The pandemic had a whiplash effect on the mortgage industry and digital lending in 2020, with a year of both records highs and lows for mortgage lenders.
In the early months of the lockdown, home sales dropped in March (-18%) and April (-10%), according to the National Association of Realtors (NAR). But as all that sheltering and working from home began to look less temporary, the demand for more space, dedicated home offices, and big backyards sent the housing market into overdrive. With the added fuel of record low mortgage rates, home sales shot up by over 20% in June and accelerated throughout the rest of the year.
Data from Freddie Mac show that both 30-year and 15-year fixed rate mortgages dropped over 30% to historic lows last year, from 3.72% and 3.16% in January to 2.67% and 2.17% by the end of the year.
Playing It Safe or Maximizing Opportunity
The last housing market downturn created a “make it or break it” mindset that still lingers today. Mortgage lenders need to ask themselves some key questions: how did we adjust to the changing market to ensure profitability? Did we get by on existing processes, or did we pivot and create a new business strategy to take advantage of the new climate?
Now is a good time to reflect on how your financial institution’s response during the pandemic compares to other players in the mortgage game. Let’s look at a few examples of mortgage lenders and how they managed the risks and opportunities.
Unusual Lending with Fidelity Bank
BankBeat predicted a record year for Fidelity Bank after analyzing the company’s activity in warehouse mortgage lending. Fidelity Bank President Chuck Mueller, who had led the company through the Great Recession, ensured that they diversified and expanded their niche in the twelve-year interim. Last year, Mueller leaned into short-term, asset-based lending again, successfully positioning Fidelity Bank to achieve impressive results as the market boomed.
In 2020, Fidelity Bank increased its asset size by nearly $690 million, a 68% jump over 2019.
How FlexPoint Pivoted from Home
Like thousands of businesses across the country, our client, FlexPoint Mortgage, switched to remote work in the early days of the pandemic. But the way they did it gave them the flexibility to face and respond to significant changes in the housing market.
According to Systems Administrator Toma Ghiran, FlexPoint Mortgage shifted to allow all employees to work from home. Along with providing work laptops and overcoming slow internet issues, FlexPoint implemented social distancing measures to allow anyone who had to work in person to come together safely. The company’s diverse cloud technology, including MeridianLink Mortgage loan origination software (LOS), made it easy for lenders and staff at home to stay on top of tasks and continue to work as a team, meeting changes in the market efficiently and effectively.
3 Steps to Excelling in a Downturn
To make the most of market opportunities, especially unpredictable ones, you must have a strategy in place for managing downturns. The world, and the housing market with it, has yet to fully stabilize, which means any strategy you create now can still offer significant protection during a period of recovery.
Here are three ways you can apply lessons learned to solidify your institution’s response.
Accessing Your Data
No strategy is complete without data you can analyze and learn from. The first step to creating a responsive plan is to review your performance over the last year.
Pay special attention to these metrics:
- Pull-Through Ratio: the correlation between your pull-through rates and the falling interest rates through 2020
- Loan Cycle Time: average closing cycle times increased in Q2 2020 to 44 days, so check your results against the industry average to see how you performed against competitors
- Decision-to-Close Cycle Time: as of May, closing rates sit at 52 days – how do decision-to-close times break down for you now as the market recovers?
- Average Origination Value: remember to factor in all fees and discount points, if applicable
- Loan-to-Deposit Ratio: a Federal Reserve survey shows that the 25 largest U.S. banks reduced their loan-to-deposit ratio to 53.9% from March 2020 to March 2021, the lowest in 36 years – where does yours fall?
These numbers will give you a better sense of how successful your financial institution’s downturn strategy was, and how you can better manage next time.
Going on the Offensive
A successful response strategy include both offensive and defensive tactics. When it comes to offense, you want a strategy in place that looks both long-term and hones in on day-to-day operations. In other words, how you’re managing the business that’s coming through your door.
One easy way to do this is by assessing the tools at your disposal. Take time to evaluate your loan processes and mortgage LOS, using data from the ratios above to determine whether they’ve hindered or helped this past year. If the numbers don’t hold up, it’s time to prioritize some internal changes. An mortgage LOS that is holding you back, for example, will erode your performance if unaddressed. Switching to a system that positions you for growth and improvement—cloud based with account opening, cross-functional selling with consumer loans, add-ons like collections, analytics, and reporting—will leave you better positioned to ride out the next downturn.
Preparing a Defense
When business slows, you’ll need to start targeting your borrower and member base more efficiently and ensure you have the tools to keep them engaged. Features like MeridianLink’s PriceMyLoan (PML)™ offer automated underwriting, pricing, and management of fees and margins, allowing consumers to shop for a loan online quickly and easily.
A complete product line of solutions can also be a good defense. For instance, our full suite, MeridianLink One, which includes MeridianLink Mortgage, Consumer, Portal, and Opening leverages consumer data and debt optimization to identify consumers who may qualify for mortgage loans.
Finally, ensure you have the right strategy for managing your loan-to-deposit ratio, which means staying compliant and positioning yourself to sell to GSEs, which we address in another recent blog.
Maximize Your Digital Mortgage Lending Opportunity
At MeridianLink, we’re committed to supporting and empowering clients through the ups and downs of the market. Our MeridianLink Mortgage loan origination system is built on decades of industry experience with a streamlined, cloud-based SaaS LOS suite and best-in-class support. Learn more about how our end-to-end solution can be the perfect partner for your mortgage lending software needs.