Over the past year, the red-hot housing market has given many homeowners a bounty of tappable equity that has risen so quickly it’s all but burst through the roofs of their very houses. Driven by increasing home values, triggered by low real estate inventory, tappable equity – the amount available to homeowners while keeping a 20% equity stake in their homes – has surged nearly 40% from last year.
In turn, we’re seeing more homeowners willing to tap into their stores of available equity. Data from Black Knight’s Q2 2021 Mortgage Monitor depicts the fourth consecutive quarter where we’ve seen over $1 trillion in originations, and the fifth consecutive quarter with at least $2.2 million of refinances. Notably, this includes $1.1 million of cash-out refinances, the largest such quarterly volume in nearly 15 years – a volume likely attributable as much to the climb in tappable equity as to historically low interest rates.
Seizing the Current Opportunity
Black Knight’s August 2021 Originations Market Monitor, which leverages rate lock data from Black Knight’s Optimal Blue PPE – mortgage lending’s most widely used pricing engine – shows that this trend appears to be continuing in Q3 as well.
Cash-out refinance locks have risen 41% over the last three months; in fact, August’s increase even pushed the overall refinance share of the market mix back above 50% for the first time since February, even as rate/term lending remained essentially flat. With so many homeowners eager to take advantage of the surge in equity in their homes due to skyrocketed real estate values, lenders have a unique opportunity to boost business by identifying tappable equity in their portfolios and proactively working to win cash-out refinance business.
However, it’s no secret that recapture rates across the industry are abysmal, hanging at startling lows. Data from Black Knight’s retention data indicates that cash-out refinances are the most difficult products to retain, with just 21% of these borrowers sticking with their current lender – a problematic figure further underscored by the current market. Recapturing refinance borrowers has long been an important, albeit lacking, undertaking for lenders, yet efforts can come up short for many reasons.
Many lenders focus too much energy on acquiring new customers and not enough on recapturing existing ones. This mistake comes even though the data shows it costs a lender five times as much to acquire a new customer than to retain an existing one. Beyond a lack of proactive outreach, other culprits of poor retention include unremarkable customer experiences, outdated technology and ineffective communication.
Fortunately, there are steps lenders can take to atone for these shortcomings and capitalize on the significant cash-out refinance opportunities currently available.
Emphasize Customer Experience
Lenders can begin by evaluating the experience they deliver to customers throughout the lending journey. Today’s lending and servicing consumers expect instant access to information and digital capabilities that allow them to complete tasks anytime, anywhere. Tools such as mobile apps can enhance the customer experience by reducing cycle times and by giving borrowers a mechanism to work through the prequalification, preapproval and refinance processes at their own convenience. Benefits of digital tools carry into servicing, too, helping increase transparency throughout the mortgage process. Customers expect self-service functionality that enables them to effortlessly complete tasks and access information, such as making payments, understanding home values, and calculating “what-if” scenarios related to refinancing.
In addition to taking a good hard look at technology and digital capabilities, lenders should also consider how well they’re keeping their brand in front of customers and maintaining relationships with them. A customer may have a great experience taking out a mortgage this year, but what are the odds they’ll think of the same lender in five years when they’re ready to upgrade their home? Remember, customers are continuously exposed to refinance advertising from competitors.
Regular communications and ongoing engagement are key to combatting this challenge. Staying in touch with customers beyond closing day is all but mandatory for competitive success. Think thoughtful, relevant content that can be delivered at scale. Customer relationship management (CRM) platforms can help automate efforts, and some tools can even assist teams with producing and delivering engaging content. By sharing relevant information that adds value to customers’ lives, lenders can build and maintain relationships and win more repeat business and referrals.
Proactive Outreach and Personalized Offers
After establishing a consistent cadence of meaningful communications with borrowers, lenders can take outreach efforts a step further by proactively identifying customers who would be good candidates for refinancing and sending them personalized offers. Robust technology and analytics can make this possible by automating the identification and prioritization of leads from portfolio data. Sophisticated flagging functionality can help determine customers and loans that can benefit from refinancing based on current home equity.
Additionally, technology with near-real-time pricing can help lenders extend the best possible offers to customers. Borrowers who leave for “greener pastures” continue to receive lower interest rates than those that stay, but the gap isn’t quite as wide as it was early in the pandemic. In fact, the average customer lost to the market received an 8-basis-points-lower rate elsewhere on average in Q2, far less than the 15-basis-points-lower rate borrowers received in Q3 2020.
With such a fine line between retention and loss, offers should be as specific to the customer as possible and account for unique attributes, such as home price appreciation in the geographic area, the current market, and the lender’s specific, up-to-date margin structures, including loan officer comp plans. By pairing this detailed, customized information with a robust CRM and other advanced systems, lenders can maximize delivery and impact to outshine the generic offers being generated by competitors.
In short, lenders must be nimble to take advantage of changing market dynamics. By leveraging innovative technology to enhance the customer experience, taking steps to build and maintain customer relationships, and proactively delivering personalized offers, lenders can pursue the present opportunity to lock more cash-out refinances – and even improve their long-term recapture strategy along the way.