Retention Rate Can Be Enhanced
by Steve Kropper
Mortgage Servicing News, November 2001

The good news is the solutions are largely within management's control. Let's focus on the two most depressing trends: average loan life in a portfolio is dropping, and customer retention is low and it is falling. A lender cannot stop borrowers from refinancing when rates go down, but they can vastly improve their retention rates and work to improve the chance that the borrower refinances with them; i.e., enters a new tranche of loans in their overall portfolio.

The truth is that lender marketing programs have been so ineffective that most lenders have a hard time getting their retention rates above their market share! A lender with an overall 5% market share of new originations is not likely to retain more than 5% of their portfolio. Moreover, given the rise in broker originated loans, most lenders are not recapturing these loans themselves; they are paying a mortgage broker to replenish their portfolio. The good news in all this is that industry retention rates are so bad there is nowhere to go but up.

Think about the current woeful-to-nonexistent state of customer management and retention programs at the big servicing companies and divisions. Despite all of the precious, hard-to-find information that lenders and servicers have about a borrower; e.g., home address, mortgage amount, income and phone number, they do not attempt to build relationships with their borrowers. The loan may be serviced, but banks call the asset a "loan" not a "customer." Since there is no relationship with the borrower, lenders have no clues, no warnings when a borrower may wish to refinance until they receive the payoff request. The payoff request comes at the last moment, when it's too late to capture that customer's new loan.

So what can lenders and servicers to do build relationships that amortize customer acquisition costs over more than one loan or financial product? For starters, think about them as customers, not borrowers or elements in a tranche of loans. Then think about what customers may want from a mortgage lender. Do they want bland mailings about loan products and interest rates? Or do they want help owning, leveraging, managing, and buying and selling their biggest financial asset, their home? Stockbrokers provide daily portfolio valuations and pricing data on your holdings. Why can't lenders share their loan level portfolio valuations with customers to meet their valuation curiosity? Who is better positioned and more trusted to be the source of this information than one's own lender?

Lenders and servicers have a golden opportunity to use their Web sites, their monthly statements and newsletters as customer retention tools, not just utility reporting. The truth is, the servicers already have the customer; the hard work is done! All they have to do is build a relationship with their existing customers, a relationship most borrowers would like to have.

One lesson to be learned from this year's refi boom is clear. Acquiring a new mortgage customer is a way to lose money. It costs less to keep a customer than to create a new one. Even in the mortgage industry! Focus on your existing customers, and build a relationship with them. Build brand loyalty by focusing on customers' interests and providing what they want: interesting, compelling content that helps them manage their biggest asset. Management commitment to a focused retention strategy is the only way to beat the runoff slide. Without this commitment, the outcome is clear: writedowns on your MSRs, losses and a one-way ticket to the auction block.

Steven Kropper is co-founder and CEO of Domania, Inc. (www.domania.com), a financial and marketing services software company that provides customer acquisition and retention products. Last month, Mr. Kropper wrote about the problem of retaining customers. This month, in the second of a two-part series, he offers some recommendations.