Large banks lag far behind their independent competitors when it comes to making a profit on retail residential mortgages, according to STRATMOR Group, a leading mortgage advisory firm. That’s one of the key findings from the most recent set of meetings of the PGR: Mortgage Bankers Association (MBA) and STRATMOR Peer Group Roundtables. Ninety-two lenders participated in seven PGR meetings MBA and STRATMOR held this spring.
“The trends we noted in the PGR large bank group were consistent with what STRATMOR has found across many of our large bank clients: low revenues, high expenses and trend lines that are moving in the wrong direction,” noted STRATMOR Principal Tom Finnegan in the firm’s just-released June 2019 Insights Report. Specifically, large banks lost $4,803 per retail mortgage loan originated in 2018 compared to large independent lenders which earned on average of $376 per loan.
A number of factors contribute to the large discrepancies in costs and revenue. “Large banks experience a significant disadvantage in the expenses we categorize as ‘corporate administration’,” Finnegan says. “Corporate administration costs amounted to $3,654 per loan in 2018 at the largest banks versus only $1,213 per loan for the large independents – a $2,441 per loan disadvantage for the large banks.”
Finnegan adds: “Portfolio loans, and jumbo loans specifically, are being priced aggressively by the banks, leading to imputed revenue that is lower than might be expected otherwise.”
He noted that large banks as a group do not focus on FHA and VA lending to the same extent that independents do, and a few have virtually abandoned FHA lending due to the perceived risk of regulatory enforcement actions. “Because FHA and VA loans typically offer the ability to price with wider margins, not participating in this loan segment can also contribute to lower per loan revenue,” according to the report.
With respect to customer retention, STRATMOR estimates large banks captured only 4 percent of the available mortgage volume from their customer base, compared to 8.1 percent at regional banks. Similarly, large banks recaptured only 12 percent of their own customers who paid off an existing mortgage, compared to a retention rate of 30 percent at the large independents.
Large banks are often slow to react to changes in the marketplace in an industry that is notoriously cyclical. Many are simply not geared toward origination of purchase mortgages, a much more reliable production source than refinances. “When our industry becomes dominated by purchase money mortgages, the large banks’ natural advantage in terms of new loan opportunities dissipates,” Finnegan says. Many bank loan officers are not incented to pursue leads from referral sources outside the bank, such as Realtors.
“The type of loan officer who is attracted to the somewhat less entrepreneurial environment inside a large bank is often not well-suited to compete for external leads,” the STRATMOR report notes. By sharp contrast, “the lifeblood of independent lenders is their aggressive marketing to referral sources,” Finnegan points out. Large bank policies tend to work against this type of personal marketing.
“The legitimate quest for branding consistency and regulatory compliance can get in the way of personalized marketing and rapid response to the needs of the real estate community,” he says. “Moreover, mortgage origination must compete for marketing dollars with other areas of the bank, and often does not come out on top.”
Despite spending more than four times what their nonbank rivals spend on technology, $1,724 per closed mortgage for the large banks versus only $437 for the large independents, “large banks appear to have great difficulty translating technological expertise and resources into efficient technology support for the mortgage origination business,” STRATMOR added. “Large banks’ IT projects appear to get mired in process considerations and take years to roll out, if they are rolled out at all. Clearly, this is an area that many of the largest banks should review.”
Finnegan advises large banks that want to remain involved in mortgage need to “operate with an entrepreneurial approach, outstanding marketing and customer focus, and excellent financial reporting on, and management of, the details of the business to achieve acceptable levels of profitability.”
In a second article in the report, STRATMOR MortgageSAT director Mike Seminari discusses how independent lenders have increased market share in recent years, particularly in purchase business. “One of the biggest reasons for this shift in power has been the independent’s ability to provide an exceptional customer experience, driving referrals from satisfied customers and traditional referrals sources,” according to Seminari. “Whether bank or independent, the ability to improve the customer experience is largely dependent on the right data. Queue the adage ‘You have to find the holes before you can fix the leaks.'”
Click here to download the June 2019 edition of STRATMOR Insights.