Mortgage lenders face customer retention challenge

Declining interest rates are leading borrowers to refinance, but even as the market picks up, servicers are encountering challenges in keeping customers. 

Servicers saw the retention rate for refinances fall in the second quarter to the second-lowest point in 17 years, ICE Mortgage Technology said in a new report. Companies managed to retain just 20% of homeowners opting to refinance, down from 25% three months earlier. 

The older the loan, the more likely borrowers would refinance it elsewhere, ICE said. Servicers found more success with loans originated in the last two years with retention rates at 41% for 2023 originations and 34% for 2022 mortgages. 

As homeowners look to save on their mortgages, servicers face growing competition in keeping them as their clients. With the number of refinances likely to grow, companies looking to capitalize have already responded by introducing various products to lure customers in this summer.  

Nonbanks saw their retention rate dip to 28% of refinancing borrowers in the second quarter, declining from 34% three months earlier. Meanwhile, the rate for banks inched down to 8%.

Still, with several recent findings from various researchers, including ICE, showing refinance volumes making a comeback once interest rates began falling this summer, servicer lenders  might have some reason for further optimism if downward trends continue as hoped. 

The recent dip in mortgage rates "may have a positive effect on retention metrics in Q3," ICE's September Mortgage Monitor report said. 

An anticipated rate cut by the Federal Reserve is fueling enthusiasm for increased business, especially from borrowers who took out mortgages over the past several months. Market volatility at various points led mortgage rates to approach 8%. The latest mortgage market survey from Freddie Mac showed the average 30-year loan coming in at 6.35% as of Aug. 30.   

In mid August, 2.5 million borrowers stood to benefit from a refinance, with the number growing by another 2.3 million if rates fell by another half a percentage point, ICE said. Of the mid month total, 900,000 were regarded as highly qualified thanks to their credit scores, amount of equity held in their home and their likelihood of saving at least 75 basis points.

Borrowers quickly took advantage of opportunities, with refinance rate locks surging to their highest level in two years and more than doubling from earlier in the month. 

The surge in activity also lifted the average refinance amount to spike in recent weeks, with the mean unpaid balance jumping to $348,000, up by over $50,000 from a few months earlier.

Earlier this summer, ICE noted the number of candidates in the money for a refinance was already at a near two-year high following the most recent meeting of Fed officials in late July. At the time, ICE vice president of research and analytics Andy Walden said there were "three times as many highly qualified refinance candidates as there were at this same time last year, when rates were at a similar level to where they are today."

Chairman Jerome Powell's remarks following the meeting — and in comments since — all point to a rate cut on the horizon. The Federal Open Market Committee is next scheduled to meet in mid September. 

Elsewhere in the report, the latest trends pointed to elevated potential in the purchase market as well, but affordability will remain an obstacle, even with recent rate pullbacks. 

"Purchase demand perked up on August's rate drops, hinting at a population of prospective homebuyers poised and ready to act as soon as market movements tip the affordability math in their favor," Walden said.

The share of median income needed to purchase an average American home currently stands at 34.1%, ICE said. A share above 25% is deemed unaffordable, according to the National Association of Realtors. 

August purchase activity came in under levels from earlier in the year and 2023 when interest rates were comparable, "but that may well turn out to be a good thing on balance," Walden added. 

"Slower home growth is a positive sign in the Fed's fight against inflation and increased – but still mild – demand is good for the market and Fed alike."