The April Mortgage Monitor published by Black Knight Financial Services revealed that mortgage servicers are having difficulty retaining customers post-refinancing.
By August 2016 the number of refinancing borrowers who returned to the same mortgage servicer with the new loan had decreased by half (24%) over what it had been in 2011, hitting a 9-year low. High credit score refinancing, revitalized by low interest rates, caused a slight uptick in the following quarter. Based on the report, servicers show a highly irregular retention rate, with the top 67% of them retaining twice the percentage of their loans as the bottom 33%.
The decline is credited to increased competition among lenders as well as servicers. In 2011, large banks had a 50% share of mortgage lending and 60% of the servicing rights. Today those shares have dropped sharply to 50% and 27% respectively.
During the housing crisis, there were limited refinance options for lower credit score borrowers and those that did refinance were frequently assisted by HARP originations. This made retaining servicing customers less of a concern. Since 2014 however, retention rates have dropped within the lower credit score segments, especially the very low score borrowers. Meanwhile, retention rates have risen for the highest group of credit scores, namely those above 720.
According to the report, servicers appear to have more success in retaining low loan-to-value (LTV) ratio loans as well. During the previous six months, loans with LTVs under 80% have nearly two times the retention rate of those with ratios of 91% or higher.
As the refinancing share of the market recedes, it will become even more critical for servicers to retain their customers. Indeed, Black Knight predicts that new loan originations could likely have more retention and longevity as rates rise.
The Mortgage Monitor data shows that the interest rates offered to refinancing borrowers are a factor in retention. At one time, those who left the servicer obtained a rate that was 20 to 25 basis points lower than those who remained. Today, that difference is as slight as 5 basis points. This further illustrates the acute importance of accurate risk-based pricing since it is clear that even marginal reductions in interest rate offerings could cause a customer to stay – or not.