Top 2010 Business Drivers in Mortgage Origination. Andy Turner, Division Product Manager, Lending Solutions

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1 Top 2010 Business Drivers in Mortgage Origination Andy Turner, Division Product Manager, Lending Solutions

2 Overview Current lending landscape 2010 mortgage origination business drivers Business Drivers What s different or changing in 2010? What is the impact to your business? Responses: What are some options for your FI? 2

3 Current Lending Landscape Tightening credit standards Foreclosure rates remain high Home prices beginning to stabilize in most markets Government based cash infusions and incentives Regulatory reform driving much operational and IT spending 3

4 Great Opportunity in Mortgage Lending for Well-Capitalized FIs Expansion / extension of first time homebuyer credit driving purchase money deals Typical market leaders are pulling back on their aggressive lending practices with more conservative pricing and credit policy. Offer programs that are a fit for customers traditional ARM programs profitable for portfolios. Taking care of your customers is job #1 they will turn to you in a time of need. 4

5 2010 Lending Business Drivers Current lending market conditions Compliance changes Operational efficiency Portfolio / fee income growth Customer profitability 5

6 Current Lending Market Conditions The net cost to originate a mortgage jumped from $1950 in Q to $2345 in Q4 2009* 2010 FHA volume as of 2/28 was up 80% compared to 2008, and down 10% compared to 2009** Lack of secondary market outside of GSEs and FHA / VA continues Homebuyers show increased loyalty to the FI that has issued their first loan Sources: *Mortgage Bankers Association, ** Office of Housing and Urban Development 6

7 Credit Policy / Risk Management Solutions Offer competitive rates, yet maintain strict credit policy. Enable your sales team, branch personnel and consumer to get a prequalification at the point of sale via automated decisioning (good loans make it to the qualified loan personnel). Use technology that streamlines your operation and allows for seamless booking of loans to the core. Ensure that your technology is updated with the latest changes to government policy. Enterprise view of risk management not just a siloed approach to risk management regulators want to see cross functional risk management*. * Aite Group, LLC

8 Compliance Changes Many changes are in flight or will be enforced in the coming months: RESPA Ongoing FAQs (latest released on 4/2/10) SAFE Act 7/1/10 TILA changes for open ended disclosures 7/1/10 FCRA Risk Based Pricing Notices 1/1/11 8

9 Compliance Solutions Updated Technology make sure your technology partners are up to date Partnering with appropriate vendors credit, compliance and vendor management services Altering business process where it makes sense appraisal management 9

10 Operational Efficiency Good, better, best, never let it rest until the good is better and the better is best. St. Jerome (and my 2nd Grade Teacher Sister Claire) Many lending functions are manual processes today. Underwriting Documentation Boarding loans to servicing There is always room for improvement to increase margins. Merger and Acquisition activity has caused inefficiencies in many Fis. 10

11 Efficiency Solutions Outsourcing Many business functions may be outsourced today, from originations through to servicing.* Offshoring Lower cost labor can immediately increase margins for larger scale operations.* Technology initiatives to increase productivity Not a big bang approach, figure out small tweaks that can add value.* Automated decisioning Integrated loan origination components to handle all loan types Automated process for boarding loans from origination system * Tower Group, LLC

12 Portfolio / Fee Income Growth Low rates and government incentives are driving great opportunities for non-traditional players to compete. Market leaders continue to retool while application volumes are high. Flight to safety many consumers trust the institutions who have come out of the credit crisis in a strong position, and want to do business with them. Opportunities to grow short term fee income with refinancing current portfolio aggressively 12

13 Growth Solutions Automate application gathering via outsource partner or technology. Focus on refinance opportunities driven by combination of government monetary policy changes and flight to safety. Use mortgage as anchor account and cross sell based on knowledge of customer. Spend as little time as possible evaluating loan applications up front. Consider creating new capabilities to expand possible customer acquisition, especially in the social media and mobile arenas. 13

14 Customer Profitability Most financial institutions count on cross selling their customer base as a majority of their new business. In an Aite Group survey, 80% of respondents said that they measured customer profitability, but only 10% of those firms said that the measures were effective.* Many FIs do not incorporate the cost of service into the profitability calculations.* In the same study referenced above, just 17% of FIs claimed to measure customer lifetime value.* Sources: *Aite Group,

15 Cross Sales Solutions Increasing wallet share of your current customer base is the lowest hanging fruit in a typical financial institution. Loans, specifically primary residence mortgages, have been found to be a great anchor account, allowing easier cross sales and wallet share growth. Some strategies include: Discounts for direct debit / deposit Targeted campaigns on home equity Aggressive internet channel sales promotions to current online banking customers for loan applications Government lending is a great way to acquire new first time homebuyers. 15

16 Creating a Government Lending Capability Major media outlets are driving the consumer to ask for government insured loans. Fannie and Freddie facilitated sale of these loans to HUD or VA. Average credit score of an FHA loan in February 2010 was 697.* What s in it for the FI? Additional wallet share and an opportunity to attract first time homebuyers. Sources: * Office of Housing and Urban Development, 16

17 How do I offer FHA loans? Requirements FDIC Insured Minimum $250,000 net worth Minimum $100,000 in liquid assets 5 years experience in the origination of single family mortgages An underwriter certified with the local HUD field office 3 years experience reviewing credit applications 3 years experience reviewing real estate appraisals No sanctions against them QC Plan Most institutions merely need to gather the information and apply! Sources: * Office of Housing and Urban Development, 17

18 Summary Changes in governmental monetary policies are keeping short and long term interest rates static, while incentives are driving purchase money applications. Many market share leading lenders have exited or greatly scaled back their lending operations. Many consumers are disillusioned with large institutions, and prefer the service and safe lending practices of local institutions. This creates an opportunity for well-capitalized FIs to grab market share without typical rate based competition. By continuing to institute sound credit policy, and by deploying technology to ensure the fulfillment of large application waves, financial institutions can significantly enhance their loan portfolio with quality paper. 18

19 Questions and Answers

20 Thank You Andy Turner