Strategies for Expansion in the Purchase-Mortgage Market

Understanding the Dynamics of the Purchase Mortgage Market

The purchase mortgage market represents a crucial segment within the primary mortgage market, exclusively dedicated to financing new home acquisitions. This sector, distinct from refinancing transactions and home equity loans, plays a pivotal role in the overall landscape of residential mortgage lending. The primary mortgage market encompasses both purchase mortgages and refinancing transactions, reflecting the diverse financial activities associated with real estate. An intriguing aspect within the purchase mortgage realm is the concept of a purchase-money mortgage, where sellers extend financing to buyers, often serving as a compelling incentive for property acquisition. It's important to note that the origination of home mortgages primarily occurs in the primary mortgage market, illustrating its significance in facilitating homeownership. Additionally, the secondary mortgage market functions as a platform for the exchange of existing loans between financial entities, further influencing the liquidity and dynamics of the broader mortgage industry. Understanding these interconnected elements is essential for comprehending the comprehensive landscape of residential mortgage financing.

Introduction: The purchase mortgage market, a segment within the primary mortgage market, focuses on loans designed to fund home purchases. Key participants, including mortgage originators like banks, initiate and provide new loans to homebuyers. Bridging the gap between lenders and borrowers, mortgage brokers, bankers, or agents play a pivotal role by facilitating the process and seeking favorable interest rates and terms. Borrowers, whether acquiring property for occupancy or investment purposes, undergo scrutiny of their financial situation in the underwriting process. Lenders determine mortgage issuance and terms based on this evaluation. A standard requirement is an initial down payment, typically around 20% of the property's purchase price. Lower down payments necessitate private mortgage insurance (PMI) to protect lenders from potential homeowner default. However, buyers can explore alternatives like a purchase money second mortgage or piggyback loan to bypass PMI. The refinance mortgage market constitutes the second component of the primary mortgage market, emphasizing its role in mortgage origination. This two-tiered structure underscores the comprehensive dynamics shaping residential financing.

The US mortgage market faces challenges due to rising interest rates and declining origination volumes, particularly impacting mortgage refinancing demand. However, the outlook for purchase mortgages, used for home acquisitions, remains relatively robust. The market has evolved significantly over the last five years, witnessing a shift towards digital channels and a decline in retail banks' market share compared to nonbanks. In this challenging landscape, organizations have an opportunity to innovate and cater to the evolving needs of homebuyers. Drawing insights from 2023 research on the preferences of over 1,100 US purchase-mortgage borrowers, the discussion outlines five strategic actions that institutions can adopt. Each lender archetype—purchase-focused nonbanks, consumer-direct nonbanks, and banks—can tailor a unique course of action to thrive in the purchase-mortgage market. By understanding customer expectations and leveraging the current market conditions, lenders can position themselves strategically and enhance their competitiveness in the dynamic mortgage landscape.

Note: wholesale-focused nonbanks, constituting 29% of the origination volume, stand apart in their approach to building relationships and expanding volume. Their distinct strategies in these areas set them apart from customer-facing organizations. As this discussion unfolds, the focus remains on the unique dynamics and strategies applicable to customer-facing entities, such as purchase-focused nonbanks, consumer-direct nonbanks, and traditional banks.

Distinguishing Between Purchase Mortgages and Purchase-Money Mortgages

It's crucial to differentiate between a purchase mortgage, traded on the purchase mortgage market, and a purchase-money mortgage. In the latter scenario, the property seller extends a mortgage directly to the buyer, facilitating the transaction without involving a traditional financial lender. Known as seller or owner financing, this option is typically chosen when a borrower can't qualify through conventional channels or in transactions involving family or close friends. On the other hand, purchase mortgages originate from financial institutions, often being quickly sold to other investors. These mortgages are frequently bundled with similar loans and traded on the secondary market, where government-sponsored enterprises like Fannie Mae and Freddie Mac are common buyers. These entities securitize the bundled loans, converting them into mortgage-backed securities (MBS), which may sometimes include commingling with refinanced loans. Understanding the distinction between these two mortgage types is crucial for navigating the intricacies of the real estate and lending landscape.

