Surging rates and shrinking origination volumes have driven the US mortgage market into a trough. Demand for mortgage refinancing will likely remain weak as long as rates hold near current levels. The outlook for purchase mortgages—mortgages used to finance the purchase of a home, in contrast to refinancing—is somewhat stronger, with volumes expected to at least remain steady through the cycle. On top of this, the mortgage landscape has changed significantly over the past five years as customers continue to embrace digital channels and as retail banks lose market share to nonbanks.
The mix of a down market and new customer behaviors presents an opportunity for organizations to compete with new propositions meeting homebuyers’ core expectations. Drawing upon our 2023 research on the preferences and attitudes of more than 1,100 purchase-mortgage borrowers in the US, we discuss five key actions institutions could apply in the US purchase-mortgage market and outline a potential course of action for each lender archetype: purchase-focused nonbanks, consumer-direct nonbanks, and banks.1
Purchase-focused nonbanks lead in the current environment
Purchase-focused nonbanks, which rely on networks of loan officers enjoying strong relationships with local real estate agents and homebuyers, are generally well positioned to power through the trough. Today they account for approximately 32 percent of purchase origination volumes among the top 50 mortgage lenders, up from 24 percent in 2018 (Exhibit 1).
Consumer-direct nonbanks typically rely on call centers supported by strong lead generation and marketing campaigns to generate refinancing transactions through outbound calls. To continue doing business at scale in the current environment, they face an urgent need to upgrade their platforms for purchase originations.
For banks, the assessment is mixed. Most have experienced a significant decline in volumes over the past five years, due largely to increased competition from nonbank lenders offering a better overall customer experience. This trend, coupled with the liquidity and capital constraints of early 2023, has prompted regional and community banks to reevaluate their stance, including options to simplify the business model and operations or to reduce their exposure to mortgage lending. Other banks, especially those aiming to meet a broad range of consumer financial needs while optimizing costs and focusing investments on core businesses, are considering off-loading their in-house mortgage business to an external partner (bank or nonbank) that handles fulfillment operations and sales/application submission. Many of these banks do not actively market mortgages to their retail customers, which opens opportunities for creative—and cost-effective—partnerships that enable the bank to strengthen customer relationships. Still others have weighed the challenges and decided to invest in the purchase business, doubling down on data and digital infrastructure to deliver a stronger value proposition for retail segments where they see a competitive advantage relative to nonbanks.
Although their hard-won market leadership affords purchase-focused nonbanks momentum in a constrained mortgage market, only the vigilant are likely to succeed in the long run. If today’s leaders have not done so already, they will need to craft proactive strategies to sustain and extend market share as competition increases. As lenders weigh competitive strategies in the purchase market, they may want to consider the imperatives described in the following section.
Five imperatives for competing in the purchase-mortgage market
Borrowers’ top expectations of lenders are competitive interest rates, early certainty of approval, exceptional service, and assurance of on-time closing, according to our 2023 survey of recent purchase-mortgage customers. Creating superior experiences for real estate agents also is crucial, as agents can inform a borrower’s choice of lender. Finally, the survey indicates that lenders of all types need to broaden the pool of prospective borrowers and identify ways to increase the quality and frequency of interactions with customers, such as through personalized journeys and live consultations with loan officers. These drivers of market leadership suggest the following five imperatives for a successful purchase-mortgage model.
1. Provide early assurance of approval
Next to finding the best interest rate, top of mind for customers seeking a mortgage is assurance that the loan will be approved (Exhibit 2). Leading firms are distinguishing their offering with sophisticated underwriting models enabling them to move beyond prequalification—a standard offering—and provide instant approval for qualified customers eligible loans, shifting the engagement model from an “invitation to apply” (prequalification) to an “invitation to accept” (instant approval). Issuing conditional approval in real time entails discrete steps, from analytical decisioning to formulation of a compelling offer and delivery of a personalized invitation via the right channel(s), all predicated on a sophisticated data-and-analytics infrastructure to churn through robust data sets.
To generate more competitive offers, lenders will want to look beyond information provided by borrowers and collect data from internal and external sources. For instance, the information traditionally required for initial underwriting includes primarily income, assets, credit score, and outstanding debt (including mortgages). Lenders often request this information directly from customers, but in many cases, it can be sourced automatically from third parties or internal bank records to validate and refine risk scoring and underwriting calculations.
The next step in this sequence is to craft a firm underwriting offer aligned with the institution’s criteria for managing risk costs. Access to the right data and the ability to scrub data sets from diverse sources can enable the delivery of finely tailored messages as unsolicited offers to prequalified prospects or responses to queries from new or existing customers.
