It’s getting harder for mortgage servicers to retain customers

Things are getting tougher for mortgage servicers trying to hold onto customers post-refinance amid a volatile refinance market.

With greater rate sensitivity limiting the pool of potential refi customers, competition among servicers is fierce according to the Mortgage Monitor Report from Black Knight Inc.

The market has led to the lowest retention rate since Black Knight began tracking the data in 2005 (18%) and marking the first time that the rate has fallen below 20%.

“Anyone in this industry can tell you that customer retention is key – not only to success, but to survival,” said Ben Graboske, Black Knight’s Data & Analytics Division President. “The challenge is that everyone is competing for a piece of a shrinking refinance market, the size of which is incredibly rate-sensitive, and therefore volatile in its make-up.”

The volatility is shown by the firm’s report one month ago, which found that that recent rate reductions (to 4.06%) had swelled the population of eligible refinance candidates by 1.6m to 4.9m in a single week after hitting a multi-year low just a few months before.

But with a slight increase in the 30-year fixed rate – less than one-eighth of a point – 1 million homeowners lost their rate incentive to refinance – almost 20% of the total eligible market.

“This is critical, because refinances driven by a homeowner seeking to reduce their rate or term have always been servicers’ ‘bread and butter’ when it comes to customer retention,” added Graboske. “Offering lower rates to qualified existing customers is a good, and relatively simple, way to retain their business.”

Dramatic market shift
Graboske says that the market has shifted dramatically away from such rate/term refinances with nearly 80% of 2018 refinances involving the customer pulling equity out of their home – and more than two-thirds of those raised their interest rate to do so.

“Retention battles are no longer won – or lost – based on interest rates alone,” he said. “A simple ‘in the money analysis’ doesn’t provide the insight necessary to retain customers and can’t take the place of accurately identifying borrowers who are likely to refinance and offering them the correct product. Rather, understanding equity position – and the willingness to utilize that equity – is key to accurately identifying attrition risk and reaching out to retain that business.”

Retention among products
Black Knight’s Mortgage Monitor report also looked at retention from the perspective of product offerings.

For example, in 2018, 72% of FHA/VA borrowers in peak cash-out refi vintages (2012/2013) refinanced into a conventional loan product to pull equity from their home; just 28% ended up with an FHA/VA product.

This suggests that borrowers may be looking to shed mortgage insurance while simultaneously taking advantage of equity. An astonishing 93% of those same borrowers raised their interest rate to do so.

On the other hand, those with GSE loans tended to remain in GSE products post-refinance; 61% remained, while 32% shifted to loans held in bank portfolios.

The report says that it could be that rising home prices are pushing that second segment into non-conforming, jumbo products. It's also worth noting that fewer GSE borrowers, as compared to FHA/VA, are increasing their interest rate in order to tap equity.