THE IMPERATIVE BLUEPRINT:

In the Evolving Mortgage Market Landscape: Purchase-Focused Nonbanks Take the Lead: Purchase-focused nonbanks have emerged as formidable leaders, contributing to around 32% of purchase origination volumes among the top 50 mortgage lenders—a notable increase from 24% in 2018. Their strength lies in fostering relationships through networks of loan officers deeply connected to local real estate agents and homebuyers. This strategic advantage positions them well to navigate the challenging market conditions. In contrast, consumer-direct nonbanks, reliant on call centers and marketing campaigns, are urged to upgrade their platforms for purchase originations to thrive in the current environment. For traditional banks, the situation is nuanced. Many have witnessed significant volume declines due to heightened competition from nonbank lenders offering superior customer experiences. Facing liquidity and capital constraints, regional and community banks are reassessing their strategies, contemplating operational simplification, or even divesting from mortgage lending. Some banks, particularly those seeking to optimize costs and focus on core businesses, are exploring partnerships by off-loading in-house mortgage operations to external entities. Concurrently, other banks are doubling down on their commitment to the purchase business, investing in data and digital infrastructure to enhance their value proposition, especially in retail segments where they perceive a competitive advantage relative to nonbanks. While purchase-focused nonbanks currently enjoy market leadership, sustained success demands vigilance and proactive strategies in the face of increasing competition. To maintain and extend market share, lenders, including both nonbanks and banks, must consider critical imperatives outlined in the subsequent sections of this analysis.

Crafting Memorable Experiences for Customer Advocacy: In the realm of mortgage lending, recommendations from friends, family, and colleagues play a crucial role, particularly when borrowers rate their lenders highly throughout the mortgage journey. Despite this, few mortgage lenders stand out in creating distinctive experiences for customers. Borrowers express the least satisfaction during exploration journeys, particularly when researching products, rates, and financing options before completing applications. Document collection, a historically challenging aspect, significantly impacts customer satisfaction, with the second request for supporting materials causing notable dissatisfaction. While recent efforts aim to streamline this process, lenders typically reach out to customers three times on average for additional documents. To enhance customer journeys, lenders can prioritize maximal personalization in document collection. This includes prepopulating application forms with data from internal and external sources and customizing documentation checklists to minimize redundant or unclear document requests. By addressing these pain points and creating personalized, streamlined experiences, lenders can foster customer satisfaction, turning borrowers into enthusiastic promoters and leveraging positive recommendations for business growth.

Integrating Live Consultations for Remote Mortgage Engagement: Survey responses highlight that digital channels have become the primary platform for mortgage lending, with two-thirds of recent homebuyers expressing comfort in completing the entire mortgage journey through digital channels. While the actual use of digital channels has seen a significant increase, with over half of mortgage applicants in 2023 utilizing lenders' websites or mobile apps for the entire process, live consultations remain crucial. Approximately one-third of customers still desire the option to consult with a live officer through telephone or in-person interactions. Despite the digital shift, live consultations continue to receive higher satisfaction scores from mortgage customers. Hybrid interactions, combining in-person meetings with remote exchanges, consistently outperform interactions conducted solely through remote channels. On average, 65% of customers report satisfaction with combined remote and in-person consultations, compared to around 55% satisfaction with entirely remote consultations. Interestingly, customer satisfaction with remote-only and hybrid interactions increases with the frequency of interactions, especially during the exploration phase. Lenders contemplating an integrated channel strategy should consider the importance of live consultations in enhancing customer satisfaction, particularly during the crucial exploration phase of the mortgage journey.