To make the mortgage value proposition even more compelling, an institution may elect to provide early in the home-buying journey a guarantee that the financing required to close a purchase (up to a certain amount) will be available, contingent on eligible documentation—for example, title, appraisal, and homeowner’s insurance. Some lenders have already developed analytical models to support guaranteed approval at the beginning of the home-buying journey, an innovation that poses a direct and fundamental challenge to the traditional purchase-mortgage value proposition of most mortgage lenders. While speed and certainty early in the process can give a lender a crucial edge, a business model centered on up-front approval and guarantee entails significant changes in technology, human skills/capabilities, and ways of working.
2. Leverage data assets to fill the sales pipeline
As shown in Exhibit 3, just over half of borrowers today consider only a single institution in their search for a mortgage, with the average borrower contacting 1.7 institutions for information. This makes it imperative for lenders to identify and engage with the broadest possible set of qualified prospective customers. Lenders seeking to improve their rate of consideration can leverage next-product-to-buy models not only to identify customers beginning to look for a home but also to support loan officers as they cultivate relationships with those likely to qualify.
Banks have natural strengths in this area, arising from their long-standing relationships and proprietary stores of historical customer data, both of which can be adopted to make personalized, competitive offers (based on highly accurate risk assessments) to new and existing customers. But despite their considerable data assets, banks trail nonbanks in converting customer interest into completed applications. Only 60 percent of customers who consider a mortgage from a bank follow through with the application, compared with 75 percent of those considering a nonbank mortgage. Banks could reduce friction in the journey from expression of interest to completed application. As it stands today, however, slow response times and cumbersome document requests weigh heavily on borrowers’ overall satisfaction with their bank.
Nonbanks may lead on conversion rates, but they underperform in establishing first contact with potential borrowers. Nonbanks also lack the vast reserves of historical customer data typically available to traditional retail banks and should invest in their data-and-analytics infrastructure to fill the sales pipeline with high-quality leads.
3. Build a compelling value proposition for real estate agents
One in four borrowers indicate they have considered a lender recommended by their real estate agent, making agents second only to a homebuyer’s bank (or other financial institution) as a key source of mortgage referrals (Exhibit 4). It is also of note that real estate agents recommend nonbank mortgage lenders twice as often as they recommend banks. Reasons for agents’ preference for nonbank lenders include their reputation for timely closings, more knowledgeable loan officers, more transparency and clarity in the process, and relatively streamlined journeys.
Given nonbanks’ advantages in these areas, retail banks should consider creating an attractive value proposition that resolves real estate agents’ pain points.
4. Create experiences that turn customers into promoters
Friends, family, and colleagues are another important source of recommendations for mortgage lenders, as shown in Exhibit 4, and the most enthusiastic referrals tend to come from borrowers who give their lenders high marks for each stage of the mortgage journey. However, few, if any, mortgage lenders create distinctive experiences. What’s more, borrowers evaluating lenders and mortgage options say they are least satisfied with exploration journeys, including research into products/rates and inquiries about financing options prior to completing the application.
Another area that customers find particularly cumbersome is document collection, which our current and previous surveys indicate has long been one of the three most important factors in customer satisfaction ratings. Customer satisfaction weakens significantly after the bank’s second request for supporting materials. But despite recent efforts to streamline the process, lenders reach out to customers on average three times to request additional documents. As lenders go about redesigning customer journeys, document collection should be among the first use cases built for maximal personalization. For example, lenders could draw upon internal and external sources to prepopulate as many fields as possible in application forms, and they could customize the borrower’s documentation checklist to minimize time spent sourcing or clarifying redundant documents.
5. Make live consultations integral to remote engagement
Survey responses indicate that digital channels are now the main platform for mortgage lending, with two in three recent homebuyers saying they are comfortable with completing all steps of the mortgage journey entirely through digital channels (Exhibit 5). While actual use of digital channels typically trails customers’ willingness to use them, digital adoption has passed an important milestone, with slightly more than half of mortgage applicants in 2023 completing the entire process through the lender’s website or mobile app. This is up from approximately a third of borrowers in 2018.
This jump in actual use of digital channels, while significant, is hardly surprising. Already in 2018, well over half of borrowers indicated they were comfortable relying entirely on digital channels (that is, without in-person or phone-based support) to complete the application. Not only have most customers migrated to digital channels for various steps of the mortgage journey, but the share of customers who state they are not comfortable with digital channels dropped to 3 percent in 2023, down from 12 percent in 2018.
