Mortgage Retention

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Mortgage Retention This article, discussing the
key approaches to mortgage retention, first
appeared as the cover article in the January 2003
issue of Mortgage Finance Gazette. Our
January 2004 cover article on cross-selling has
prompted a number of requests for this previous
piece. It is reproduced here by kind
permission.
Mungo Dunnett Associates 11 Polstead Road, Oxford
OX2 6TW Tel [phone] Email
info_at_md-as.com Web www.md-as.com We operate
across a range of Financial Services
organisations. Our focus is on ensuring that
your activities are geared towards the areas
that are most commercially valuable.
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Mortgage Retention doing nothing
is NOT AN OPTION
BY MUNGO DUNNETT
treating all customers the same (or maybe
not treating them at all), data that points you
in the right direction and gives you some big
wins is a good start and you will improve this
focus over time.   Rather than blaming the
IT spaghetti, or the quality of the management
information, it is perfectly possible to ferret
for the information you need. Find those
mortgage customers that are the most important
generally, they will be the ones with the biggest
balances but cross-holdings are important too.
Prioritise these by profit, not simply revenue
allocate costs against these customers. This
will produce a list of the customers on whose
mortgage business the profitability of your book
heavily depends. Unfocused retention activity
is like an unguided missile. You are dealing
with matters fundamental to your organisations
profitability And what will you find?
Well, if you are similar to just about every
other lender out there, the picture will be this
The top 20 per cent of your mortgage customers
will be generating between 65 per cent and 90 per
cent of the entire profitability of your book.
You will already know what the net growth of
your book is but will you have worked out what
is happening to the actual value of that book?
One UK lender was recently shown that, whilst its
book had increased by 5.9 net (high fives to the
salesforce), the margin of the new business was
an average 55bps, while the outflow had been
making an average 140bps. The value of the
entire book had dropped by 8.4 per cent.  
You also need to know why these customers are
walking out of the door and again, if you are in
any way typical of other lenders, the story will
be a familiar one. First of all, there is a
direct linkage between the profitability of
mortgage customers and their likelihood of
leaving. There is also a direct linkage between
customer satisfaction levels and retention.
There is, too, a fair chunk of customers
particularly those with the bigger mortgages (and
Did last year worry you? On the one hand, there
was record lending and on the other hand, record
remortgaging. A rising tide of lending, so to
speak, covers a multitude of sins. But those
lenders watching the underlying profitability of
their book are finding signs of real trouble
ahead. UK lenders are currently divided
into three camps. There are those who have done
their homework, built the analysis to identify
what is happening to their customer base, and
implemented the activities to stem their outflow.
Then there are those who have done the analysis
but cannot manage to implement the activities
yet. And there is a third group who have not
done either. Those in the second and third
camps will know who they are. There are a host
of reasons these lenders have not fully got to
grips with their retention problem some good
reasons and others less than good. But there is
a common thread that joins them all mortgages
are deemed to be too complex and too profitable
to mess with, at least until they have more
certainty about the best move. But the result is
that nothing is effectively being done. And
while nothing is being done, the book is
shrinking either in value (the profitability it
generates) or, in certain cases, even in volume
(number of accounts, and on the book). When
rates rise, and the housing market passes its
peak, these lenders are going to be in serious
trouble. Doing nothing is simply not an option.
And yet is it really that impossibly
complex an issue? Does it cost fortunes to
address, and take years to implement? No. And
this is the secret for those who are getting it
right.   Getting the facts   You need to know
some fairly simple things. Who are your most
profitable customers? Who are the customers that
tend to leave? Why are they leaving? What is
the changing value of your book? This is a
combination of data analysis and research. And
here is the first rule of thumb dont try to
produce data that is absolutely, indisputably 100
per cent correct. You will die in the attempt
probably of old age. Where youre currently
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dont get me started on the trials and
tribulations of out-of-area lending) who walk
because of price.   However, it is not all
about price. Customers will tell you, at first
asking, that it is price but it is subtler than
that. It is about what they really think about
you, their lender. In other words, it is back to
that hackneyed, well-worn but little-understood
concept relationships.   The borrowers
whole experience of their mortgage lenders is
often one of initial promise, followed by rebuff.
They saw lots of your staff while they were
buying the mortgage, and afterwards nothing.
They will have had no proactive contact and no
ongoing dialogue. They will have had very
little, in fact, apart from the odd customer
magazine (trying to sell them something else),
and the statement telling them they still owe you
thousands of pounds.   What they want is
recognition. They want to be told that you know
who they are that you value their business that
you still care about them. And they also want
communication they would like to have some
indication that somebody has remembered them, and
is making contact with them. Simple stuff but
is it done?   In summary you need to know
the facts. But the next step is the only one
that really counts you need to use the
facts. Using the facts What about all the
reasons why nothing then gets done? Well, there
is the data analysis team. They are too busy to
get the work done. Or somebody once put a
decimal point in the wrong place on an important
report, and they have been damned ever since. Or
somebody says that you cannot do anything until
you have blown up the IT system and put in place
a new one. Or the analysts are, heaven forbid,
techies! They are not like us they dont
understand the business!   Then there is
the cost allocation, which is heavy politics.
Do you include the branch costs or dont you?
Who picks the tab up on the big fixed costs and
what does that do to their bonus?  Then
there is also the whole issue of learned
behaviour. Broadly, people do what they are
expected to do. They do the things that they
think will get them noticed, promoted, paid more.
And in

