Mortgage lenders compete in a business that is both simple and complex, which means we often have different approaches.
In his book, Competitive Advantage: Creating and Sustaining Superior Performance, Michael Porter identified three generic strategies that companies can pursue to compete:
This strategy involves producing goods or services at a lower cost than rivals. Companies that pursue a cost leadership strategy focus on efficiency and reducing costs throughout their operations.
This strategy involves offering products or services that are unique and valuable to customers. Companies that pursue a differentiation strategy focus on innovation and creating products or services that are not easily replicated by rivals.
This strategy involves targeting a specific market segment and tailoring products or services to the needs of that segment. Companies that pursue a focus strategy focus on understanding the needs of their target market and meeting those needs better than rivals.
Porter argued companies that are successful in their chosen strategy can achieve a sustainable competitive advantage. This means that they can outperform their rivals over time.
Mortgage lenders compete in a business that is both simple (because all we do is real-estate related financing) and complex (no borrower can fully comprehend our process or the agreements we ask them to sign) than other businesses, which means we often have different approaches.
Which strategy will be most effective at helping lenders survive this downturn to emerge more powerful when the business returns?
Cost leadership in the mortgage industry has traditionally reduced to the interest rate. While the real estate industry has made cash-to-close understandable to consumers, it’s unclear whether anyone really understands what a mortgage costs.
But an interest rate is easy. Competing on rate worked well during the refinance boom because, frankly, that’s all our borrowers cared about. That strategy will not work today.
Differentiation, as a strategy in our business, has typically come through specialization in a particular kind of loan product, a focus on a particular origination channel or customer service.
As the purchase money emerged, the brilliance of Rocket’s easy button for home finance came into focus. But when it became clear that it was only easy for a very small percentage of borrowers who contacted the call center, it was revealed as an economy of scale play that smaller lenders could not easily execute.
Except for reverse mortgage lenders, who until recently required specialized technology to originate their loans, focus in our business has basically been about business referral partners.
Loan officers who have strong partnerships with real estate agents do well in a purchase money market. Unfortunately, the easy refi days meant that few loan officers had developed these important relationships. When large lenders used technology and access to subscriptions in an attempt to lock in lead generation relationships, the CFPB found RESPA violations.
It’s still a good strategy if done well, but there is a better one.
Today’s lenders cannot promise a low rate. Neither can they promise that originating a mortgage loan will suddenly become an easy process. They would love to serve business referral partners in a mutually beneficial manner, but to do so requires them to have the ability to always say “yes.”
Can you originate this loan in time to close by this date? Yes.
Can you originate this loan and a HELOC with it? Yes.
This client’s parents need a reverse mort…. Yes.
The only way the lender can always say yes is if they have technology that will allow them to originate any loan product required through any required channel to best serve their business referral partners.
Fortunately, such technology exists today. To see if in action, reach out to us today and ask to see a demo of MCP, the next-generation LOS from Mortgage Cadence.
By Joe Camerieri, EVP, Sales & Strategy at Mortgage Cadence
Follow us on LinkedIn to be notified when our next article is released.