The dreaded question

It’s not hyperbole to say every parent of children between the ages of three and six dread THE QUESTION.  You know which question I am talking about.  It’s so anxiety provoking I can’t even write it down.  The typical parent cringes, preferring a root canal over providing an answer, any answer, reliably offering an apocryphally obtuse response hoping either little Emma or Ethan will be satisfied.  And they are, for a while.  Until they are not.

The Dreaded Question a la Credit Union Mortgage Lending

We’ve been satisfied with obtuse answers and strategies for decades to our own dreaded question:  Where do homebuyers come from?   Over the past 30 years, roughly as long as credit unions have been making mortgage loans, we have not had to confront the brutal reality that homeowners are not delivered by the stork.  Serial refinance booms every 12 or 24 months have kept pipelines full and balance sheets happy and growing.  It has been a great run.  We learned a lot about the real estate finance business.  We got efficient, more efficient than many of our counterparts, and we provide a better financing experience for members.  We’ve been satisfied not confronting the dreaded question.  Like little Ethan and Emma, however, our satisfaction with obtuse answers has reached its end.

The Facts of Mortgage Life

The last 30 years have been unusual.  Starting with the highest rates in 200 years, the era ended with the lowest rates in over 70 years.  Homeowners and lenders alike developed new habits, some of them good.  The economy became addicted to housing as an economic engine like never before. All epochs end.  This one began sputtering when rates started rising in May, hitting a “horrifically” high 5.00% before retreating to the mid-4s.  This is exactly how rate cycles work.  Up some, down a little less.  Up some more, down a little and so forth until a peak is reached some years out. If history repeats itself as it often does, rates will trend this way for the next 20 or 30 years.

That’s the first fact of life.  We have to learn to lend in a rising rate environment.  That’s why facing the dreaded question is so important.  Refinance will not be the factor it was.  Purchase-money lending is now the dominant factor, hence the need to understand where homebuyers come from.

Where do homebuyers come from?

Let’s start at the 50,000 foot level with some of the best news of the year:  the majority of those 45 years of age and younger still plan to own a home according to the Joint Center for Housing Studies of Harvard University.  That’s the second fact of life, and our start, we know the age demographic we’re looking for.

Moving down a level or two we realize we know the answers, or at least the answers are easy to come by.  Starting with first-time homebuyers, it is relatively easy to know the answers. Formation households are a re-emerging market.  Dormant during the recession, this demographic is expected to top well over one million every year through the early 2020s.  They won’t buy homes all at once, yet if the US population holds true to historical homeownership rates, approximately 65% of them will end up with a front-porch, a garage, a yard, all the accouterments of the typical householder. There’s fact number three.

New formation households is one demographic to focus on.  There are more.  Read the Joint Center’s 2013 State of the Nation’s Housing report for detailed information.  It takes about an hour.  It’s worth ten times that to every serious mortgage lender.

Yet if we expect to serve first-time buyers, we have to be thinking about existing homeowners.  With housing in short supply all over the country, these real estate participants have to be thinking about selling and buying as well.  This is where it gets even easier, at least among existing members.  Credit unions know who their homeowners are.  It’s also possible to know who the homeowners are among potential members.  Second-, third- and fourth-time homebuyers come from existing homeowners.  It’s critical in today’s market to focus on them, too.  This is the very important fourth fact.

How do you reach homebuyers?

Knowing where homebuyers come from is an important first step.  Knowing how to reach them is the tricky part because they do not think of a credit union, or any lender for that matter, first.  Homebuyers are much more concerned, at least at first, about so many other things: their budgets and finances, cities, communities, neighborhoods, schools, proximity to work, that financing takes a back seat. Eventually it takes the driver’s seat which, when you think about it, happens late in the game.  The home buying process, especially today after the housing crisis, takes from as little as six months to more than three years.   The mortgage process takes less than 60 days.  It’s easy to see how lenders really are an afterthought.

The trick is becoming part of the forethought.  But how?  Identify them.  While none of us really want to admit it, our lives are an open book.  Can’t run. Can’t hide.  Technology brings virtually everything we do and say under the cover of broad daylight.  Use it to your advantage.  Team up with a market research firm; tell them you need to know who is thinking about buying a home.  They know, and they can tell you.  Get the list, then devise a marketing strategy that positions you as a trusted adviser just as emerging homebuyers are beginning to think about their first home, or second, or third.  Thriving lenders are taking these steps now.  Be one of them.

Becoming a forethought is a critical step, though it’s not enough.  If you haven’t done so already, it’s time to get very serious about a Realtor strategy.  People buying homes think of Realtors before they think of lenders.  Form alliances with the real estate community so they think of you before they think of other lenders.  Their influence is significant; thriving lenders build these relationships.

There’s another relationship worth considering.  All new homeowners lived somewhere before they bought their first home.  Many begin down the path by renting an apartment or a house.  Many apartments and houses are managed by property management companies.  Why not get to know the property management companies in your area?  They know who will be buying homes, too, if they’ve been in the business long enough.  They want to see these renters move because they make room for new renters, and there are always new renters.

Thinking tactically is important, too.  The next technology wave in mortgage lending is integrated customer relationship management systems.  Industry fall-out – the measure of applications lost to those taken – is historically high and remains so.  All lenders are going to work harder for borrowers as the market shifts to purchase-money lending; much harder work will be necessary to close their loan.  Regular contact throughout the mortgage process, aided by technology, will decrease fall-out.

Not so dreaded after all

Credit unions will thrive as mortgage lenders for the next 30 years just as they have for the last three decades.  Market share is growing as steadily as recognition that credit union mortgage loans are as available as car loans.  The difference in this next cycle, however, is we have to be much more thoughtful and strategic in order to succeed.  And we can’t wait for Emma and Ethan to come to us for their first loan and every other mortgage they need.  We have to go to them in this round and let them know we want to be their lender.  That’s how we confront the dreaded question.