• most mortgage lenders, the thing that counts is
• sales. Gross lending is the metric that
  determines the focus of the whole busy operation.
  
•   The simple truth is that you cannot afford
  to let these things get in your way. Others have
  worked their way through it why cant you? We
  are talking about bottom line profitability of
  the enterprise here, and if that does not act as
  a rallying cause, nothing will.
• Doing the right thing
• Unfocused retention activity is like an unguided
  missile. You are dealing with matters
  fundamental to your organisations profitability.
  The beauty of data analysis, as we have said, is
  that there is a gearing effect attached to
  everything you do. This means that small
  improvements create a disproportionate effect.
  But this effect can work against you, too. There
  is nothing more dangerous, therefore, than some
  of the activity that is currently underway among
  UK lenders.
• Make sure you understand the effect of what
  youve just done. Watch the customers speak to
  them track them. Think about return on
  investment the only purpose of retention
  activity is to produce an incremental improvement
  in the profitability of your customer base
• For example
• Implementation that is not based on analysis
• Approaches to the customer base that are
  generic, and therefore offered to everyone
• Dangerously unstructured reactive deals,
  struck with pushy customers
• Whole initiatives that are fundamentally based
  on price discounts (where the only certainty in
  the whole exercise is that you start by cutting
  your profitability)
• Pilots lots of pilots which are mismanaged
  and not evaluated properly 

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Do the right thing protect yourself.
Take one step at a time and make sure you
understand the effect of what you have just done.
Watch the customers speak to them track them.
Think about return on investment the only
purpose of retention activity is to produce an
incremental improvement in the profitability of
your customer base. So whatever you do, and
whatever it costs, must be more than covered by
the increased time (or money) the customer spends
with you. The effective activity  But enough
of the hard elements. The benefits actually
appear only where you are using the soft stuff,
but plan and train for it, and watch it like a
hawk. The effective activity involves two things
working together (which can be tricky for people
who often do not even spend the time of day with
each other) your sales staff and your marketing
communications material. Remember the gearing
effect you only need small turns on the wheel
to create a big commercial impact  
Remember that customers crave recognition and
communication. I am not suggesting that our
approach will prevent the more cost-conscious
from walking, but the effect it will have will be
significant all the same (remember the gearing
effect you only need small turns on the wheel to
create a big commercial impact). You may
be surprised to know, even at the start of 2003,
that the key relationship customers feel is with
their local sales staff. They must be moved to
the heart of the ongoing relationship with your
key customers whereas they usually play no
part, as they are incentivised to be off flogging
new mortgages to new customers. Secondly,
the communications material must be changed so
that it, quite simply, passes the So what? test
for customers. It must be attractive, adding
value (and that is not more generic magazines!)
and involve making an attempt to speak to what
that customer is genuinely interested in.

•   The beauty of intelligent and
  sensitively-used communication is twofold first,
  you can take some
• of your existing marketing budget and turn it
  into collateral that materially and demonstrably
  improves the bottom line (and when was the last
  time you got that impression from your marketing
  budget?). In
• There is nothing more dangerous than some of
  the activity that is currently underway among
  UK lenders
• other words, this pays for itself, and more.
• Secondly, you are building critical bridges
  between sales staff (and these might be call
  centre staff) and their instinctive grasp of
  customer likes and dislikes, and the rest of the
  organisation. A token offer, put across by a
  local sales person rather than a faceless
  head-office person, can have an extraordinary
  impact on customer behaviour. And the offer
  could even be based on price. Just do not give
  away the family silver it is the thought that
  counts.
• So here is a picture of where lenders potentially
  could be
• Retention is seen as a top issue by the
  organisation, with the heavy involvement of
  finance
• The data has been analysed and is now being
  used
• Measurement takes place on all aspects
• The programme is run with consistent attention
  and adequate staffing
• Day-to-day management involves both sales and
  customer services, as well as marketing
• Net lending becomes an important metric, and
  retention efforts affect peoples pay
• The answer is communication, based on sound
  analysis. Neither by itself will do but at a
  more basic level, lenders need to want to do this
  work because the stakes are going up.