As the U.S. economy rebounds farther and unemployment rates dip lower, lending portfolios are poised for significant expansion in 2015. That will continue the momentum of last year, when credit unions posted the highest year-over-year growth since the first quarter of 2006 according to data from Callahan & Associates.
Home mortgages are one piece of the lending portfolio worthy of particular focus. While U.S. homeownership rates hit a 20-year low last year at about 64%,the rate at which Americans are setting up home more than quadrupled compared with the year before. That, along with a strengthening labor market, is expected to drive a sharp uptick in housing this year.
At the same time that many consumers are looking to step into homeownership, many big banks are taking a step back. More regulator scrutiny and new banking standards have slowed mortgage lending at big banks such as Wells Fargo and JPMorgan Chase. Other lending institutions are filling the void. In the first half of 2014, non-bank lenders made almost a quarter of all mortgage loans, according to data from industry newsletter Inside Mortgage Finance. That’s the highest level since at least the financial crisis.
Building a strong mortgage program does more than expand a lending portfolio. It deepens borrower relationships and boosts profitability. The average household balance is $67,555 for a household with a mortgage, compared with just $16,075 for a household without a mortgage, according to CU Companies’ Mortgage Analysis.
Households with mortgages also have a higher cross-sell ratio of 2.75 compared with 1.98 for households without mortgages. And they boast higher profitability as well, averaging $938 more than households without mortgages. Perhaps most importantly, though, newer households are especially attracted to mortgage products. So offering competitive mortgage products could be one way for credit unions to seed new relationships.
Shifting Gears Toward Home
Despite the huge potential of a healthy mortgage program, many lending portfolios remain overly focused on other products. Though every category posted year-over-year growth at member-owned lending organizations, first mortgages lagged significantly. New auto loans, for example, grew 21%; member-business loans grew 14%; used auto loans grew 13%; and first mortgages grew just 9.2%, according to Callahan data.
CU Companies research has found that auto loan relationships often have lower profitability than first mortgage loan relationships.
Yet CU Companies research has found that auto loan relationships often have lower profitability than first mortgage loan relationships. In a case study by Marquis and CU Companies, a $350 million credit union received a 160% ROI on an auto loan campaign. While 115 new auto loans were written, the annual profit on the household with a share and auto loan relationship was a negative $96.
Borrowers in the same credit union that had a mortgage in addition to the auto loan had a household profitability of $1,402. (That profitability can be made up in correspondent or retail lending channel fees for those credit unions and community banks that do not portfolio mortgages.)
Of course, simply having a mortgage program isn’t enough. To capture the potential profitability of mortgage products, credit unions and community banks must first invest in marketing these programs. Half of CU Companies' owners/partners cite a lack of mortgage marketing materials as a barrier to a successful campaign, according to CU Companies’ Mortgage Marketing Survey.
Mortgage communications are entirely absent from nearly one in five annual marketing plans at member-owned lending organizations, according to CU Companies’ Mortgage Marketing Survey. And only 6% of mortgage campaigns always include an incentive for borrowers.
Asked to cite the biggest pain points in mortgage marketing, survey respondents pointed to a lack of budget focus (32%), lack of staff education for cross-training (21%) and lack of data for targeting (28%).
Mortgage Program Blueprints
It costs eight to 10 times more to acquire new members or customers than to sell additional products to current ones, according to CU Companies’ Trends in Mortgage Marketing.
And the more products a consumer has with the credit union or community bank, the longer they stick around: People with one product stayed for just 1.5 years compared with six to eight years when consumers had three products with the organizations. So a smart and cost-effective starting point for any mortgage marketing campaign should be with existing members.
CU Companies’ research found that loan-officer calling programs should focus on four distinct audiences:
New account holders, older than 25, who started with other products in the previous month, such as opening a car loan or a checking account
Borrowers whose current mortgage loans are approaching four years
Borrowers with current home equity line of credit (HELOC) loans who don’t have first mortgages
Borrowers ages 25 to 45 who have a share draft with at least two other loan products with total balances of $5,000 after any HELOCs
Additionally, credit union marketing teams should remember that they needn’t go it alone. Real estate agents can be valuable partners for spreading the word about a mortgage program—whether it’s new or well-established, fledgling or flourishing.
Cultivating a realty partnership can be win-win-win: It provides the consumer with a connection to a trusted real estate agent. It provides lead-generation opportunities for new mortgage business. And it protects the mortgage relationship between a consumer and preferred financial institution.
Start with first sourcing a trusted real estate agent who is willing to serve as a partner, support the mortgage program strategy, and be an advocate for the borrowers. Manage expectations with the real estate agency or agent by setting up a system of regular and open communication and meeting periodically to review and assess goals. Identifying a contact person on both sides can foster relationship-building more quickly and minimize any communication missteps.
Cultivating a realty partnership can be win-win-win: It provides the consumer with a connection to a trusted real estate agent. It provides lead-generation opportunities for new mortgage business.
Once a partner has been identified and a partnership established, create a marketing plan that benefits both sides. In addition to the marketing messaging, be prepared to discuss with the real estate agent partner which audiences the materials will target, how they’ll be distributed (radio ads, TV commercials, social media), and if the pieces can be co-marketed with the real estate agent and the lender as a complete package. Setting up metrics at the beginning of a campaign to track response rate and ROI can make fine-tuning future campaigns much easier and more cost-effective.
As the marketing materials are prepared, both teams should keep in mind the Real Estate Settlement Procedures Act. Plan in advance when borrowers will receive the appropriate disclosures to ensure the financial organization is compliant.
Strategic partnerships and ongoing, targeted marketing efforts are but two ways that credit unions can ensure they’re strengthening their mortgage programs—and that will put them a cut above the competition.
About CU Companies
Based out of Minnesota, CU Companies works with credit unions and community banks across the nation. CU Companies has been in the mortgage business since 1987 and has built a team of experienced mortgage professionals whose sole focus is the success of their partner credit unions and community banks' mortgage lending departments. CU Companies was created to provide the service, products, and programs that financial institutions need to be competitive in the mortgage lending area.
In a continued effort to help our owners/partners to stay abreast of the current mortgage industry trends, we created this white paper. If you are not a partner of CU Companies and would like to learn more, please reach out to us at 651-631-3111 or check out the mortgage partnership information on our website at http://www.cucompanies.com/partners/mortgage. A value-add for our partners is the ability to work with our marketing department to attract borrowers. You can make profitable mortgage marketing decisions, and we'll help you with every step.