North America Mortgage Banking 2020 - Accenture · North America Mortgage Banking 2020 “Convergent Disruption in the Credit Industry: ... The increase in mortgage rates has pushed

North America Mortgage Banking 2020

“Convergent Disruption in the Credit Industry: A Roadmap to Achieving Sustainable Competitive Advantage by 2020”

Executive Summary

Copyright © 2014 Accenture All rights reserved.

Current Situation: Convergent Disruption

• Today’s Lenders are still challenged to rebuild growth, profitability and efficiency following the recent credit crisis

• To further compound lenders’ challenges, convergent disruption is leading to a structural change in the industry; Multiple disruptive forces are converging on the Credit Industry at the same time, both from inside and from outside the Credit Industry, creating an increasingly complex and highly dynamic future environment

Building Blocks for Success in 2020: 1. Optimization & Simplification, 2. Agility and 3. Continuous Innovation

• To avoid being marginalized as the future evolves, traditional lenders must become agile and innovative; this will help Lenders adjust to industry changes and even help them define the industry’s future

• Three building blocks are essential for achieving sustainable competitive advantage in the “Era of Convergent Disruption”:

1. Optimization & Simplification are today’s table stakes and are the essential foundation for 2020; this building block is required to survive

2. Agility is the new table stakes for 2020; this building block will allow lenders to succeed

3. Continuous Innovation will separate the leaders in 2020; this building block defines high performers

• Lenders that become more agile and innovative will be future high performers, potentially realizing a sustainable >3.5% Gain on Sale Margin in 2020; this is far better than the ~2.3% margin expected for lenders that simply continue optimizing and simplifying the current model

Successful Business Models in the “Era of Convergent Disruption”: New business models will take market share from today’s Lenders

• Agility and product commoditization expand the business models for success in the future

• Today’s traditional Lenders could collectively lose about 35% market share by 2020 to new entrants and current players who adopt new business models

• While traditional business models can succeed in 2020, new business models could emerge and be highly successful

Roadmap: Today’s Lenders can choose several different paths

• The choice of business model need not be a “one-size-fits-all” decision; Different business models can be adopted for different business units

• Each business model can also deploy innovative go-to-market strategies to further increase returns

• The Table Stakes will be much higher in the Year 2020 no matter what business model is pursued; Lenders must start building the groundwork today

2

Current Situation

Market Environment and Outlook

Industry Trends

4

Mortgage

Originations

and Housing

Jumbo

Private-Label

Securitization

Distressed

Whole Loans

Correspondent

Lending

Competition

Mortgage

Regulation

• Changes in interest rates drive outlook for mortgage origination market; $1.3 trillion in originations forecast

for 2014, >60% expected to be purchase money1

• Home purchase demand is anticipated to remain robust, though some seasonal slowing is expected

• Slow economic growth and fiscal uncertainty have modestly tempered the outlook for future price appreciation

• Pipeline of distressed whole loan opportunities remains strong with additional sellers emerging – expected to remain strong through 2014

• Home prices impact returns; expectation of continued price appreciation at a more moderate pace

• Alternatives to property resolution (e.g., modification, refinance) are increasingly important strategies to maximize returns

• Contracting origination market has led to tighter margins

• A smaller market results in higher barriers to entry for new entrants

• Emphasis on disciplined pricing, execution and service to maintain profitability

• Agencies dominate the high-balance loan market; conforming loan limits likely to remain until

mid-2014

• Limited depth of market for private-label securities – significant near-term challenge

• In the past, regulator efforts to protect consumers were prioritized by the risks consumers could pose

to the safety and soundness of the institution if they took action, such as filing a class action lawsuit

• Under new regulatory scheme, the CFBP will judge compliance by the extent to which consumers

have access to financial products and services and that such offerings are fair, transparent, and

competitive. Today, it’s the consumer the government is out to protect, not the institution it regulates

1Source: Average of the Mortgage Bankers Association, Fannie Mae and Freddie Mac

mortgage market forecasts as of October 2013 Copyright © 2014 Accenture All rights reserved.

5.1%

5.0%

5.2%

4.9%

5.0% 4.9%

4.4% 4.4%

4.8% 4.7%

4.3%

4.0% 3.9%

3.8%

3.5% 3.4%

3.5%

3.7%

4.4% 4.4%

4.7% 4.8%

5.0% 5.1% 5.1%

5.2% 5.3% 5.3%

$50

$100

$150

$200

$250

$300

$350

$400

$450

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

30-Year FRM (%) Purchase Refinance

Source: www.mortgagebankers.org/NewsandMedia/PressCenter/86645.htm

Forecast (as of December 2013)

The benchmark 30-year FRM interest rate is projected to continue to rise over

the next two years, according to the MBA.

US Interest Rate Trending and Forecast

+0.9%

Recent Highlights:

• An increased in mortgage interest rates – such as

conforming, 30-year fixed rate mortgages – has

caused a drop in refinance applications

• Purchase volumes have remained more resilient

to higher rates and continue their upward trend

The increase in mortgage rates has pushed refinance application volume down to levels we have not seen since

early 2011. Given the expectation for rates to remain at current levels or potentially move higher, the refinance

boom we experienced over the past 12 years has…ended”

– Compass Point analyst Kevin Barker, 2013

Industry Trends

5

“


$US Billions

http://www.mortgagebankers.org/NewsandMedia/PressCenter/86645.htm

Crisis Disruption Pre-Crisis

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1Q

02

3Q

02

1Q

03

3Q

03

1Q

04

3Q

04

1Q

05

3Q

05

1Q

06

3Q

06

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

Today’s lenders are still challenged to rebuild growth, profitability and efficiency following the receding credit crisis in today’s low risk/low reward environment.

Moving Forward

Manageable

Risk/Higher Reward

• Balance rapidly increasing

investments in regulatory

compliance with

investments to build the

business

• Focus on the Customer:

Invest in product and

customer experience

structural innovations that

capture market share and

proactively respond to

changing customer

needs, including use of

digital

• Rebuild lender reputations

6

Low Risk/Low Reward • Extreme focus on regulatory

compliance

• Limited work done to

sustain competitive

advantages in future

High Risk/High Reward • Underwriting guidelines loosened

• High volume

• Record introduction of new businesses and

products

• Government guarantee of mortgages

• Too big to fail mentality

Ga

in o

n S

ale

Ma

rgin

Prim

ary

-Se

co

nd

ary

Sp

rea

d

Lenders are still

struggling in today’s low

risk/low reward

environment

Gain on Sale Margin Primary Secondary Spread


$2,324 $2,345

$2,945

$2,610 $2,722 $2,827

$3,539 $3,513 $3,360 $3,324 $3,413

$3,224 $3,353

$3,813

$4,182 $4,207

$4,573

$3,310

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

2008Q4

x 2009Q4

2010Q1

2010Q2

2010Q3

2010Q4

2011Q1

2011Q2

2011Q3

2011Q4

2012Q1

2012Q2

20123Q

20124Q

20131Q

20132Q

20133Q

PeriodAverage

Total Net Cost to Originate Residential Mortgage Loans

+97%

Key Points:

