Fundamentals of Direct to Consumer Mortgage Portfolio Recapture
(I had written this article on LinkedIn in 2019. I still read it at times. Synergi, from my perspective, wouldn’t be what it stands for, if not for these nuggets. What fascinates me more is how times change, needs change, people change, business processes change & therefore what we thought was true then gets modified. Hence making it part of our Blogs.!)
If I was to summarize portfolio recapture strategy, it would be "to make your in-the-market borrower call your sales team first with processes in place to fulfill borrower needs". With this basic definition in mind, below are some fundamentals of the business from my perspective.
1. Learn your business
Sounds clichéd! But wait. When I say learn your business, I also mean understand the market you operate in. You are managing a portfolio for an investor and you & everyone around maximizes their gains by increasing the chance that a borrower regularly pays you through the life of the loan.
Investor choices, which are few, and basic economic theory will tell you that you operate in an oligopolistic market, at the most tending to monopolistic competition (if you include private investors). Extending the same theory, you will also know that, therefore, your best strategic choice is in differentiation and within that price discrimination. (Trust me, I would love to talk market segmentation but it is ruled out). Here again, a regulated environment, forces you to practice price discrimination through building your core competencies. One of the reasons, why we over focus on technology in our business.
Bottom line is, you will be able to retain more borrowers if you are able to offer them a rate benefit that is more than a competitor’s. And do to so, you need to build internal efficiencies that can have an impact on your product rate sheets. Improve your margin per funded loan and you will improve recapture.
Yes, in the long run, branding might impact but its utility, as I see it, is only effective if you can offer a lower rate!
2. Know your portfolio
Many, including me, often struggle to answer basic questions – “what is the size of the portfolio?”, “what do we mean by marketable?”, “how many loans are over 80 LTV?”, “what percentage is govt.?” etc. And at the same time, we are ok spending dollars behind profiling our customers through primary and secondary research.
You are in the business of portfolio recapture and not customer retention. Unless your organization has 100% recapture, general question always will be “what slice of the pie?” and not “which ingredients of the pie?”. Without knowledge of the portfolio, how are you going to translate it into product promotion tactics?
Try this and see possibilities for yourself. If you were to know what part of the portfolio regularly makes additional principal payments or if you were to know borrowers that are current for the last six months but were delinquent in prior periods?
A common stumbling block in acquiring this knowledge is dependence on technology. Over-emphasis on design and management of data makes one lose sight of basic analytics. Who has ever stopped you from crunching some numbers even if the database is not standardized!
3. Sales & Ops will always be the critical functions
In order to build your core competencies Sales and Operations efficiencies become critical. These are the two functions that convert leads into apps (called conversion rate) and process apps to final funding stages (called pull-thru rate). All other organizational functions are support functions and should primarily focus on improving these two metrics. It’s a common misnomer that marketing should drive a customer centric strategy. On the contrary, call it marketing, business development or business strategy group, should be driving a portfolio-centric sales enabling strategy. As an extension, another important role that this group should play is align product and pricing strategy with portfolio profile to help Sales & Ops improve conversion and pull-thru rates.
The agenda, then, is not to increase lead volume but to increase funded units. As one of my colleagues once told me, one could ask their grandmothers to keep calling your call center – many leads, no apps!
4. Recapture reporting is a function of the past
The time and energy we spend in creating various reports, using most recent technology help us visualize data! And at heart of it all is the Recapture Report – basically meaning of the borrowers that paid-off how many did we recapture?
Have you ever wondered that this particular report never actually gives you any directional indication on what to do next tactically in the short term, unless it is a recurring trend? The only purpose it can serve is tell you how well or poorly you performed last month.
And the reason is very simple, we allow borrowers 30-60 days to lock their loans and therefore a recapture rate last month is a reflection of what you did tactically at least 2 months prior. Correct? And has not the market changed in the last 2 months?
So, what is an alternate? How about application data, lead data, call data, online lead profiles – activities that are current? Have you ever looked at Mortgage Bankers Association’s (MBA) Weekly Activity Report and compared industry averages to your offers/ performance? Is your organization an MBA member? Are you aware that Freddie publishes similar weekly insights on industry?
To improve recapture, you need to refocus on the right data sources and then possibly in the long run your Recapture Report will help you with strategic decisions!
5. DM/EMAIL are most cost-effective channels
Let me put it this way any channel that makes a customer self-select you is a good channel. More importantly, in a finite portfolio where not all borrowers need to be targeted, DM/EMAIL become effective because any lead from these channels would have a better conversion rate. If for some reason it is not the case with you or your organization, then there is something definitely wrong.
