Data, Discipline And Technology Can Unlock Mortgage Lending’s Potential

Today’s high interest rates are taking too much of the blame for depressed home sales.

Yes, mortgage rates are at their highest levels since 2001, and weighted-average locked rates have increased by more than 130 basis points since Q3 2022, according to Curinos LendersBenchmark
Analyzer data (See Figure 1). And many metropolitan areas homes are more expensive, but mainly that’s because supply is lacking. Would-be sellers of existing homes are loath to give up their low fixed rate, and there are not enough affordable new homes to meet demand from first-time and average-income buyers

Despite evidence to the contrary, Curinos believes today’s residential mortgage market can be summed up in one word: potential.

Figure 1: Weighted Average Locked Rate By Quarter

Source: Curinos LendersBenchmark Analyzer FM Originations

Lower inflation is one reason for optimism. The Consumer Price Index rose 3.2% in July from the prior year, well down from the 9% rate seen in summer 2022. The Federal Reserve wants to bring inflation down even more, but it’s proceeding cautiously on further interest-rate increases. Even a suggestion that rates will stay where they are would almost certainly result in lower mortgage rates. Lenders would be able to capitalize on market inefficiencies and an environment that could soon turn the corner and show promise. But to realize its potential, that promise needs to translate into strategic decision making that avoids playbooks and mindsets that are outdated or overly defensive, and ultimately result in lost market share and decreased profitability.

Whatever strategy a lender chooses, its execution needs to be guided by data. From Curinos’ experience, data-derived decision making is a characteristic universally shared by lending organizations that display best practices. The right data applied with surgical precision – rather than one-size-fits-all – can help banking institutions recruit new loan officers, evaluate product offerings, expand into new markets, redirect marketing efforts and make difficult decisions relating to retraction and right-sizing.

The opportunity with millennials and first-time home buyers is a good case in point. According to data from Curinos LendersBenchmark Analyzer, Federal Housing Authority and Veteran Affairs loans are at their highest percentage of total origination volume since 2017, which indicates that affordability remains a challenge (See Figure 2).

Figure 2: Funded Product Distribution By Quarter

Curinos LendersBenchmark Analyzer FM Originations

For originators, this suggests a potential market opportunity in reevaluating their affordable-lending efforts. Key areas to consider are expanding eligibility and credit guidelines, diversifying affordable lending programs, exploring alternative types of property and targeting more affordable cities. All require the right data, correctly applied.

Refining price discipline is another area with potential, but it needs to be within a proven, scalable framework based on objective data. To capitalize on today’s pricing variability, lenders need to adopt a localized price strategy using data that reveal where competitors are positioned and where transactions are taking place.

According to LendersBenchmark Analyzer data, price deviation by market is 100 bp in fees for conforming 30-year production (See Figure 3), and it’s 90 bp for FHA 30-year production and almost 250 bp for production of non-conforming (jumbo) 30-year loans. Given current challenges, every basis point matters, so establishing a meaningful price strategy (or refining an existing strategy) is the critical first step. It will allow for preservation of margin in the short term and, if successfully executed over time, create opportunities for increased market share and profitability.

Figure 3: Weighted Average Market Price | Conforming 30-Year Mortgages

Fee Dispersion At A Rate of 7.625%
Source: Curinos LendersBenchmark Analyzer FM Originations | As of 7/31/2023

Another success factor is engaging the right technology to ensure a pleasing customer experience. A digital mortgage loan or line is now table stakes, and a transparent and intuitive journey is expected.

In a streamlined operations process, embedded loan-origination system or customer relationship management platform, components need to communicate with each other, store comprehensive data and seamlessly interact with the customer. Technological advancements drive down costs and create efficiencies or scale. An in-depth review of a lender’s tech stack will result in innovative ways to recapture existing customers, attract new ones and eliminate redundancies, all of which can enhance the bottom line.

Still another area where proactive data management and precision can play an influential role is counterparty risk. Lending is based on relationships that help win over customers and facilitate transactions, so lenders should work to develop trade partnerships with well-capitalized institutions that are experienced and committed to the long-term success of their partners.

But lenders should focus on more than just capital. They should also secure multiple outlets for specific loan collateral, whether from an agency (Fannie Mae/Freddie Mac), government production (Ginnie Mae) or traditional non-agency/jumbo production. This is because counterparties will certainly continue to evolve through consolidation, and investor appetite will ebb and flow with changing market dynamics. Private demand and capital are likely to both complement and compete with public demand and investment through the government-sponsored entities.

Lending companies have a lot to consider, but no doubt the potential is there. Those that want to survive, then thrive and eventually soar will need to expand initiatives to meet the shifting demand of demographic segments, invest in technology and process, establish pricing discipline and prudently evaluate their counterparty risk. Going from potential to realization means adopting a proactive, data-driven mindset and acquiring the right tools, and then diligently applying both of these assets to achieve business success.

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