Mortgages: Business Line or Product Line?

By Joe Camerieri

Mortgages can be an expensive, risky and an agonizingly cyclical proposition for many midsize and community banks. But what drives that expense? For many, it’s driven by a business model in which a mortgage operation is a standalone unit—separate and distinct from branch operations and online banking. Not only is this approach inefficient—it cuts the rest of the bank off from a wealth of data that can be used to drive customer-focused sales opportunities and increase the bank’s wallet share.

Path dependency

In essence, these siloed operations are mini-mortgage companies that exist within or, in some cases, alongside their retail bank organizational structures. In many cases, first mortgages are the only products these units offer, because home equity lending is often part of a consumer finance group that also handles auto and personal loans.

As you’d expect, mortgage operations tend to be run by experienced mortgage executives and staffed by commissioned loan officers, dedicated underwriters, processors and closers—plus secondary marketing staff to deal with the agencies and large investors. Banks that service their own loans have the additional costs of servicing executives, loss mitigation, collections, REO managers and other staffers. And, of course, there is a need for compliance staff on both the origination and servicing sides of the business.

In addition to the dedicated personnel costs, there are also the licensing fees and extras that are paid to loan origination and core servicing systems vendors. According to the Mortgage Bankers Association, it costs $8,957 in fully-loaded production expense to close a loan when you factor in commissions, marketing and infrastructure.

Maintaining a standalone mortgage operation also drives several conscious operational decisions that can have unintended consequences. In many instances, LOs expect to be fed leads, which increases acquisition costs. Some leads come from branches. (This raises the question: Why are you paying LOs high commissions to be “hunters?”) But it’s also not uncommon for mortgage operations to buy leads from aggregators, like LendingTree, and at the same time overlook their own customer base. This is a prime example of a market versus wallet share mentality.

Also, a standalone mortgage business approach can often become an outlier to other efforts, particularly digital strategies. Many institutions have invested in making their traditional retail banking online interfaces easy to use for checking, savings, credit cards and credit line customers. But in too many cases, as soon as a customer becomes interested in a mortgage, he is shuffled off to a separate distribution channel with regional, cellphone-based LOs who respond to consumers at their leisure.

A product like any other

In contrast, banks that view mortgages as a product tend to integrate them more closely with their overall retail strategy. This enables them to gain efficiencies and cut operational costs by staffing more leanly—with a mortgage line head and credit officer, for example, while serving the bank’s existing customers through call center LOs with cross-sell capabilities. Additionally, some of these banks go further and outsource non-customer back-office functions (processing, underwriting, compliance and pre-and post-close) with white-labeled services. This approach alleviates the staffing churn caused by staffing up or down as volumes rise and fall.

One unintended consequence of the way banks silo their mortgage business is that data collected in the application process doesn’t flow efficiently to other parts of the institution. Many larger banks commonly analyze their current customer base and append data, which educates them about where their customers currently have first mortgages and home equity lines. With a more integrated approach to mortgages, banks can capture data from the Uniform Residential Loan Application to offer additional non-mortgage product opportunities and marketing campaigns.

Committing to a strategy of capturing, analyzing and monetizing the mortgage application data collected is a smart way to achieve organic growth in building wallet share of existing customers and sourcing new business. While there are several big players in the market using this approach, it isn’t necessarily out of reach for midsize and community banks.

Amid the many changes in the mortgage market is a constant: the value of customer satisfaction and retention. Integrating a mortgage lending strategy into an overall banking strategy is the wave of the future for community banks, because it will not only increase wallet share, but also help retain customers’ confidence that all their banking needs can be met through one institution.

Joe Camerieri is EVP for sales and business strategy at LenderLive.