A loan for every lifestyle.

Author:White, Gary
Position:Mortgage lenders' tailored products

Mortgage lenders have tailored their products to an increasingly diverse population of consumers. The right loan for the borrower is no longer just the standard-issue fixed-rate, 30-year mortgage.

Many mortgage lenders probably never thought they would see the day when homebuyers would earn frequent-flier miles based on the amount of interest paid over the life of a loan. But lenders across the country are developing products with "hooks" to attract certain consumer segments.

These hooks are targeted to a variety of customers, ranging from the first-time homebuyer to the elderly homeowner. They include offerings such as the asset integrated mortgage that acts as a combined mortgage and tax-deferred investment product, or the bridal registry product that allows first-time homebuyers to receive down payment funds as wedding gifts.

Mortgage lenders are listening to their customers - homeowners and real estate agents - and delivering products that offer shorter approval and closing times, adjustable-rate schedules, price incentives and more convenient channels of delivery. Some potential results of this include:

* Automated loan approval likely will soon become the norm.

* Pricing incentives will be used to drive customers to more convenient delivery channels such as telephone and computer banking.

* Rates could be adjusted downward as a result of the cost savings realized by consumers using more cost-effective delivery channels.

These are just some of the effects the industry might see as a result of changes designed to serve today's mortgage consumers. Before we analyze these changes more closely, it is necessary to look at what is motivating these product and service innovations.

Catalysts for change

Shrinking origination volume was the original catalyst for change. In 1993, the mortgage industry originated more than $1 trillion in home loans. That number fell to $769 billion in 1994 and $639 billion in 1995. Market share for loans to repeat buyers and first-time buyers with average to slightly above average earnings has been steadily declining. In 1995, homebuyers with a household income of between $41,000 and $60,000 accounted for 27.2 percent of all home sales in major U.S. housing markets. This is down from 33.4 percent in 1993, according to the Chicago Title and Trust Family of Title Insurers' annual survey. On the other hand, the percentage of homebuyers with household incomes of less than $40,000 has increased from 25.7 percent to 31.2 percent.

Just a few years ago, many lenders offered almost identical loan products. Little besides interest rates differentiated one lender from another. The negative profit consequences of interest rate competition, however, have forced lenders to become creative in their approaches to attracting new customers. Lenders are looking for innovative ways to woo first-time buyers and current homeowners looking to move up.

The advances in product and service offerings have been brought about by a combination of market influences. The impact of interest rates cannot be overemphasized. The interest rate that a lender quotes still ranks as the No. 1 reason customers choose one lender over another.

While an overall rise in rates in 1994 and the subsequent decline in mortgage volume have been the catalyst behind many mortgage innovations, the actual product and service offerings being introduced are a result of consumer preferences. Lenders are responding to consumers who are looking for convenience, incentives beyond rates, good service and, in general, a product that best suits their individual needs.

The days of one mortgage fits all no longer exist. It is not enough to offer just plain vanilla adjustable-rate, fixed-rate and government loans. All the aspects...

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