• A re-engineered lending “factory” could cut cost of originating a mortgage by ~25+%, reversing a trend that has seen

origination costs rise by 79% since year-end 2009

• Companies need to reduce sales/servicing costs via reduction of redundancy and automation

• Increasing attention on technology applications: To improve efficiency and reduce costs, but also to help re-allocate

resources based on shifting demand as well as adding necessary customer/credit analytics

• Rising costs with decline of mortgage brokers , which has had had a profound affect on loan origination system

providers with their customer bases shifting dramatically from broker to lender since 2008

Based on Un-weighted Averages

For Non-Depository US Companies

Footnote 1) The net cost to originate includes all origination operating expenses and commissions, including corporate allocated expenses, minus fee income, but excludes

secondary marketing gains, capitalized servicing, servicing released premiums and warehouse interest spread

Note: Tracked by MBA’s Quarterly Mortgage Bankers Performance Report through 3Q12

Source: The Economist, 2 March 2013: “Spread Besting” – www.economist.com/news/finance-and-economics/21572796-feds-frustration-mortgage-profits-have-been-soaring-

spread-besting

7

The net cost to originate a residential mortgage has increased dramatically since

year-end 2009, including seeing a steady rise over the past five quarters.


Period Average Net Loan Production Operating Cost ($) +36%

http://www.economist.com/news/finance-and-economics/21572796-feds-frustration-mortgage-profits-have-been-soaring-spread-besting























8

Since FY08, originators as a group have raised dramatically their spending on (in

order of magnitude): Outsourcing & Professional Fees, Personnel-related

expenses and IT.


Sales Personnel Fulfillment Personnel

Production Support Employees Benefits

Occupancy & Equipment

Technology

Outsourcing and Professional Fees

Other Operating Expenses

-30%

-10%

10%

30%

50%

70%

90%

$- $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000

Expense Average = +31% 38%

98%

33%

-13%

29% 44%

Expenses of US Originators Decomposed Through 3Q13 (vs. 4Q08)

Source: MBA Performance Report, 3013

Radius = Relative Contribution to Expenses

$ Cost Per Loan at 3Q13

% C

han

ge in

Exp

en

ses T

hro

ug

h 1

Q13

15%

32%

Based on Un-weighted Averages

For Non-Depository US Companies

Industry Trends

Trend of US Mortgage Industry Employment

Mortgage Industry Employment…

Since 1990...

9

Symbolizing the volatility in managing FTE capacity in the industry, Wells Fargo

and other large bank providers are projecting large cutbacks in the foreseeable

future.

Copyright © 2014 Accenture All rights reserved. Source: Compass Point Research & Trading LLC analyst Kevin Barker, 11 July 2013

Wells Fargo FTE Trending….

683 710

733 736 752 763 771

787 789 797 801 803 817 836

851 857 885 890 896

600

650

700

750

800

850

900

950

Inte

rnet

Cu

sto

mer

Se

rvic

e

Resid

en

tia

l H

om

e T

ele

ph

one

Serv

ice

Resid

en

tia

l M

ort

ga

ge

Serv

icin

g

Sm

alll

Busin

ess B

an

kin

g

Self-I

nve

sto

r In

vestin

g

Reta

il B

ankin

g

Re

sid

en

tia

l M

ort

ga

ge

Orig

inatio

n

House

hold

Insu

ran

ce

Full-

Se

rvic

e In

ve

sto

r

1st T

ime H

om

e B

uye

rs-

Selle

rs

Ma

ss C

onsu

me

r F

inan

cin

g

Repe

at H

om

e S

elle

rs

Repe

at H

om

e B

uye

rs

Captive

Mass M

ark

et

Len

ders

Captive

Luxu

ry L

en

de

rs

US

Tab

let B

uyers

Dig

ita

l C

am

era

Buye

rs

US

Deale

r F

ina

ncin

g

US

Deale

r L

ea

sin

g

Relative JD Power Consumer Satisfaction Scores

10

Compared to other product/services customers purchase, Mortgage Servicing

and Origination are ranked near the bottom in terms of satisfaction.


Latest Annual US Customer Satisfaction Index Score by Category

(Based on a 1,000 point scale)

Industry Trends

Source: J.D. Power and Associates, 2014

Relative JD Power Consumer Satisfaction Scores

However Mortgage Originators have seen a rebound in their customer satisfaction

and though Servicers have also seen a steady improvement, it is not as dramatic.

11

Sources:

www.jdpower.com/content/press-release/c6oSdyC/2013-u-s-primary-mortgage-servicer-satisfaction-study.htm

www.jdpower.com/content/press-release/guM7kPe/2013-u-s-primary-mortgage-origination-satisfaction-study.htm

Industry Trends

Trending Annual US Customer Satisfaction Index Score by Mortgage Category

(Based on 1,000 Point Scale)

798

784

730

747

718 725

733

2007 2008 2009 2010 2011 2012 2013

Origination Servicing

Key Servicing Points:

Leveling result of increase in new clients combined with new set of rules

released by the CFPB – effective January 2014 – where under new

rules, servicers are required to have systems, policies and procedures in

place to ensure customers receive the appropriate information and

support from servicers


750

757

739

734

747

761

771

2007 2008 2009 2010 2011 2012 2013

Key Origination Points:

The use of electronic closing documents improves customer

closing satisfaction. Closing satisfaction among the 8 percent of

customers who closed their mortgage using electronic documents

in person averages 830, while satisfaction among the 84 percent

of those who closed with paper documents in person is 772.

+18 Points

+37 Points

http://www.jdpower.com/content/press-release/c6oSdyC/2013-u-s-primary-mortgage-servicer-satisfaction-study.htm

















http://www.jdpower.com/content/press-release/guM7kPe/2013-u-s-primary-mortgage-origination-satisfaction-study.htm

















Today’s Customer Segments* Customer Trends Challenges for Traditional Providers

Consumer

Lending

Unbanked &

Underbanked

• Looking for low-cost FS alternatives,

especially through digital channels

• Pitched marketing batted underway with low-

cost delivery emerging disruptive providers

Youth • Frequent users of digital channels & wallets

• Many are delaying homeownership or opting

to rent vs. buy

• Attract and position young customers

through lifecycle

• Gear mortgage and other credit products to

shifting needs of this segment

Mass Consumer • Customers are willing to switch from their

primary-banking provider to find a lender

with the best rates

• Overall customer satisfaction with mortgage

lenders reaches a seven-year high, with

satisfaction among first-time home buyers

improving considerably from 2012,

• Many are still delaying homeownership or

opting to rent vs. buy

• A number of emerging disruptive providers

emerging, focused on customer-led, socially

conscious innovation

• Gear mortgage and other credit products to

shifting needs of this segment

• Despite improvements, customers

purchasing a home, particularly 1st-time

home buyers, continue to experience

difficulties understanding the loan options

available to them

Mass Affluent /

HNWI / Private

Banking

• Increasingly looking for high-value,

customized wealth advice through digital

channels

• HNW customers will not reliant on online

applications; rather, they will want a financial

manager who knows of their entire financial

situation

• The market opportunity for HNW customers

is huge

• High touch service will be critical with digital

making fulfillment process more convenient.

