In its June Insights Report, STRATMOR Group examined how lenders will fare in the next refinance boom and why some will be more successful than others in capturing that business. Lenders need to prepare now or risk losing business, STRAMOR Group said in a press release.

In his article, “Why a Refi Wave Won’t Save Every Lender and How to Prepare,” Senior Partner Garth Graham explained why the next refi wave will be different than past refi booms and provided strategies lenders can implement now to prepare.

 “I’ve talked with many lenders who believe at the core of their beings that as soon as the next wave of refinances hits the business, all of their problems will go away,” Graham said in the release. “But that isn’t guaranteed.”

Graham noted the industry has changed “significantly” since the last boom. After over two years of COVID-era profits, most lenders are now struggling.

“In fact, the data shows that the typical mortgage banking firm has been taking on water, with the industry showing losses for eight quarters in a row,” he said.

Additionally, many lenders opted to sell off servicing rights for cash, thus severing their relationships with borrowers who might refinance in the future. Lenders that retained servicing, on the other hand, will hold an advantage when the next refi wave hits, Graham said, as they can leverage existing relationships instead of relying on “trigger leads.”

 Large consumer direct lenders may also fare better than smaller lenders when rates drop, as they are typically well-staffed and equipped with advanced technology that can identify refinance opportunities.

Lenders with outdated compensation structures will also struggle to compete with lower costs offered by consumer direct lenders and banks, according to Graham. Refinances are much easier to originate, so loan originators should be paid less for them, he suggests.

“Traditional comp plans are serious impediments to any lender who wants to be competitive,” Graham said. “Optimized compensation plans typically mean paying less for refinances and in-house deals.”

STRATMOR data showed over 60 percent of no-cash-out refinances are being originated through consumer direct lenders, who pay a lower commission on those loans than independent mortgage banks and retail banks.

Graham said it’s the ideal time for lenders to adjust their compensation structures.

He offered several strategies lenders can employ to prepare for lower rates and the subsequent wave of refinances. For example, he recommended developing strong retail or consumer direct channels to handle a surge in refinance applications.

“These channels need to be well-managed, properly staffed, and ready to compete aggressively when rates drop,” he said, while recommending that lenders tune up their lead generation efforts.

“Lenders without established servicing relationships need to create targeted marketing strategies to attract new refinance business,” Graham said.