financial institution that meets their expectations.
Many financial institutions make the mistake of forcing their traditional website to double as a mobile site. But borrowers don't want to pinch or move around a browser screen on their phone in order to learn about rates, fees, and application processes — and they definitely don't want to see a pop-up telling them they're leaving the financial institution's site and being sent to a website they've never heard of. Redirecting borrowers to an unknown site erodes the sense of trust and personalized service that attracted them to a credit union or community bank in the first place.
Borrowers do want a clean look, intuitive navigation, and the ability to access full information on all products and services. When applying for a loan, they expect the same speed and convenience from their credit union or community bank that they can get from an online-only bank.
For instance, online banks can approve or deny a loan application in just 30 seconds. Thirty seconds would be a difficult goal for most credit unions and community banks if they were to develop all the technology in-house, where progress would be hindered by non-integrated legacy systems with limited APIs and functionality. However, help is out there, and the real challenge isn't in development but in choosing a technology partner that is the right fit for a financial institution's priorities, budget and time frame.
When developing an automated loan application, think carefully about getting the right information — not too much (which is inconvenient for the borrower) and not too little (which can stall processing). Find a balance.
With an automated self-service app, compliance is embedded into the system. There is no human error or lost papers; the integrity of loan data remains rock-solid as information moves from the mobile or desktop POS into back-office workflows. E-consent travels with the data, and the audit trail is always accurate and accessible.
An automated process can create an outstanding borrower experience and help loan officers and processors approve loans with greater speed and ease. And that's the goal: to increase the loan flow while creating a more efficient process.
By next year, 85% of account holders will manage their banking relationships without ever interacting with a human. There's an intense demand for instant communication. Instant communication isn't possible with human processes; there will always be phone trees, hold times, and closed hours. Automation, however, makes it possible to always be open and ready to engage with a borrower, and always able to provide the right offer to the right person at the right time.
Conversational artificial intelligence is the future of mortgage lending. On a website or mobile app, conversational AI enables a credit union or community bank to connect with borrowers around the clock and answer their questions in real time. The AI system can sound as natural as a human and ask questions in a way that establishes trust. Hot leads can automatically be forwarded to the first available mortgage loan officer.
But while borrowers want to research and apply for loans online, they still want the option to meet with a loan officer to validate their information. In practical terms, that means that a self-service loan app should connect with the financial institution's customer relationship management system via an API, so a borrower can instantly connect with a loan officer.
The outlook for mortgage lending is steady, with rates and activity remaining at current levels. This healthy environment is fertile ground for credit unions and community banks to build and grow their mortgage operations.
Flexibility and customization are big value differentiators for credit unions and community banks. These financial institutions can use automation and self-service to further their unique ability to tailor products and services to a focused base of prospective borrowers. Those that are able shake the status quo by reducing costs and increasing volume will find abundant opportunities to gain market share today and can expect to remain stable through the next disruption.