• Banks focused on high net worth customers

are competing for market share that was left

by large lenders who got out of jumbo

lending to focus on their conforming

business. As a result, a gap exists in the

market for serving these HNW customers

when it comes to mortgage

Proactively responding to changing customer values and needs is critical for

Lenders moving forward.

Customer segments are evolving into lifestyle/behavior segments

http://www.jdpower.com/content/press-release/guM7kPe/2013-u-s-primary-mortgage-origination-satisfaction-study.htm 12 Copyright © 2014 Accenture All rights reserved.

To further compound lenders’ challenges, convergent disruption is leading to a

structural change in the industry.

• Becoming Digital on the inside of lenders and on the

outside with customers and suppliers is rapidly redefining

interactions, information flows and data transparency

• Ongoing industry convergence is opening the door to

new competition, new ways of doing business and new

revenue opportunities

• Emerging new entrants are joining the market (in many

cases from different industries); they are competing in

innovative ways for customers and profitably serving

traditionally unprofitable segments

• Customers are more empowered through social media

and the prevalence of information and giving them an

information edge over lender employees. Transparency

will drive improved customer trust.

• Rapid consolidation continues; 20%-30% of today’s

lenders will be gone by the year 2020

• A subdued economic outlook is forecast through the

next 3 years as the Fed will leave targeted federal funds

rate at between 0% and 0.25% in the foreseeable future

and interest rates will rise

Expanded regulations may cost largest US banks a

further $104bn to resolve mortgage-related legal issues as

they try to put the costs of the subprime crisis behind them.

Also, the second largest civil settlement ever obtained by

the state attorneys general will cost the nation’s 5 largest

mortgage servicers, which control about 60% of a servicing

market, an ~$25bn to $32b 1

Convergent Disruption Multiple disruptive forces are converging on the Banking Industry at the same time, both from inside and from outside the Banking Industry, creating an increasingly complex and highly dynamic future environment with “permanent volatility”

Expanded

Regulation

Subdued

Economic

Outlook &

Rising Rates

Continued

Consolidation

Customer

Empowerment

Ongoing

Industry

Convergence

Digital Inside

& Outside

Structural

Change Emerging

New

Entrants

Inside

Outside

13


Source: 1) Office of Mortgage Servicing Oversight. Joint State-Federal Mortgage

Servicing Settlement FAQ http://nationalmortgagesettlement.com/faq

http://nationalmortgagesettlement.com/faq

http://nationalmortgagesettlement.com/faq

A view to the mortgage industry revolution

14

Source: CEB TowerGroup Retail Banking analyst Craig Focardi, 2013

Subprime

Mortgage

Crisis

Market Events

Technology-Related Events

Non-agency

market collapses

(Lehman) GSE

Conserv-

atorship

begins

Dodd-

Frank Act

passes Original

conservatorship

timeline ends

GSEs

return to

profitability

Begin planning

for GSE

consolidation Basel 3, QM

and QRM rules

in place

US

Presidential

Election

Uniform GSE

Guidelines and

Tech Standards

begin

“NewCo”

established to

build common

“GSE” platform

Uniform GSE Guidelines

and Tech converge

Common US mortgage

secondary market

platform goes live?

FHFA

strategic

plan

released

GSE platform induced

technology changes

begin? Dodd-Frank Act

induced technology

changes

2007 2009 2011 2013 2015 2017 2019 2021

GSE

conservatorship

ends?

Private-label MBS

market running

smoothly

GSE ‘consolidation’

occurs?


Other industries have experienced similar levels of disruption in recent years;

many leaders emerged with entirely new business models.

• Best available technology/ largest

content provider

• Strong brand development

• Optimized user experience

• “Google is about getting the right

information to people quickly, easily

and cheaply – and for free” (L.Page)

• World’s largest music platform

• First sustainable alternative to

music piracy

• Comprehensive user experience

from online music to electronic

devices

Redefining

Information &

Advertising

Redefining Retail

Mortgage Origination

Redefining

Music Industry and

Content Distribution

• The #1 online lender and the 3rd largest

retail mortgage lender in the US

• Recognized for a 4th consecutive years for

its higher customer satisfaction (source:

JD Power)

• Time from application to approval

averages 17.8 days for Quicken Loans

customers, which is 8.5 days shorter than

the industry average (26.3 days)

Emerging Entrants Redefined Traditional Player

In some cases traditional players completely

redefined themselves to remain relevant…

…and in others new entrants are taking dominant roles

as they revolutionize the customer experience.

From Ma Bell to Global Networking / IP Provider

• From 1984 until 1996 AT&T was an integrated

telecom services and equipment company

• As new entrants eroded traditional profits, AT&T

reinvented itself from a telecom and equipment

company to a global networking leader to remain

relevant

• Excluding its divested Advertising Solutions unit, 81%

($126.4B) of AT&T’s revenues in 2012 came from

these growth areas, which grew ~6% YoY

19% 28% 53%

81% of total revenues grew nearly 6%

year over year

Voice/

Other

Wireline Data/

Managed IT Services

Wireless

15 Copyright © 2014 Accenture All rights reserved.

Lessons Learned from Telecom Industry Disruptions (Credit Industry Parallels): • The pace of change is much faster when enabled by agile, digital technology

• Leaders find innovative ways to improve the customer experience, and they continually redefine themselves (e.g., AT&T was

a telecom services and equipment company in 1983 and is a global networking leader today)

• Those companies that do not innovate and adjust to industry disruptions eventually become obsolete (e.g., NYNEX)

The telecom industry exemplifies how disruption can quickly and radically

alter an entire industry; Lenders must prepare for a similar, sustained era of

convergent disruption.

Evolution of the Telecom Industry (a regulated industry like Banking)

1885:

AT&T founded

1983:

7 Regional Bell Operating

Companies created in AT&T

divestiture

1997:

Bell Atlantic merges

with NYNEX, another

Regional Bell

Today; AT&T is the

largest communications holding company in the world with phone,

cable, wire-line data and managed IT services

2000:

Bell Atlantic merges with GTE and

adopts name "Verizon"

Traditional

Providers

1996: Comcast

launches Comcast Online, a broadband Internet service

2005: Comcast creates

Comcast Interactive Media, a new division focused on online

media

2009: General Electric

(GE) and Comcast announce a buyout agreement for NBC

Universal

Cable Industry

Convergence

2005:

SBC purchases former parent AT&T Corp. and

rebrands AT&T

Ma Bell Era Baby Bell Era Media Era

Traditional

Telecom

Player

Response

Optimize & Simplify Example: AT&T restructures into 3

separate companies (AT&T, Lucent and

NCR) then spins off Lucent and NCR

Become more agile and digital

Continuously innovate to stay relevant Example: AT&T is a worldwide provider of IP-based

communications, manages largest 4G US network, has wireless

coverage overseas and recently developed AT&T U-verse to deliver

services across mobile devices, PCs and TVs

Scale Example: AT&T adopts

“one phone system”

campaign from 1907-1960s

2003:

Skype introduced

2009:

Skype is largest carrier of

Int’l voice traffic

New

Entrant

Example

2011: Microsoft

buys Skype to “generate new revenue

opportunities”

Today: 33%

of world's voice calls are on Skype

Today: Verizon

Wireless to pay $1B to

air NFL games over

customers'

smartphones

1941: First

installation of coaxial cable in the network

is placed in service

1993:

AT&T restructures into 3

separate companies (AT&T,

Lucent, NCR)

1994:

AT&T spins off

Lucent and NCR

1885 – 1983 (first ~100 years)

1983 – 2003 (~ 20 Years)

2003 – Today (~10 Years)


http://blog.100tb.com/wp-content/uploads/2013/04/skype.jpg

Lessons Learned from Evolution of the Banking Industry • After a decade of focusing on building scale in the 1990s, the dominance of the universal banking model is being questioned, including by

regulators who are examining “Too Big to Fail” and possible scenarios to carve up failed large full-service banks

• In the post credit crisis, banks – traditional and emerging - are focused on strategies to boost customer centricity (e.g., social media/Big Data)

The NA Lending Industry is already experiencing disruptions of the magnitude

seen in the Telecom Industry; disruptions that completely transform an industry.

