With a great deal of mortgage industry conversation revolving around how companies might best survive the current downturn, a theme has emerged around the value of offering more, even if the market expects to originate less.
Having a full slate of products to stay competitive next year when originations are expected to remain muted is a matter of necessity, lenders stress. A diverse mix — potentially including some products outside traditional home lending channels — is a way for lenders to set themselves apart and stay top-of-mind to consumers, referral agents and mortgage brokers that bring them to the table.
“If you are a borrower-centric business, you’re just adapting to whatever ways that the clients are coming at you and what their needs are. And so that’s why you have to have such a wide swath of products and be knowledgeable about these products,” said Franco Terango, CEO of Certainty Home Lending.
In the most recent release of J.D. Power customer satisfaction rankings, the research group determined that a lack of sufficient loan offerings to fully meet client needs was a weak point the mortgage industry could address.
The current state of the housing market highlights the importance of meeting consumers where they are with specialized or niche products, even if those might not be the biggest revenue drivers, said Joey Davidson, president of Acopia Home Loans.
“We’re going to see more agency-driven products going forward, but right now, you have to have the down-payment assistance, you have to have a non-QM offering. You have to have a home equity line of credit,” he said. “All revenue is good revenue.”
Around the time interest rates began their climb upward in mid-2022, a number of nonbanks rolled out home equity lines of credit. While they might not be a primary driver of business today, they remain an important arrow in the quiver to engage customers as 2024 approaches. “It’s a service that you’re offering to keep your client happy,” Davidson added.
In contrast to HELOCs, non-QM products have the potential to eventually expand into something more substantial, given the nontraditional ways people earn their income today, according to Terango.
“It’s a rare time where you understand the market is shifting right when it happens. Typically, you’re looking backwards,” he said. “Right now, we know it’s happening and the way people derive income is changing, so non-QM is something that we continue to look to grow in.”
Product diversification has not been limited to home lending products as mortgage companies looked into new channels for customer acquisition. Rocket added a rewards card, while Guaranteed Rate unveiled a wellness app. Meanwhile, multiple IMBs introduced unsecured personal loans, but branching out into business lines outside of mortgage lending has mostly been restricted to the largest nonbanks.
These specific diversification efforts are more likely to stay in the domain of the biggest industry players, sources said.
While the monetary investment required to offer unsecured loan products isn’t overly expensive, especially if launched in partnership with a financial institution, the value added might not be commensurate with the risk when it comes to underwriting.
“You don’t have a piece of collateral. You don’t know the market, ” said Kevin Schalk, partner and leader of the capital markets industry division at financial services consulting firm Baker Tilly.
“You’re basing your decision on the ability of a person to pay on a credit report and W2. And so that risk — that cost is as important as the actual dollars and cents,” he noted.
Still, if mortgage companies want to look for opportunity in outside lines of business, they likely can find willing partners in the fintech and specialty finance sector next year, according to Schalk.
“What I’m seeing and what I anticipate seeing is more partnerships between those entities.”
While a mortgage lender could benefit in the short-term from a fintech’s operational know-how depending on how the relationship is structured, “the fintech is saying I’m willing to make an investment here, anticipating rates are going to come back down in the future, and I’m going to see my return from this down the road,” Schalk said.
If there are more common paths for IMBs to generate revenue outside the box of traditional mortgage, the lending industry is likely to see them come through title and insurance programs, said Kenny Hodges, CEO of mortgage lender Assurance Financial. These are also more likely to be offered in partnerships with other businesses.
Cooperation between mortgage and insurance industries received a boost this spring when Guaranteed Rate opened up a new digital marketplace. The launch gave affiliated partner brands within the Guaranteed Rate family, such as Certainty, the opportunity to offer various insurance products.
Greater opportunities for cooperation exist in the home construction industry, whose market share has grown while existing homeowners remain reluctant to sell.
“A good portion of the new inventory that comes to market is new construction. And when that new construction comes to market, you’ve got a lot of people, a lot of companies fighting for that small market share,” Hodges added.
“I think you’ll continue to see, IMBs, particularly — and banks — try to forge partnerships with builders.”
Among the programs builders and lenders are already cooperating on are forward commitments that can help create revenue streams for both parties while expanding homeownership opportunities. Through them, a builder will participate by buying down the interest rate on blocks of loans, allowing them to advertise their properties at much lower-than-market averages.
“The forward commitment is still a little bit of a niche product, but it’s becoming more and more common,” Davidson said.
But the ultimate purpose of a diverse product mix is not to become a trailblazer, mortgage companies say. They are meant to turn the one-time borrower into a client, who will return for the type of services lenders know how to do best.
“It’s trying to become a go-to over the life of the borrower from the first-time home buyer to a move-up loan to a jumbo loan,” Terango said.