A lot of times it is suggested that integrated communications is effective and therefore you would tend to align DM/EMAIL strategy with your outbound calling efforts. Why? An outbound call is a cold call and unless from your portfolio analytics you are very sure of conversion do not hand over the lead for a cold call.
To me, integrated communications means, slicing my portfolio to optimize my channel selection. And this does not require a very robust channel attribution model. Basic knowledge of the portfolio coupled with some current industry knowledge should tell you what part of the portfolio should go to which channel!
6. Use digital marketing judiciously
Essential question is why would you pay for SEM if your objective is recapture. If your own customers don’t know you, it’s unlikely that they are going to come back. I know it looks cool and technological advance to see your company pop-up on a search engine with an “AD” – but you pay a lot for it.
Coming to social media. It should only be used for brand building and improved customer experience. Use it as a dip-stick for customer satisfaction or as a platform for customer education. You need not spend countless hours creating blogs. If you don’t have anything meaningful to say stay away or recycle content.
At the same time, it is not a bad idea to spend on lead aggregators or facilitating online lead creation (on your website). These are good alternate lead sources for sales and help them manage volume on lean days!
7. Trigger programs are costly but effective Sales tools
A credit trigger program is an integral part of retention strategy. Of late we are also witnessing use of online behavioral triggers. I will address behavioral triggers in my next article and limit this discussion to credit triggers.
Many past articles and research on mortgage shopping behavior has noted that over two-thirds of shoppers normally do not look for more than one lender. And through credit triggers you are trying to tell a borrower, who has already started an application with some other lender, that you have a better deal for them. This change is only going to occur if the deal definitely is better and timely.
Naturally then channels like DM or EMAIL are out of question (as they do not allow for negotiations) and only an outbound call by your sales team can help convert borrower intent. To achieve this, sales should be equipped with suitable price discounts on rates. This is the reason credit triggers (though on the face of it cheap) are an expensive proposition (they increase your cost to originate substantially). For a credit trigger program, no other offer, i.e. gift cards, low closing costs, other freebies, would work as much as a rate discount offered by a loan officer!
8. Believe in customized communication
You know it better than me, that a borrower in the market to refinance is only doing it out of some need. It could be to reduce payment, to take cash out, to payoff faster etc. To illicit action from her or him you need to communicate to that need.
Fairly simple, right? But let’s just extend it a bit. You know a borrower’s balance, you know the rate, you know your products, you know what product should suit the borrower best, and you do advertise products/ rates on your website. What is stopping you from doing some simple math and customizing the offer on your DM/ EMAIL communication?
Why do we have to always join the bandwagon? Market suggests cash-outs we blindly increase cash-out messaging, market drives HARP or FHA we run after it, market says low refinance season we start communicating purchase.
Finally, if the math to customize to each borrower’s needs is figured out, please avoid making promises that you cannot keep or are not in the borrower’s favor. What is the point of quoting a low rate where the resultant is very high closing costs because of extremely high points that you are charging!
9. Predictive modeling has limited use
Too much time is spent on building response models – how does one increase DM/EMAIL response? Is it really relevant? In this day and age, are you not targeting all borrowers who might remotely be in the market? If so, what is the point of having a response model? A response model would work if you were to selectively target a portfolio not when you are going to go after all of them.
Instead a data scientist’s time is better spent in building pre-payment models or understanding causes of payoff (if you have access to CPR rates). From this analysis will arise a need for market-basket analysis i.e. how to customize your offer/ product combo by borrower segments.
Another factor deterring modeling utility is our regulated environment - almost all demographic and credit data cannot be used for targeting unless it is a firm offer. Which implies that all a modeler has is loan level characteristics to play with. Think about it, how many models can you possibly build if you were to only use unpaid balance, rate, LTV, monthly payment, property type, ownership type & year of origination and do you really believe that for each of those models contributing factors would be different!
10. Partnerships are better
Let’s start with the first one first. Servicing. As an originator, you have at the most a 60-day relationship with your borrower. Servicing extends this beyond - across the entire life of loan. Unless you integrate your customer promise with servicing, causes of disconnect will hamper your ability to retain the borrower when she or he is back in the market. To keep a customer content is critical and more so when the expected relationship duration is 30 years or more.
Now the external partners – be it service providers or third-party data vendors. You cannot do everything yourself in-house and it is also not cost effective, so why not build the right partnerships. In our haste to build our own technologies, we sometimes neglect the fact that there are others who can do the same job better.
Focus should be on building a platform that allows for seamless integration rather than a complex structure that would inhibit you from growth in this ever-changing world of fintech companies!
(Original Publish Date – October 15, 2019)
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