Evolution of the NA Banking / Lending Industry

1998: Citibank

merges with Travelers to form

Citicorp combining

banking, securities and insurance

services

Traditional

Providers

Industry

Convergence

Glass Steagall Era Universal Banking Era Post Credit Crisis Era

New

Entrant

Example

1998:

LendingTree created to provide

consumers a centralized location to

receive multiple loan offers

1985: Quicken Loans, originally Rock Financial Mortgage, founded

2008:

• PennyMac founded by seasoned lending

executives who have focused on origiinating HARP-based loans 1999: Gramm–

Leach–Bliley Act: allows commercial banks, investment

banks, securities firms, and insurance companies to

consolidate

2012:

• Capital One acquires ING DIRECT in the US and

rebrands its retail unit CapitalOne 360

• Scotiabank acquires ING Direct Canada

2012:

• Simple (Bank)

launched – 100%

online bank

• American Express

and WalMart

launch Bluebird, a

prepaid debit card

2013+: S&P reports

that the biggest

US banks may

have to spend a

further $104bn to

resolve mortgage-

related legal

issues as they try

to put the costs of

the subprime

crisis behind

them.

Build Specialization Scale Optimize & Simplify

Agility & Innovation On Horizon

1933:

Glass–Steagall Act separates

commercial and investment

banking

1999:

goodmortgage.com founded

1938:

Fannie Mae created;

Freddie Mac created

in 1970

1969:

First ATM installed (at

Chemical Bank)

1995: First

large bank offers online services

(Wells Fargo)

2007:

Wells Fargo reintroduces mobile

banking

2008: Significant

consolidation

• Bank of America acquires Countrywide

• Wells Fargo acquires Wachovia

• JPMC acquires most of

Washington Mutual from FDIC’s receivership

1933 – Late 1990s (first ~65 years)

Late 1990s – 2008 (~ 10 Years)

2009 – Today (~5 Years)

17

2010 :GSE

conservatorship

begins


http://www.google.com/url?sa=i&rct=j&q=lendingtree&source=images&cd=&cad=rja&docid=wd-e7q7JnD9sxM&tbnid=kojRVQXiKq9tkM:&ved=0CAUQjRw&url=http://www.underconsideration.com/brandnew/archives/a_lendingtree_grows_in_the_web.php&ei=Y0HtUb3oMO2v4AOK-oD4Dw&bvm=bv.49478099,d.dmg&psig=AFQjCNHmYliC7fD8ERmQwu6vJHBfwMPs_w&ust=1374589649334066

Building Blocks for Success in 2020

Optimization &

Simplification

(Today’s Table Stakes)

Agility

(Year 2020

Table Stakes)

Continuous Innovation

(Year 2020 Leaders)

Era of

Convergent Disruption

Era of

Survival

To avoid being marginalized as the future evolves, traditional Lenders

must become agile and innovative; this will help Lenders adjust to

industry changes and even help them define the industry’s future.

• No longer will traditional

practices of optimizing and

simplifying the existing

infrastructure and business for

improved efficiency and

effectiveness yield a

competitive advantage; this

simply allows lenders to survive

• Rather, adoption of a new,

broader mindset focused on

managing change quickly and

effectively is critical to compete

in the increasingly complex and

highly dynamic banking

industry of the future

– Agility is table stakes for the

Year 2020

– Continuous Innovation is

what will separate the

leaders in the Year 2020

• The “Era of Convergent

Disruption” has begun

Business

Performance

Today’s Penetration 93% of lenders are here 5% of lenders are here <2% of lenders are here Time

Average Time to

Sustainable Benefit 3-5+ years 2-4+ years 2-5+ years

Journey to Sustainable Competitive Advantage

•Leverage a proprietary analytics system that

integrates into its servicing system of record

•The system is used to predict loans in danger of

delinquency and generate automated decisions to

determine the best possible loss mitigation option.

•Recently completed a server / desktop virtualization

initiative that improves data security and integrity

and enhances employees’ access to systems by

providing remote access.

•Also uses robust data mining tools to improve quality

control, customer service and compliance.

Online-only originator

Quicken Loans bolsters

its growing servicing

portfolio

Leveraging

virtualization and data

mining tools

Lender Industry

Examples of

Agility &

Innovation


2.0%

1.5% 1.6%

2.7%

3.1%

3.7%

3.2%

2.3% 2.1%

1.6%

2.5%

$50

$100

$150

$200

$250

$300

$350

$400

$450

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4Q10 1Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 e2H13 O &S Agility Innovation 2020

Industry Margin 1 Purchase Refinance

Footnote 1): Gain on Sale as reported by Compass Point Research & Trading

Other Sources: The MBA and Accenture Research, December 2013 http://www.mba.org/files/Bulletin/InternalResource/86348_.pdf

US Mortgage Volumes & Margin Trending

As the production side of the business rebounds, lender margins continue their

steady decline – so future winners will have to focus on boosting not only their

efficiency but their agility and continuous processes to innovate.

20

Average

Performers

Status Quo

(continued optimization

& simplification only –

Not Sustainable)

0.3%

0.4%

0.2%

0.5%

“Era for Convergent Disruption”

High

Performers

of the

Future

3.8%

Quarterly Averages of US Industry’s Gain on Sale

Rising interest rates have reduced mortgage re-financings and income

from the sale, securitization and servicing of retail mortgage loans by

$4bn among the largest bank lenders

Recovery

0.4%

0.4%


http://www.mba.org/files/Bulletin/InternalResource/86348_.pdf



Three building blocks are essential for achieving sustainable competitive

advantage in the increasingly complex “Era of Convergent Disruption.”

3. Building Blocks for Sustainable Competitive Advantage in the “Era of Convergent Disruption”

3.

