By Mark Gibson
Last week’s Wall Street Journal article about the return of subprime mortgages Banks Take Hidden Subprime Path, had a bombshell message hidden deep in the article:
“In 2016, for the first time in more than 30 years, nonbank lenders accounted for the majority of mortgage dollars extended to borrowers.”
This fact has huge implications for banks.
Home purchases (and the mortgages that enable them) are the single largest financial decision most people make.
Mortgages are an important “gateway” product for financial institutions, meaning they are one of the few products that older established (and more affluent) consumers are willing to purchase from someone other than their primary FI.
Mortgages are arguably one of the single most profitable products that an FI offers, particularly when viewed from a lifetime profitability standpoint.
So how has this tectonic competitive shift happened, and what should bankers do in response?
We have the 2008 financial crisis to thank. Remember the subprime mortgage? Since mortgages created the crisis, regulators overreacted and made banks jump through many more hoops to make mortgages. Think “qualified mortgage.”
The net result is that, at best, banks restricted lending only to those—with a 700 or 750 credit score—who were likely to fully meet the new restrictive federal criteria. At worst, many banks found that “zero tolerance for defects” by the regulators just wasn’t worth the risk, and exited the mortgage business altogether.
So, while banks were moving away from home loans due to red tape and regulatory scrutiny, half the population was shut out of home purchase. At first, investment firms like Blackstone were the only ones able to purchase middle market homes, snatching up more than 50,000, then renting them back to people no longer able to qualify for loans. (And in the process profiting $5 billion—see Blackstone’s $9.6 Billion Bet on the U.S. Housing Recovery Files to Go Public.)
At the same time, entrepreneurs like Quicken moved into the void, most recently with its Rocket Mortgage. Not only did Quicken make loans available to those shut out of bank loans. It dramatically improved the process, turning a 30-day, paper-laden task into a 5-minute digital sortie. In the process, it became America’s largest mortgage lender, as chronicled in Quicken Loans Overtakes Wells Fargo as America’s Largest Mortgage Lender.
It’s time for action.
The home loan is one of two linchpins of the customer relationship—the other being the checking account. The third critical product—credit cards—is almost entirely out of the community bank market, with the top 10 card issuers providing nearly 90 percent of all credit cards in 2016. Banks cannot afford to lose mortgages as well. What to do?
- Wake up to the fact that mortgages are critical to the client relationship, and treat them as such. Promote them to attract new customers, and offer them to your existing clients too.
- Work with your credit department and compliance to make sure your institution is not turning away high-quality applicants due to overly restrictive policies. For example, make sure you are offering non-qualified mortgages to business owners who have irregular earning patterns that don’t always meet qualified mortgage standards.
- Finally, heed the lesson offered by Rocket Mortgage and reinvent your application process so that it’s fast, simple, digital and transparent.
Home loans are the most important financial purchase our customers make. Banks can’t afford to hand them over to nonbank competitors. The huge sucking sound you hear is billions of dollars of profit being flushed down the drain.
Mark Gibson is senior consultant at Capital Performance Group, a strategic consulting firm that provides advisory, planning, analytic, and project management services to the financial services industry. Email: mgibson@capitalperform.com. LinkedIn.