Mortgage servicing providers need to market new loans to their customers to prevent the value of their portfolio from decreasing when borrowers refinance with other lenders. When rates fall, some marketing techniques may ultimately result in frustrated borrowers and wasted sales time if they do not take the right details into consideration, especially for the FHA Streamline Refinance program. By making deal structuring and escrow analysis part of marketing segmentation, lenders can avoid these pitfalls and create better recapture programs.
A mortgage servicing portfolio can be a rich source of potential sales leads, and servicers have every incentive to retain their customers by making them a compelling mortgage offer. As rates fall and refinance deals become more important, lenders should be careful to take mortgage deal structuring into account when they make their marketing plans. Some marketing campaigns take a shotgun approach and try to facilitate as many loan officer sales calls as possible using a generic message designed to get a borrower on the phone. This tactic can result in an increase in sales calls, but it also carries hidden risks if the borrower is ultimately not able to close their deal. For example, Ardley has come across portfolios utilizing legacy logic showing over 10% rate and term eligibility, whereas the available deals are likely closer to 1.5 - 2.5% of the portfolio.
This situation can occur with many different loan programs, but is perhaps most common in the FHA Streamline Refinance program. In many cases, the borrower finds out late in the sales process that their deal cannot close, resulting in an unhappy customer and wasted sales resources. Worst of all, the borrower will likely be less responsive to future marketing efforts and may be more likely to work with other lenders.
This paper examines the FHA Streamline Refinance program rules that can cause a deal to fall apart and using a real example, shows how the Ardley platform can prevent over-estimating portfolio opportunities. Ardley can help servicers send the right recapture message to the right borrowers at the appropriate time, creating more efficient sales conversations and building trust with borrowers.
The FHA Streamline Refinance program is popular with mortgage borrowers due to its unique benefits, including no required credit check or appraisal. It also has unique program constraints that lenders must consider when evaluating potential deals. Two important rules are the Net Tangible Benefit (NTB) and upfront closing costs. A loan in this program must reduce the current interest rate by enough to meet the NTB requirements, which can vary based on the type and/or term of the new loan. Lenders are allowed to cover closing costs by increasing the interest rate on the new loan, but only in an amount that does not cause the loan to violate the NTB rule. In practice, the tension between these two rules sets up the key dynamic that can cause some deals to fall apart and lead to marketing messages that target the wrong borrowers.
Typical FHA borrowers choose their loan over a conventional program to take advantage of the lower down payment requirement and be able to buy their house with less cash upfront. When these borrowers want to take advantage of the FHA Streamline Refinance program, they are almost always trying to lower their monthly mortgage payment while minimizing the cash they must pay for closing costs. In most cases, the loan works for the borrower only if they are required to pay closing costs equal to or less than the current mortgage payment amount.
The closing cost amount can vary widely depending on the funds needed for prepaid expenses and priming the escrow reserve. Both of these categories are almost completely dependent on the timing of the tax and insurance payments that the services must make on behalf of the borrower. In other words, if a servicer makes an FHA Streamline Refinance offer at the wrong time the closing costs may easily be too much for the borrower to cover and cause the deal to fail.
Consider a real world scenario to illustrate the importance of timing on closing costs, using a loan with the following characteristics:
In this scenario, the large insurance and tax payments made from escrow funds must be accounted for, whether or not the refinance deal is completed. There is a considerable difference in required closing costs between the two closing dates six months apart. The difference is almost entirely due to the escrow shortage that occurs on the two different closing dates (both closings are 60 days from the offer date).
In Scenario 1, the borrower can refinance if they bring over $4,000 to the closing table (cash they very likely do not want to use, or may not have). In Scenario 2, the closing costs are lower than the current monthly payment on this mortgage simply by making the offer at a different time. The borrower will be able to handle this amount, assuming that they would have been able to make their planned mortgage payment before the refinance.
These two scenarios will have very different outcomes for the mortgage lender depending only on the timing of the offer. Scenario 1 will likely not close and make the borrower less likely to respond to future marketing offers. Scenario 2 has a much better chance of closing and resulting in a lower monthly payment for the borrower.
To craft the most effective portfolio recapture strategy, mortgage servicers must account for (1) the likelihood that a borrower will want to refinance as well as (2) whether a deal can actually close. Performing deal structuring analysis as part of portfolio segmentation enables lenders to make more accurate offers with confidence that they will close and retain more value in their servicing portfolios.
Ardley believes in making the most accurate offer possible with the highest likelihood of success. Ardley Intelligence helps mortgage teams uncover and prioritize loan-ready borrowers every day with personalized offers and real-time pricing insights. The Ardley platform takes all factors into account when making a mortgage offer to a customer, including eligibility, pricing, escrow analysis, and fees. As a result, lenders avoid making offers that cannot close, leading to happier customers and more effective sales teams.
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Ardley is an enterprise class software platform that removes friction for mortgage servicers, originators, and borrowers. Ardley’s product suite leverages captive borrower data to identify, structure, and deliver loan offers directly to borrowers with Navigator (borrower-driven loans) and Autopilot (automatic underwriting). Our products are reactive to all rate cycles and provide scalable, API-led integrations.