Continuous

innovation Have the ideas, vision

and leadership to proactively

stay ahead of the market

2. Agility

Be able to seize opportunities

In times of change

1. Optimization and simplification

Be as efficient and effective as possible in current structure

• Become Digital: Transform IT platform to overcome rigid legacy

technology in back office and enable analytical-driven front office

• Be Customer-Driven: Make all decisions to improve the customer

experience and proactively meet customer needs

• Fulfill Self-Service vs. Channel Potential (including social media):

Maximize channel management per broker, loan officer and consumer

direct to best engage customers in sales and fulfillment using their

preferred methods (e.g., mobility, social media and online)

• Manage the New Talent Dynamic: Re-engineer human capital

platform/program to leverage best available talent internally and

externally on demand

• Employ Optimal and Flexible Financial Strategies: Adaptable

portfolio and product strategy

• Channel Fulfillment: Provide capability in all

channels to serve target customers most effectively

• Streamline and Simplify The Business: Remove

redundancies and improve processes and

technologies to become lean and rationalize

business, products, technology and operations

• Manage Regulatory Requirements: Handle

increasing regulation as a competitive advantage

• Manage Enterprise Risk Management Regime:

Provide early-warning to emerging risk threats in

possible siloes of business

• Create Capital and Funding Strategies: Optimize

to meet business opportunities/challenges as they

arise

3. Year 2020 Lender Leaders

Sustainable Competitive Advantage

Differentiate

Through

Adapt

Through

Drive

Efficiency

Through

Building Blocks

1. Today’s Table Stakes

2. Year 2020 Table Stakes


The building blocks are enabled by technology; lender leaders

need to balance innovation demands of the business with

ongoing scale and efficiency needs of the corporation.

Enabling Technology in the “Era of Convergent Disruption”

Agile Information Technology • Mobility: Extending mobility across the distribution spectrum • Analytics and Data Velocity: Using business intelligence, data analytics and

big data to access the right data at the right time by creating a data supply chain • Social Collaboration: Combining customer oriented service and a highly

effective capability – Social Enterprise • IT Infrastructure: Could include a private cloud for its loan origination system, a

VoIP phone system and paperless underwriting • Electronic Closing Documents: improves customer closing satisfaction

Optimizing & Simplifying Technology • Digital HR & Finance: Workplace Collaboration, Hyper Change

Management and Virtual Learning, Financial Performance Analytics, and Real-time operations performance and cost to serve monitoring

• Digital Logistics & Operations: Electronic document management system and a Web-based LOS that includes a module for borrowers to initiate loan applications

• Cyber Security & Fraud Management: Data privacy management platform including enhanced email security tools and digital file upload portals.

• eCustomer Interface: Loan onboarding processes with automated workflows that collect, compare and route mortgage file data and documents as well as real-time status alerts that give borrowers and their real estate agents real-time status updates on their loans

• Imaging Technology: Allows for document collaboration across all departments

1. Today’s Table Stakes

2. Year 2020 Table Stakes

Year 2020 Lender Leaders Technology As Continuous

Provider of Innovation

3. Enabling Technology 3.

Continuous

innovation

2. Agility

1. Optimization and

simplification

IT Balance

Corporate

IT

Business IT

(“As a

Service”)

Innovate

Scale Drive

Efficiency

Differentiate

3.

Continuous

innovation Have the ideas, vision

and leadership to proactively


2. Agility


In times of change



Building Blocks 22


Emerging Lender Business Models

Changing Large US Lender Landscape – 2008 vs. The Present

A handful of the largest US lenders that did not exist five years ago have

emerged to capture >10% origination share from traditional legacy providers.

24

% Declines in Origination

Sources: Accenture Research analysis using MortgageData.com, 2013

New Entrant Since 2008

Total Number of Lenders -4.6% 2.5% 484 472 611 -4.9% 1.5% 461 454 594 Total Residential Origination Volume

($US Millions) Total Residential RETAIL Origination

Volume ($US Millions) All Companies 6.4% 20.6% 1,941,536 1,424,581 13.0% 28.1% 1,158,456 904,165 627,666 Big 4 Market Share 0.5% -4.9% 45% 50% 44% 0.0% -3.7% 45% 49% 45% Emerging Providers Market Share 10.2% 5.0% 11% 6% 1% 12.2% 4.4% 13% 9% 1% Company Name % 5-Yr CAGR % 1-Yr CAGR LTM 2013Q2 LTM 2012Q2 LTM 2008Q2 % 5-Yr CAGR % 1-Yr CAGR LTM 2013Q2 LTM 2012Q2 LTM 2008Q2 Wells Fargo & Co. 12.3% 3.8% 490,336 472,407 274,557 14.9% 9.6% 251,883 229,922 126,030 Chase 12.0% 26.6% 212,735 168,004 120,580 24.7% 8.2% 113,870 105,253 37,758 Bank of America -4.2% 4.8% 95,534 91,190 118,519 1.0% 39.0% 95,422 68,660 90,885 Quicken Loans Inc. 68.7% 114.4% 94,250 43,952 6,890 68.7% 114.8% 94,250 43,884 6,890 US Bank Home Mortgage 21.1% 18.5% 86,946 73,397 33,441 28.4% 18.2% 24,906 21,069 7,144 CitiMortgage, Inc. -9.2% 4.3% 73,443 70,383 119,259 16.6% 64.0% 61,334 37,398 28,508 PHH Mortgage 22.4% 3.2% 56,890 55,152 20,704 23.2% 26.5% 49,894 39,434 17,553 Flagstar 27.4% 30.2% 53,171 40,829 15,860 17.0% 25.4% 3,233 2,578 1,476 BB&T 17.9% 14.7% 34,729 30,268 15,244 10.1% 12.1% 13,243 11,818 8,187 SunTrust Bank 9.5% 19.3% 34,058 28,548 21,613 11.4% 14.6% 18,265 15,938 10,654 PennyMac -- 540.4% 33,672 5,258 -- -- -- -- -- -- Provident Funding Associates 30.6% 1.9% 31,964 31,358 8,422 68.6% 21.1% 4,782 3,949 351 Fifth Third Bank 28.1% 8.2% 27,748 25,646 8,059 25.7% 2.8% 15,555 15,134 4,950 Ally Bank/ResCap (GMAC) -8.2% -46.8% 24,786 46,606 37,928 -14.7% -61.4% 4,425 11,477 9,801 Franklin American Mortgage Co. 20.4% 39.8% 23,794 17,024 9,388 34.5% 35.4% 1,037 766 236 Guaranteed Rate Inc. -- 86.2% 18,020 9,676 -- -- 86.2% 18,020 9,676 -- USAA Federal Savings Bank 20.1% 18.4% 17,932 15,151 7,189 46.2% 18.4% 17,932 15,151 2,689 PNC Mortgage 6.2% 35.0% 17,114 12,675 12,667 7.2% 35.0% 17,114 12,675 12,094 Nationstar Mortgage -- 206.4% 15,416 5,031 -- -- 148.9% 7,913 3,179 -- PrimeLending 51.4% 29.7% 14,455 11,145 1,820 51.5% 29.7% 14,455 11,145 1,814 Stearns Lending 72.8% 65.1% 14,436 8,746 938 162.4% 92.7% 2,486 1,290 20 Navy FCU 28.9% 54.1% 12,048 7,817 3,383 28.9% 54.1% 12,048 7,817 3,383 Everbank 33.1% 50.8% 11,456 7,596 2,742 56.1% 64.1% 6,290 3,834 679 United Wholesale Mortgage -- 234.6% 10,953 3,273 -- -- 87.9% 1,037 552 -- NYCB Mortgage -5.9% 7.5% 10,258 9,544 13,883 -100.0% -100.0% -- 3 124 Amerisave Mortgage Corp. -- 42.9% 10,062 7,040 -- -- 34.2% 8,507 6,340 -- M&T Mortgage 27.1% 41.2% 9,357 6,626 2,822 37.3% 40.2% 5,523 3,938 1,131 Union Bank 31.1% 8.2% 9,232 8,529 2,386 40.8% 0.5% 3,321 3,305 601 Prospect Mortgage -- 20.2% 8,883 7,389 -- -- 19.3% 8,812 7,389 -- Sierra Pacific Mortgage 23.8% 33.9% 8,464 6,322 2,913 56.6% 39.9% 2,102 1,503 223 TD Bank NA 75.2% 27.4% 8,296 6,513 503 87.2% 27.4% 8,296 6,513 361 Regions Mortgage 20.8% 15.8% 8,088 6,985 3,146 20.9% 16.2% 7,967 6,855 3,082 Manufacturers & Traders Trust Co. 8.7% 310.6% 7,761 1,890 5,107 22.0% 334.0% 4,197 967 1,552 LoanDepot.com -- 99.3% 7,704 3,866 -- -- 106.7% 7,704 3,728 -- RBS Citizens, NA 40.0% -3.8% 7,245 7,532 1,349 40.0% -3.8% 7,245 7,532 1,349 Fremont Bank 55.0% 60.0% 7,158 4,475 801 46.6% 51.0% 5,110 3,383 754 Cole Taylor Mortgage -- 125.2% 7,114 3,159 -- -- 117.3% 1,193 549 --