Maximizing Data Assets to Enhance Mortgage Pipeline: In the competitive mortgage landscape, over half of borrowers consider just one institution, emphasizing the need for lenders to identify and engage a broader pool of prospective customers. Utilizing next-product-to-buy models, lenders can identify potential homebuyers and assist loan officers in cultivating relationships with qualifying prospects. Banks, with their historical customer data and established relationships, have a natural advantage in personalizing competitive offers based on accurate risk assessments. Despite their robust data assets, banks lag behind nonbanks in converting customer interest into completed applications. Only 60% of customers considering a bank mortgage proceed with applications, compared to 75% for nonbank mortgages. To address this gap, banks need to streamline the journey from expressing interest to completing applications. Currently, slow response times and cumbersome document requests significantly impact borrower satisfaction with their bank. As lenders strive to maximize their data assets, optimizing the customer experience in the mortgage application process becomes a critical factor in ensuring overall satisfaction and successful conversion rates.

Early Assurance: In the competitive landscape of mortgage lending, securing customer trust and satisfaction is paramount. Beyond seeking the best interest rates, prospective homebuyers prioritize assurance of loan approval. Leading firms are innovating by employing sophisticated underwriting models, moving beyond standard prequalification to offer instant approval for qualified customers eligible for loans. This transformation shifts the engagement model from a mere "invitation to apply" (prequalification) to a more compelling "invitation to accept" (instant approval). The process involves real-time conditional approval, encompassing analytical decisioning, crafting compelling offers, and delivering personalized invitations through appropriate channels. Leveraging a robust data-and-analytics infrastructure allows lenders to scrutinize extensive data sets, moving beyond traditional borrower-provided information. Incorporating data from internal and external sources enhances risk scoring and underwriting calculations. To further enhance the mortgage value proposition, some institutions are considering providing early guarantees of financing availability during the home-buying journey. This guarantee, contingent on eligible documentation, assures prospective buyers that necessary funds will be available up to a specified amount. While this innovative approach provides a crucial competitive edge in terms of speed and certainty, it necessitates substantial technological, human, and operational changes to align with a business model centered on upfront approval and guarantees. This transformative shift challenges the conventional purchase-mortgage value proposition, prompting lenders to reconsider their technology, skills, and workflow strategies. 

Recommendation

In navigating the dynamic landscape of the mortgage market, lenders, irrespective of their size or business model, need to invest in new capabilities to stay competitive. The success of purchase-focused nonbanks lies in their local market presence and superior experiences for homebuyers and agents, yet creating a distinctive value proposition remains a challenge for most lenders. Advanced analytics and automated processes can be pivotal in lowering costs, expediting decision-making, minimizing errors, and enhancing underwriting precision.

For Purchase-Focused Nonbanks, addressing the challenge of lower rates of consideration involves investing in data-and-analytics capabilities. They should build digital tools such as mortgage calculators and marketing engines for personalized campaigns, while also upgrading underwriting capabilities to provide early firm approval offers.

Consumer-Direct Nonbanks need to shift their business model for purchase leads by leveraging advanced analytical engines. Organizing distinct teams for refinancing and purchase officers, along with targeted incentive programs, is crucial. Consideration should also be given to developing or acquiring a presence in specific markets to compete directly.

For Banks, leveraging data from existing relationships is key for early assurance of loan approval. Enhancing conversion rates from consideration to application submission through AI-enabled engagement tools is essential. Banks can also build an ecosystem of housing-related services to provide a "one-stop shop" for borrowers.  

Key research insights reveal that 30 to 40 percent of borrowers prefer a lender offering a "one-stop shop" for managing the entire home-buying process. Banks can seize an opportunity by building housing-related service ecosystems and empowering loan officers to discuss financial wellness.

Opportunities for market leadership can be achieved by focusing on five imperatives: early assurance of approval, data-and-analytics-driven lead generation, compelling value propositions for real estate agents, superior customer experiences, and integrating live consultations into remote engagement. Strategically implementing these imperatives can not only help lenders thrive in the purchase-mortgage market but also establish themselves as leaders in a rapidly evolving landscape.