My cousin grows corn in South Dakota, and he currently gets $4.65 per bushel – the same price every other corn farmer can get.
BUT – if he offers to be a “corn supplier for life” along with an annual financial review to buyers, he can get $6.65 per bushel… or not.
OK – my cousin can’t actually get more than $4.65 per bushel no matter what “value adds” he offers, but I shared the above story to illustrate a tactic many mortgage lenders take.
And, it sort of works, but I think they should take a different tactic.
What Makes the Commoditization of Mortgages Terrifying
Corn buyers know that for the most part corn is corn is corn, so they don’t care how friendly the seller is, what the seller’s input costs are, or what “value adds” a seller might offer.
So, the only thing that matters to sellers is being able to produce corn as inexpensively as possible – so they can sell corn as cheaply as possible while still making money.
The perceived commoditization of mortgages terrifies mortgage lenders for several reasons:
- Low Margins: It pushes margins to zero and makes it very difficult to make money.
- High-Cost Structures: Many mortgage lenders have way too high of cost structures to compete in a commodity market.
- Borrowers Still Demand High-Touch Service: Borrowers often want commodity pricing, but they still often want their hands held while also getting dozens or even hundreds of questions answered. This of course requires staffing, training, and expertise at the mortgage lender that makes them far different from actual commodity sellers (no corn farmer is going to staff up to answer questions and/or send dozens of closing cost and payment scenarios like our Mortgage Analysts do 7 days per week).
- More Labor Than Meets The Eye: This is related to #3 above and #5 below. Corn farmers do not have to spend hours answering questions and/or pre-approving corn buyers, but most mortgage lenders do. And – that makes it very difficult to be a low-cost producer while still offering adequate levels of service and maintaining a good reputation.
- Purchase Expertise Necessary: Purchases often require a tremendous amount of expertise, as I explained in this recent blog: Everyone Wants to Jump Into the Mortgage Pool.
I personally know a former executive from an enormous online/call-center lender that absolutely dominated the mortgage market during the COVID refi boom. But, their business died almost instantly when refis dried up. The reason was not just because volume plummeted everywhere; it was also because their mortgage advisors were insufficiently trained to handle purchases – and deals blew up constantly. Seasoned agents quickly got word of this and refused to let the lender finance any of their transactions.
I also know of a tech application that uses AI to underwrite files – and it too worked beautifully… for refinances. It is NOT working well for purchases though because purchases are just too complex.
Why Borrowers Perceive Mortgages as Commodities
- 30-Year Fixed-Rate Mortgages Dominate. Prior to the 2008 meltdown, there were hundreds of different mortgage products from an equally large number of mortgage lenders – and it was the loan officer’s job to search for the best product for every borrower. It was a very difficult task too – for good loan officers who took the job seriously. Good loan officers could often find far better loans than anything Fannie, Freddie, and the big banks could offer. That all came to a screeching halt after 2008. In an effort to stop “predatory lending” and to eliminate “risky” loans, regulators effectively made 30-year fixed-rate loans (via Fannie Mae and Freddie Mac) the only game in town. And regulators also gave themselves total control of the mortgage industry and eliminated competition for big banks. In any case, now that most borrowers shop for the exact same type of loan, they often perceive loans to be commodities.
- Technology. Despite how difficult regulators made mortgage lending, technology continues to make applying for a mortgage easier and easier – with online apps, rate comparison tools, and automated income and asset verification tools. This tech incentivizes borrowers to apply with multiple lenders, forcing them all to compete.
What To Do?
- Stop Whining 😊: This is a reminder to myself and all mortgage lenders, as this commodity perception will persist. And – it is our job to continue to cut costs while still providing stellar service and educating agents and buyers alike that mortgages are not commodities.
- Expertise Reigns Supreme: I know many loan officers who take the “value add” approach discussed at the top of this blog, but they are also brilliant loan officers who know far more than any call-center loan officer will ever know. I think those loan officers would do better to remind buyers and agents how important actual expertise is when it comes to purchases – and I again reference this blog: Everyone Wants to Jump Into the Mortgage Pool.
- Rates Often Not Lower: I remind shopping borrowers that they can easily get misled too, referencing these blogs: 5 Misleading Rate Quote Tricks or Misleading Closing Cost Tricks Big Banks Play.
- Ethics Too? There is an ACE Hardware near my house where several retired contractors work – and their advice is invaluable! There is also a Home Depot near my home where I can get items far cheaper, but good advice is nearly impossible to get. I would, however, never go to the ACE to get advice, only to leave to buy the related item at Home Depot. Many borrowers have no qualms about doing this. What makes this especially frustrating for me is that JVM offers ACE hardware service AND Home Depot prices, and we still sometimes lose borrowers when rates fall after we lock in an interest rate. But, this is just me whining again. 😊