25

Over the past five years, emerging Online and Independent lenders, many of

whom did not exist during the depths of the Credit Crisis, have stolen market

share away from primarily the midsize / regional banks in the US.

Mortgage Origination Market Share Change Among US Lender Types

6% 9%

17%

23%

45%

0%

10%

20%

30%

40%

50%

60%

Online Small Banks Independents Midsize Banks Big 4

2008 2012 2013 +0.5%

Sources: Accenture Research analysis using MortgageData.com, December 2013

Footnote 1): Market share data comparing each time period at the 2nd Quarter on a trailing 12-month basis

+12.1%

+3.7%

+5.3%

Wholesale and Retail Origination Combined

0% % Market Share Change 2008-13 -21.6%


10% 11%

15%

20%

45%

0%

10%

20%

30%

40%

50%

60%

Online Small Banks Independents Midsize Banks Big 4

2008 2012 2013

Mortgage Origination Market Share Change Among US Lender Types

Over the past five years, emerging Online and Independent lenders, many of

whom did not exist during the depths of the Credit Crisis, have stolen market

share away from primarily the midsize / regional banks in the US.

26

Sources: Accenture Research analysis using MortgageData.com, December 2013

Footnote 1): Market share data comparing each time period at the 2nd Quarter on a trailing 12-month basis

0% % Market Share Change 2008-13

Retail Origination

+0.0%

+9.9%

+2.3% +5.3%

-20.8%


27

Agility and product commoditization expand the business models for success in

the future of the mortgage origination industry.

Current Lender Landscape – 2014


Large-Scale, Commodity Products Specialized

Emerging Entrants and Adopters (Current

Players who Adopt new Business Models)

Big 4 Banks

4 players

~45% market share*

(Wells Fargo, Chase,

BoA, CitiMortgage)

Small Bank

Lenders

360+ players

~9% market

share*

Highly Agile • Most business generated

through online/digital channels

• Highly nimble

• Flexible infrastructure

• Social media an integral part of

strategy

• Optimized and simplified

• Customer-centric

• Most business generated through

traditional, physical channels

• Less nimble

• Heavy infrastructure

• Less optimized and simplified

Less Agile

• Focused products or limited geographic focus

• Highly customer-centric

• Higher priced

• Advice-driven

• Highly nimble

• Simplified/optimized infrastructure

• New entrants

• Compete largely on advice and product depth/differentiation

• Commodity products (mass market focus)

• Product and customer centric

• Low price

• Low amount of advice

• Not very nimble

• Large, often legacy infrastructure

• Larger foreign entrants, but mostly traditional

players

• Compete largely on price * Market shares are based on enterprise-level revenues

B. Independent Lenders C.

Emerging

Digital

Lenders

6% MS

Sources: Accenture Research analysis using MortgageData.com, 2013

A. Traditional

Lenders

~425 Lenders

~77% market share*

(US Bank Home

Mortgage, BB&T,

SunTrust, USAA)

Mid-Size

Banks

60+ players

~23% market

share*

50+ Players

~17% market share*

(PHH, Nationstar)

Potential Lender Landscape – 2020 (Status Quo Scenario)

Today’s bank lenders could collectively lose ~20% market share by 2020 to new

entrants and current independent lenders who adopt new business models.

28


Highly Agile

Less Agile

Big 4 Lenders

4 players

~30% market

share

Market Share # of Players

Comments Today 2020 Today 2020

Big 4 Lenders ~45% ~30% 4+ 4+ • The Big 4 Lenders will continue to manage through the complexity of increasing regulatory requirements and will

be motivated to battle for lower risk / higher margin markets (HNW)

Mid-Size Lenders

~23% ~17% 60+ 45+ • Midsize / regional leaders have lost the most market share since the credit crisis and will continue to see runoff as

they look to reposition their business models to be more competitive and unique in an increasingly fragmented

credit market

Small Bank Lenders

~17% ~26% 360+ 250+ • Though the number of small banks will continue to consolidate, the survivors (including innovate credit unions) will

continue to capture market share for customers seeking high-touch customer service

Online ~6% ~15% <5 10+ • With Quicken dominating the space, new entrants will emerge, especially from the ranks for independent lenders

Independents ~17% ~26% 50+ 95+ • The independent lender model appears to be gaining mind/market share very rapidly

Emerging Lenders and Adopters (Current

Players who Adopt new Business Models)

~100 players

~40% market share

Examples of who could steal market share

from Traditional Lenders:

• A handful more pure play online lenders will

look to take advantage of Quicken Loan’s

market dynamics

• Small/community banks that become highly

agile and can now compete with larger banks

(e.g., innovative credit unions)

• Agile / innovate independent lenders

• Retailers that continue to move into the

lending space

Mid-Size

Banks

45+ players

~17% market

share

A. Traditional Full-

Service Lenders

300+ banks

~60%

market share

Small Bank

Lenders

250+ players

~26% market

share*

10+ Players

~15% market

share

C. Emerging

Digital

Lenders

90+ Players

~26% market

share*

B. Independent Lenders


29

Emerging Disruptors

Through the rest of the decade, traditional lenders will increasingly need to respond

to emerging lending disruptors like Quicken, Guaranteed Rate and

Goodmortgage.com, which will look to continue to build scale.

