A change in plans: a new survey finds mortgage bankers are responding in different ways to the changing mortgage business environment.

Author:Fairbank, Mark
Position:Cover Report: Origination Strategies

At the end of the first quarter of 2006, The Performance Group (TPG), Concord, New Hampshire, conducted a confidential survey and interviewed more than two dozen mortgage banking executives to learn what leaders are doing to remain competitive and win customers in the face of fierce competition. What traditional or non-traditional approaches are these executives considering to enhance their competitive advantage and lead their companies through dramatic shifts in the marketplace? How are these leaders improving margins and managing costs? [??] In short, we wanted to find out how these executives are focusing their efforts in 2006 in response to recent changes in the mortgage lending landscape. [??] We used a straightforward set of questions to find out how near-term priorities are affecting competitive advantage. We wanted to identify what levers companies are using to improve efficiency and differentiate themselves to customers. And, finally, we wanted to understand how companies are positioning themselves for future growth and success. [??] As in previous surveys, we keep things confidential because we believe it enables the participants to speak frankly and share candid observations of their own companies. They trust that our work will add value through constructive criticism, while not damaging any individual or company in the process.

The big picture

Unlike the past five years, when companies competed for volume based on a seemingly endless supply of borrowers looking for the next great rate or simply taking the equity out of skyrocketing property values, now managers must seize every opportunity in the marketplace and within their companies to capture revenue and reduce cost (see Figure 1).

As one executive vice president of a large nonprime lender stated, "We've gotten away with using volume to solve every issue. When volume declines, we're left with the same business problems and, because we haven't solved the root causes during boom times, we find ourselves without a handy remedy."



Gaining competitive advantage

When asked how their companies define competitive advantage, participants said it centers on where leaders invest time and capital to develop advantages based on internal operating characteristics and/or differentiators in the marketplace. In most cases, investments were spread among a mix of internal and external factors. In only a few instances, companies focused their pursuit of competitive advantage exclusively through internal advantages, while another couple of companies do the opposite and focus their efforts on advantages gained exclusively through differentiation in the marketplace.

More than 75 percent of companies interviewed indicate their competitive advantage rests in some large way on being perceived as the best in quality of customer care. An almost equal number consider their companies the easiest to do business with for customers (see Figure 2).

This begs the question: Where is the differentiation, if most folks rely on the same claim to draw a distinction between themselves and the rest of their competitors?

To be competitive, the business of mortgage lending relies on a blend of compliant processes, supportive technology, intelligence and good judgment. So the need for value contributed by employees is undeniable. With motivation, expertise, the right tools and solid leadership, companies can attack the marketplace, beat competition and grow their business by seizing the opportunities at hand. This is true wherever a company decides to invest resources toward building competitive advantage. Lacking any of these four basic elements, a company will be challenged to sustain competitive advantages and the economics necessary to defend its position during periods of decline.

Given the conversations we have had with many companies prior to launching this survey, it's not surprising that seven out of 10 companies interviewed reported they plan to compete fiercely to increase sales in their existing markets. What is telling is that the majority of these companies plan to increase sales within their current business model and regardless of major changes in other areas; the projected increases are based primarily on increases in their origination sales force and, to a lesser extent, on additional products or the expansion of geographic markets (see Figure 3).

Along these same lines, just 40 percent of companies interviewed reported changes--under way or planned--to their business model in 2006. Changes include centralizing retail operations; expanding business channels such as broker and correspondent lending; developing third-party servicing and private-label origination-production services for smaller companies whose businesses are focused on sales development; and, in one case, changing the structure to a federally chartered bank (see Figure 4).

Half of the companies interviewed are offering or are in the process of launching interest-only mortgage products. One-third of the companies participating in the survey already offer 40-year mortgage products, while only two of those companies are offering or contemplating reverse mortgages in 2006.

Many turn to technology

The trend to seek performance improvement through the introduction of new technology was underscored by...

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