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Faced With Lower Interest Rates, Mortgage Bankers Must Look to CRM
Faced with a customer retention rate of only 25 percent, mortgage bankers must look to CRM, according to a report by Mortgage Guaranty Insurance Corporation's Capital Markets Group.
Posted Feb 2, 2001
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With lower interest rates boosting refinancing activity, 75 percent of borrowers who get new home loans will eventually switch mortgage companies if historical trends are any indication, according the nation's leading provider of mortgage insurance.

Faced with such low retention rates, mortgage bankers might well be looking to new CRM strategies to remain competitive if new findings from Mortgage Guaranty Insurance Corporation's Capital Markets Group (CMG) are any indication. CMG predicts the mortgage industry's customer retention rate will reach 25 percent this year, based on research of its 14-million-loan data warehouse. CMG's study also revealed that lenders experienced similar retention rates during the 1998 refinancing wave.

"The importance of this figure is that it gives lenders a loyalty benchmark for their brand," said Michael Zimmerman, CMG's VP for mortgage banking strategies. "It shows that borrowers are less loyal to their mortgage lender than they are to other product and service providers. As a result, it is even more important for mortgage lenders to make it a priority to establish programs and practices aimed at maximizing customer retention."

Zimmerman said the mortgage industry's customer retention rate of 25 percent lags behind rates for the auto industry (52 percent), airlines (63 percent), household products (70 percent), health care providers (77 percent), banking (84 percent) and insurance (70 percent).

"A name is not enough in mortgage lending as it is in fast food, cars, or clothing," said Mark Marple, another CMG VP for mortgage banking strategies. "When it comes to mortgages, lenders need to be the first to offer their existing customers a refinancing opportunity, new home purchase mortgage or home equity loan. Timing is the key--lenders need to make these proactive offers when it is most likely that an existing borrower is weighing his or her mortgage options. Lenders have an advantage over the competition when it comes to keeping existing customers because they possess loan-level data that can be mined to target which of their customers is most likely to be in the market for a new mortgage."

Marple identified three emerging CRM technologies that could have a profound impact on the industry's customer retention rate if broadly adopted:

  • Loan-Level Prepayment Scoring--The industry has developed scoring models which consider certain loan and borrower characteristics to predict the likelihood that a borrower will refinance or seek a new mortgage.
  • Interactive Voice-Recognition--So-called IVR systems will handle incoming calls, capture important consumer information that can later be used in targeted marketing, and route consumers expeditiously according to their needs.
  • Customer-Only Web Features--Lenders are providing existing customers with access to secured Websites through which they can view their mortgage statement, make electronic payments, and obtain a new loan using a streamlined approval process.

    "Broad adoption of these technologies, combined with a comprehensive and consistent strategy, could result in a customer retention rate of close to 50 percent within five years," added Zimmerman. "In working with mortgage lenders of all sizes, we have seen retention rates exceeding 50 percent achieved by lenders who have embraced this approach."

    What makes customer retention so critical today is the current wave of refinancings. According to information published by Fannie Mae, more than $1 trillion in mortgages will be refinanced over the next two years. Though a lender's retention rate is typically higher in periods of high refinancing, more of their customer base is at risk for defecting. According to CMG, this means their replenishment rate--or new originations as a percent of total mortgages serviced--falls, decreasing average yields and hurting servicing profits.

    MGIC has tracked industry customer retention rates since early 1998. As the Freddie Mac average commitment rate for 30-year fixed-rate mortgages (FRMs) rose, retention rates fell. For example, when the 30-year FRM rate rose from 6.98 percent in 1998 to 7.81 percent from July 1999 through December 1999, the customer retention rate fell from 26 percent to 12 percent. Interest rates then fell from 7.81 percent during July-December 1999 to 7.57 percent during November and December of 2000. As a result, the customer retention rate rose from 12 percent to 19 percent.

    With the 30-year FRM rate expected to average around 7 percent in 2001, MGIC projects the industry's customer retention rate will rise to 25 percent. The fact that customer retention rates rise during periods of increased refinancing is evidence that lenders are to some degree already leveraging their existing relationships and offering their customers benefits like streamlined processing or quick approval of rate and term refinancings.

    "The mortgage industry has just touched the tip of the iceberg in customer retention," said Marple. "Over the next five years we expect more lenders will invest in their own 'loyalty infrastructure' and become adept at mining the loan-level data they have on existing customers to take steps necessary to retain a greater percentage of them through periods of rising and falling interest rates.

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