Banks Disruptors Common Characteristics of

the Emerging Disruptors

Innovation

Agility

Optimization and

Simplification

Innovation

Agility

Optimization and

Simplification

3

2

1

1

2

3 Circa

2020

Circa

2013

Market

nimble

Scale

Circa

2020

Circa

2013

Market entry

Scale

• Emphasize social

responsibility

• Focus on customer centricity

and empowerment

• Present simpler fee structure

to customers

• Provide personal financial

management tools and

access to other accounts

• Embedded with social

media, especially Facebook

• Leverage Big Data and

analytics

• Willingness to leverage

Cloud and Virtualization


• Key Membership Metrics:

– 39m households

– 71.2m cardholders

– 90% renewal rate (for US and Canada)

– $2.3bn+ in cash fees for LTM

• Financial Services Proposition:

– Began making mortgages in late 2010

– Sells auto and homeowners’ insurance

– Offers credit card processing for small

businesses

– Provides financial planning

• Credit Value Proposition: Costco does not make

money on mortgages, but instead uses it as

another incentive to get people to renew their

store memberships, where Costco makes a large

chunk of its profit.

• History of Innovation:

– First with its membership-fee structure

– Move into selling gasoline

Courting customers who are fed up with their banks, Costco continue to build out

its financial services offering, after first offering mortgages in late 2010.

30

Sources:

www.fool.com/investing/general/2013/10/11/10-reasons-why-peter-

drucker-would-have-thought-co.aspx#878482

The New York Times, 13 November 2013

www.costcofinance.com/LoginAndPricing.aspx

Costco’s Emerging FS/Credit Business


http://www.fool.com/investing/general/2013/10/11/10-reasons-why-peter-drucker-would-have-thought-co.aspx#878482

















http://www.costcofinance.com/LoginAndPricing.aspx

Highly Agile • Most business generated

through online/digital channels

• Highly nimble

• Flexible infrastructure

• Social media an integral part of

strategy

• Optimized and simplified

• Customer-centric

• Traditionally customer facing

• Most business generated

through traditional, physical

channels

• Less nimble

• Heavy infrastructure

• Less optimized and simplified

Less Agile Large-Scale, Commodity Products

• Focused products or limited geographic focus • Highly customer-centric • Higher priced • Advice-driven • Highly nimble • Simplified/optimized infrastructure • New entrants • Compete largely on advice and product depth/differentiation

• Commodity products (mass market focus) • Product and customer centric • Low price • Low amount of advice • Not very nimble • Large, often legacy infrastructure • Larger foreign entrants, but mostly traditional

players • Compete largely on price

Best

positioned

for global

expansion

Specialized

Potential Landscape – 2020 (Emerging Model Scenario)

While traditional business models can succeed in 2020,

two new lender business models could emerge and be highly successful.

31

Industries Outside Lending

Possibly

Large

Retailers +

One of the

Large 4 /

Largest

Indies /

Larger

Midsize

Banks

E. Retail

Correspondents

5-8 players

(Lenders + Large

Retailers)

~10% market share

(Example: Costco

partnering with one

of the Big 4)

A. Big 2

Lenders

2 players

~25% market

share

A. Midsize

Lenders

~40 players

~15% market

share

B. Independent Lenders 90+ Players

~15% market share*

D. Digital Hybrids 10+ Players

~20% market

share*

A. Small Bank

Lenders

~240 players

~10% market

share

Possibly a handful of small banks

(~10) decide they will be more

competitive by assuming a pure play

digital approach ; might be conducive

for credit unions

Possibly Today’s Largest Digital Lenders,

1 of the Big 4 Lenders, and Large Indies

and Midsize Banks Focus on Evolving to

a Digital Model With Scale

20+ Players

~5% market share

C. Emerging Digital

Lenders

Digital pure plays have to adopt a broader

infrastructure to scale and properly manage

customer expectations



These new business models have the potential to be highly disruptive to the

banking industry.

32

2. Hybrid Digital Bank Scenario: • Example: One of the Big 4

banks and a few of the Midsize banks focus on going digital with scale

• Market Edge: Gaining cost and process efficiencies vis a vis traditional lenders

1. Emerging Digital Scenario: • Example: Some small

banks and independents see a competitive advantage in becoming as a digital pure play

• Market Edge: Gaining cost efficiencies and expanding beyond legacy physical footprint

3. Digital Hybrid Independents: • Example: A few of the

largest indies will see advantage of focusing on a digital value proposition

• Market Edge: Could have competitive advantage over most lenders, especially in adjusting to market demand

4. Retail Correspondent Bank Scenario: • Example: One of the Big 4

banks or midsize banks will provide the lending engine behind one of the big retailers

• Market Edge: Immediate market share and low pricing across a broad range of products appealing to existing customers

5. Retail Correspondent Indie Scenario: • Example: Large retailers

partner with a few of the large independent lenders

• Market Edge: The independent lenders who partner with retailers will gain an additional distribution channel and higher customer brand awareness

Highly Agile

Less Agile


High Performers

will be OUTSIDE

this box (more

agile)


A. Big 2

Lenders

2 players

~25% market

share

A. Midsize

Lenders

~40 players

~15% market

share


~15% market share*


~20% market

share*

A. Small Bank

Lenders

~240 players

~10% market

share

20+ Players

~5% market share

C. Emerging Digital

Lenders

E. Retail

Correspondents

5-8 players (Lenders

+ Large Retailers)

~10% market share

(Example: Costco,

Sam’s Club, Home

Depot partnering with

one of the Big 4)

1

2 3

4

5



Lenders choosing to remain Traditional Full-Service Providers

can also be successful by becoming more agile and/or large-scale.

33

High Performing Lenders Banks will transform themselves by 2020 to become:

1. More Digital – Focus of applying digital capabilities will be on the sales process/rate shopping and consumer finance education. When it comes

to needs analysis and product fit, it will be a very customer / loan officer centric interaction. Digital capabilities can also be used in the back office

to exchange data/information and provide transparency into the life of the loan

2. Truly Customer-Driven – All decisions will be made to satisfy customer needs: this requires offering more transparency, ease of doing

business, having to request assistance once and setting and meeting expectations

3. Omni-Channel – Over half of business will be conducted through digital channels; although physical channels will still play a very important part

in the business, these banks will not rely on them for survival

4. Innovative at the Core – Innovation will be embedded in all levels of the organization to proactively stay ahead of the market; do not settle for

anything less than being a leader

5. Partnering With Leaders in Other Industries – Witnessed by the recent moves of top builder-oriented retailers, opportunities will continue

exist for lenders to partner with companies in other industries’

6. OR Large-Scale – Deliver products to the mass market at lower margins (number of products sold makes up for lower margins); costs must be

substantially reduced through reduced product complexity and streamlined technology and operations to make this work

Highly Agile

Less Agile


High Performers

will be OUTSIDE

this box (more

agile)


A. Big 2 Lenders

2 players

~25% market share

A. Midsize

Lenders

~40 players

~15% market share


~15% market share*


~20% market share*

A. Small Bank

Lenders

~240 players

~10% market share

20+ Players

~5% market share

C. Emerging Digital Lenders

F. Retail

Correspondents

5-8 players (Lenders

+ Large Retailers)

~10% market share

(Example: Costco,

Sam’s Club, Home

Depot partnering with

one of the Big 4)

1

2 3

4

5


The Table Stakes will be much higher in the Year 2020 no matter what

business model is pursued; Lenders must start building the groundwork today

3 Building Blocks for Sustainable Competitive Advantage

in the “Era of Convergent Disruption”

What Must Lenders Do

TODAY to Succeed in the

“Era of Convergent

Disruption”?

