June 23, 2023

Understanding Mortgage Retention and Why It’s Key to Unlocking Growth With Charlie Pratt

A mortgage lender’s retention rate might be the most predictive metric for long-term enterprise value creation.

That’s why Charlie Pratt, Homebot’s CEO notes that it’s no surprise that Rocket Companies consistently touts its retention rate amongst its most important KPIs. Yet, it’s brutally hard to come by consistently defined and widely adopted retention metrics in the mortgage industry.

Charlie adds:

We’ve often heard something like, “mortgage retention rates average around 20%” due to the widely circulated Black Knight Mortgage Monitor Survey which illustrates that mortgage servicing companies have averaged around 20% refinance retention rates for the last five years. 

What about servicing companies with well-established distributed retail segments? What about purchase retention rates?”

If you’d like to get a better grasp on your mortgage retention rate and why it's key to growth, keep reading 👇

Understanding the Compounding Power of Retention in Your Mortgage Business

Customer retention is a metric that reflects the ability of your company to maintain its customers over time. It is generally understood that retaining customers is not only more cost-effective than acquiring new ones but also that a high customer retention rate can considerably increase the lifetime value of customers and, consequently, your company's revenue.

Let’s take a look at a quick example to highlight the power of retention.

The Scenario:

  • Consider a scenario with two hypothetical businesses: Company A and Company B. Both companies have a similar customer base to start with, which is 100,000 former clients. 
  • Additionally, they are both adding 12,000 new clients annually.
  • Now, let's talk about the frequency of transactions. On average in the mortgage industry, these past clients transact once every seven years.
  • Here's where the companies diverge: Company A retains 40% of its clients, whereas Company B has a retention rate of only 20%, which is considered the industry average.

To sum it up, both companies start with 100,000 clients, gain 12,000 new clients per year, and see past clients transacting every 7 years. The key difference lies in the retention rates: 40% for Company A and 20% for Company B. 

Now let’s take a look at the impact of Company A’s retention rate.

The Results: Exponential Growth For Company A

Over a span of seven years, Company A will have successfully closed 20,000 more loans compared to Company B. This translates to an impressive increase in net production profit for Company A, which is approximately $80 million. 

This figure doesn’t even account for any additional benefits that might arise from retaining the servicing rights. Moreover, this estimate is based on the conservative assumption that the net production profit margin for retained clients is twice that of newly acquired clients.

At year seven, Company A's past client base has grown to around 125,000, while Company B's stands at about 105,000.

And by year fourteen, after two transaction cycles, Company A pulls away exponentially as its expected client value is greater than 4x that of Company B’s.  

You might think that by doubling retention, you would just double the sales, but not so fast. Compounding creates an exponential benefit.

The Benefits of Improving Your Mortgage Retention Rate

This example above is a clear demonstration of how retention compounds over time, allowing a company to exponentially grow.

In fact, Company A can easily afford to outspend Company B to attract new customers, but they won’t need to. 

Company A likely benefits from an influx of word-of-mouth referrals, a better reputation, and most likely, more real estate agent relationships as a result of higher customer NPS, brand equity, and trustworthiness. A mortgage company’s retention rate reveals a whole lot about the investment put into the customer journey, relationships, and technology.

In essence, focusing on improving your retention rate not only boosts immediate profits but also paves the way for sustainable, long-term growth.

The Problem: Variation in Retention Reporting Methodology, and Lack of Measurement

Charlie notes:

I recently read through as many publicly traded mortgage company filings as I could get my hands on — this includes 10-ks and investor decks. Four stood out as having published retention metrics that were digestible. Each of the four companies is publicly traded, a top-20 originator, and a top-30 servicer (with three in the top 10).

His summary:

1) All four companies had distributed retail segments and servicing segments.

2) Retention reporting methodology was inconsistent:

  • Only one company published its “purchase recapture rate” for 2022.
  • One company published its refi retention rate, though it was specific to its CDL business segment.
  • One company reported an annual net retention rate, which inflates retention relative to the other companies that measure retention based on those past clients who transact in the year. 

3) Refi retention rates are FAR higher than purchase retention rates (more to come on this below). He also notes that Consumer Direct refi recapture rates are higher than distributed retail refi retention rates. 

Charlie’s Takeaways: Unveiling Three Game-Changing Opportunities By Focusing on Your Mortgage Retention Rate

Based on his Analysis, Charlie has three takeaways, all of which are also opportunities.

Takeaway #1: Our industry could benefit from consistent retention reporting definitions and methodologies.

To the generalist institutional investor, the mortgage space is difficult enough to understand. 

Creating clear and well defined metrics makes the mortgage space more investable, and sets an easily defined benchmark for competitors to set themselves apart from the pack. 

Takeaway #2: Every public and private mortgage origination company, servicer, and individual LO should measure their retention rate. 

You don’t need to be a mortgage servicer to understand whether or not you’re retaining your past customers. 

As the late management guru Peter Drucker said, “what gets measured gets managed.”

Takeaway #3: Purchase retention rates are far worse than refi retention rates. 

Circling back to Charlie’s mortgage retention analysis, he notes:

These four companies had 2022 refinance retention rates in the 40-70% range, compared to purchase retention rates in the 5-35% range. Why such a massive gap?

He believes that it likely has to do with these three things:

  1. Purchase business is heavily dependent on real estate agent relationships. Consumers tend to reach out to agents before a loan officer, which puts agents in the driver’s seat when it comes to bringing in a loan officer.
  2. Loan officer turnover is high. From 2002-2020, turnover averaged 38% according to the MBA and Stratmor Peer Group Roundtable Program. It’s extremely difficult to retain purchase business, which is very relationship dependent, if a large portion of your loan officers leave every year. 
  3. Time and effort. It takes consistency, discipline, and technology to stay in touch with your past client database over a 5-10 year period.

A Final Word

As a loan officer or mortgage company leader, you do not need to see a big lift in retention to see a big impact across your entire business.

This is why your retention rate is amongst the most important KPIs for those who want to build an enduring business.

So where should you start?

Charlie recommends starting by measuring your retention rate. 

And when that first customer inevitably goes elsewhere for their next loan, pick up the phone and see why. You’ll learn a ton throughout the process, your retention rate will increase as you learn, and you’ll set yourself up for long-term results and success.

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