Despite the strong shift toward digital, live consultations remain vital to any mortgage lender engaging with a broad cross-section of customers. One-third of customers still want the option to consult with a live officer by telephone and/or in person (Exhibit 5).
What’s more, mortgage customers consistently give higher scores for hybrid interactions—interaction models that include both in-person meetings with loan officers and remote interactions such as online exchanges or telephone conversations—than for interactions conducted solely through remote channels. On average, 65 percent of customers report they are satisfied with combined remote and in-person consultations, versus approximately 55 percent reporting satisfaction with entirely remote consultations. (“Satisfaction” here means a rating of five or six on a six-point scale.)
Lenders considering an integrated channel strategy should also note that customer satisfaction with their remote-only and hybrid interactions with loan officers (that together compose more than 95 percent of total loan officer interactions) increases with the frequency of interactions (Exhibit 6). This is especially likely during the exploration phase.
Implementing the imperatives requires investment in new capabilities
The success of purchase-focused nonbanks in building market share is grounded largely in the combination of their physical presence in local markets and their ability to deliver market-leading experiences for homebuyers and agents alike. Despite the relative strengths of purchase-focused nonbanks in these areas, practically no lender—whatever their size or business model—has created a highly distinctive value proposition. Delivering new purchase-mortgage value propositions could bring significant benefits to mortgage lenders over the long term, as well as enable them to improve competition for volumes in the current cycle. Further, lenders that double down on advanced analytics and automated processes could potentially lower their costs, speed up decisioning, reduce errors, and produce more precise underwriting decisions.
The following considerations could serve as a starting point for leaders reevaluating their institution’s strategy for the purchase-mortgage market. These ideas recognize the different starting points for purchase-focused nonbanks, consumer-direct nonbanks, and banks.
Purchase-focused nonbanks
One of the main challenges of purchase-focused nonbank lenders is lower rates of consideration, which suggests they may want to invest in filling the sales pipeline to increase their likelihood of receiving customers’ first request for information. This entails, among other things, building data-and-analytics capabilities to identify and engage customers early in the purchase journey (for example, with mortgage calculators, borrower eligibility models, and other digital tools), as well as digital marketing engines to support personalized campaigns.
To remain competitive in a wider market, purchase-focused nonbanks will also benefit from upgrading their underwriting capabilities so they can give borrowers the assurance of firm approval offers early in the journey.
Consumer-direct nonbanks
Although consumer-direct nonbanks have been successful in the refinancing business, they have not been able to gain traction on the purchase side with the traditional telephone-centric model. Attracting homebuyers calls for a new business model centered on purchase leads generated by advanced analytical engines, with loan officers cultivating prospective borrowers and building relationships with real estate agents. In addition to addressing the five imperatives discussed in this article, consumer-direct lenders may need to organize refinancing officers and purchase officers in distinct teams, with the former pursuing leads identified by the institution and the latter focusing on strengthening relationships with prospective customers and real estate agents. The refinancing and purchase businesses also require distinct incentive programs.
Consumer-direct nonbanks that aspire to grow their purchase business significantly may want to explore the option to develop or acquire a presence in targeted markets where they seek to compete directly with banks and purchase-focused nonbanks. To be clear, building a purchase business requires a significant shift in go-to-market strategy and aggressive hiring of experienced loan officers to establish a more localized presence.
Banks
Retail banks should focus on building capabilities in areas where they typically trail purchase-focused nonbanks. The priority is to leverage data from existing relationships to provide early assurance of loan approval and to improve conversion rates from consideration to application submission. For example, knowledgeable loan officers and consistent follow-up can play a key role in a customer’s decision to buy; banks can potentially grow sales by supporting frontline officers with AI-enabled engagement tools. Banks could also improve their referral rates by streamlining customer journeys (including on-time closings) and upgrading their value proposition for real estate agents.
Finally, our research shows that 30 to 40 percent of borrowers would prefer to work with a lender that provides a “one-stop shop” for managing the end-to-end home-buying process. This points to an opportunity for banks to build an ecosystem of housing-related services (financing, renovation, warranty, relocation, utilities setup, maintenance, and conversion to investment property) and to empower loan officers to speak with customers about financial wellness and other services offered by the bank.
Ambitious lenders prepared to act decisively have an opportunity to achieve and sustain market leadership in the purchase-mortgage market. The key is to focus on implementing five imperatives: (1) provide early assurance on approval for those who are eligible, (2) leverage data-and-analytics capabilities to fill the sales pipeline with high-quality leads and support loan officers cultivating relationships, (3) build a compelling value proposition for real estate agents, (4) create superior customer experiences, and (5) make live consultations integral to remote engagement.
