Lenders aren't targeting right customers for new loans, ICE says

Mortgage lender customer retention, normally an issue during refinance waves, is at a 17-year low, as lenders are missing the mark on their marketing efforts, the latest Intercontinental Exchange Mortgage Monitor report found.

That comes as principal and interest payments on newly originated mortgages topped $2,500 a month for the first time ever in October, according to the company's data.

Mortgage rates were above 7.5% throughout October — except for one single day — topping out at 7.8% on Oct. 25, Andy Walden, ICE vice president of enterprise research, said in a press release.

"The situation was already dire, but recent weeks have seen rates climb to where it now takes nearly 41% of the median monthly income just to make the P&I payment needed to purchase the median-priced home," Walden said. 

The P&I payment alone rose by $144 over the past 30 days, independent of any increases in taxes, insurance and other fees that the borrower is responsible for in their monthly mortgage payment.

"For the last 35 years, the share of income needed to cover P&I has averaged below 25%," he continued. "The last time affordability was this bad in the '80s, rates were in the double digits and the average home was about 3.5 times median income, in stark contrast to today's price-to-income ratio of nearly 6-to-1."

Meanwhile, the high level of homeowner equity is contributing to activity for cash-out refinancings, but Walden identified that as a niche opportunity but one some lenders are botching.

In the October Mortgage Monitor, the first published under the ICE banner following the acquisition of Black Knight, Walden warned that lenders wanting to do business with these consumers had to look beyond what he termed the standard method of finding candidates.

This is because those looking at normal "in the money" analytics were missing these customers completely. The November Mortgage Monitor data bore that out.

Combined, U.S. homeowners hold $16.4 trillion of total equity; of that $10.6 trillion can be tapped, which means even after taking this out, the borrower would still have at least a 20% stake in the property, Walden explained.

"Unfortunately, with borrower retention at a 17-year low, lenders are losing customers seeking to tap equity via cash-outs," he said. "What's notable is that they are losing this business not due to their rate offerings, but rather an inability to identify and market to those borrowers likely to transact in today's market."

The refinance retention rate among servicers for the third quarter was 21%, which ICE said was the lowest in 17 years.

In the second quarter, the total retention rate was 24%, while for the third quarter last year, it was 26%.

The most recent peak retention rate was 33% in the fourth quarter of 2021; the highest rate since this data started being tracked in 2008 was in the first quarter of 2011 at 48%.

While the rate-and-term refinance business is moribund, whatever activity going on in that category found the third quarter retention rate to be just 10%. Fewer than 25% of cash-out refis were kept by the same servicer.

There's a dichotomy between banks and non-banks: the latter keeping one-in-three cash-out refi borrowers; for banks it's just one-in-10.

"That likely explains, at least in part, the dramatic difference in retention rates across product and investor types with portfolio-held mortgages (typically held by banks) being retained at only a 12% clip, while FHA/VA loans (heavily serviced by non-banks) are being retained at a 27% rate," the Mortgage Monitor report said.