• Proactively invest in

initiatives that will build the

business rather than

reactively respond to

regulations, competitors and

industry changes

• Fundamentally shift from a

product-oriented organization

to a customer-driven

organization

• Rebuild bank reputations

• Embrace and integrate new

technologies, channels and

strategies

3.

Continuous

innovation Have the ideas,

vision and leadership

to proactively


2. Agility

• Become More Digital • Be Customer-Driven • Fulfill Omni-Channel Potential (incl. social media) • Manage the New Talent & Regulatory Dynamic • Employ Optimal and Flexible Financial Strategies


• Channel Fulfillment

• Streamline and Simplify The Business

• Manage Regulatory Requirements

• Manage Enterprise Risk Management Regime

• Create Capital and Funding Strategies

1. Today’s

Table Stakes

2. Year 2020

Table Stakes

3. Year 2020

Leaders


In times of change



-$1 QoQ

-$9 YoY

Includes life insurance companies; pension funds, retirement funds, finance companies and REITs

Sources: Federal Reserve, Amherst Securities, Compass Point Research & Trading LLC analyst Kevin Barker, 11 July 2013

Residential Real Estate = $18,453

Mortgage Debt Outstanding = $9,868 Homeowner’s

Equity = $8,585

Agency Balance Sheet = $5,830

Bank Balance Sheet = $2,957

Non-Agency MBS = $886

Other =

$195

GSE MBS = $4,490 Ginnie MBS = $1,340

1st Lien =

$2,051

2nd Lien =

$748

Other* =

$158

Prime =

$188

Alt A =

$288

Option ARM

= $117

Sub- Prime =$293

+$819 QoQ +$2,077 YoY

+4 QoQ

-$102 YoY

+$ 18

+$102

-$17

+$60

-$22

-$84

-$2

-$11

-$12

-$47

-$11

$56

-$7

-$25

-$8

-$46

Dramatic increases in home equity

could support the issuance of

HELOCs, increase the amount of

loans able to refinance and

improve the mobility of

homeowners.

36

The US Mortgage Lender industry is managing a $18.5 trillion balance sheet.

US Household Balance Sheet – $US Billions


30.0

46.9

52.1 50.0

61.0

53.0

720

740

760

780

25

30

35

40

45

50

55

60

65

2006 2007 2008 2009 2010 2011 2012 2013

Cycle Time

CustomerSatisfaction

Customer Satisfaction

On Scale of 1,000

Total Cycle

Time in Days

Sources: JP Power & Associates’ annual US Primary Mortgage Origination Satisfaction Study, November 2011;

http://online.wsj.com/article/SB10001424052702303459004577364102737025584.html;

http://www.jdpower.com/content/press-release/guM7kPe/2013-u-s-primary-mortgage-origination-satisfaction-study.htm; PNC investor presentation

37

As customer satisfaction continues to improve steadily, mortgage lenders are still

seeing some inconsistent performances year on year with their origination cycle

times.

Trend for Residential Mortgage Origination Cycle Time & Customer Satisfaction


• The time from application to approval averages 17.8

days for Quicken Loans customers, which is 8.5 days

shorter than the industry average (26.3 days)

• In late 2011, CitiMortgage had been adding staff,

streamlining its processes in effort to cut its refinance

time from 77 days to <50 days

http://online.wsj.com/article/SB10001424052702303459004577364102737025584.html





















38

Half of the complaints received by the CFPB are related to mortgages.

Consumer Complains Received by the CFPB – Through June 2013


Between July 1, 2012 and June 30, 2013, the CFPB received ~122,000 consumer complaints.

Source: http://files.consumerfinance.gov/f/201312_cfpb_report_financial-report.pdf

Consumer Complaints by FS Product Consumer Complaints Related to Mortgages

http://files.consumerfinance.gov/f/201312_cfpb_report_financial-report.pdf





39

Gain on Sale margin assumes a mortgage is originated at going market

rate, a guarantee fee paid to GSEs, servicing fees are paid and a

mortgage is sold in the secondary market.

Gain on Sale Margin Index Decomposed 1


1 MSR capitalized at 90 bps, 30-year fixed retail originations only

Sources: Compass Point Research & Trading LLC analyst Kevin Barker, 11 July 2013; chart sources include Bankrate, Bloomberg, FHFA and Compass Point

Inputs 4Q12 Average 1Q13 Average HARP Notes

Duration (years) 7 7 8 Assume mortgage duration

Coupons per yr 12 12 12 Monthly mortgage payment

Mortgage rates 3.43% 3.55% 4.00% Primary rate

Guarantee-fee 0.40% 0.48% 0.48% Paid to GSE

Servicing free 0.25% 0.25% 0.25% Paid to servicer

Other 0.10% 0.10% 0.10% Hedging, fall-out, etc.

Net Yield 2.68% 2.72% 3.17%

MBS Yield 2.18% 2.46% 2.30% Yield in MBS market

Net Spread 0.50% 0.26% 0.87%

Secondary Market Price $1,032.43 $1,016.70 $1,063.52 Price of bond in market

Face Value $1,000.00 $1,000.00 $1,000.00 Original value of mortgage

Priced-in Margin 3.24% 1.67% 6.35% Diff between secondary $ and

mortgage balance

Capitalization of MSR 0.90% 0.90% 0.90% Initial value of MSR created (non-

cash)

Total Gain on Sale 4.14% 2.57% 7.25%

Appendix

40

Additional information about each building block is available

in the provided links


Additional Information Business Technology

Continuous Innovation https://kxws.accenture.com/Repositories/C23/54/24/Accenture_Banking_2016_v14_PRINT.pdf http://www.accenture.com/us-en/Pages/insight-banking-2012-revenue-growth-innovation-summary.aspx

http://www.accenture.com/us-en/Pages/insight-banking-technology-vision-reshaping-landscape-summary.aspx

Agility

Digital https://kxws.accenture.com/Repositories/C25/73/9/Accenture%20Interactive_Banking_Social%20Engaging_Banking_3_14_13.pdf https://kxws.accenture.com/Repositories/C25/17/54/Accenture%20Interactive_PoV_Banking_on_Digital_1_8_13.pdf

https://kxws.accenture.com/Repositories/C23/82/64/12-1315_BankingCloud_v5.1_Final_May2012.pdf https://kx.accenture.com/repositories/contributionform.aspx?path=C25/89/26&mode=read

Customer Centricity https://kx.accenture.com/Repositories/ContributionForm.aspx?path=C26/36/72&mode=Read

http://www.accenture.com/us-en/Pages/insight-boosting-relevance-returns-digital-channel-banking-summary.aspx

Omni-Channel

Potential

https://kxws.accenture.com/Repositories/C23/54/24/Accenture_Banking_2016_v14_PRINT.pdf

http://www.accenture.com/us-en/Pages/insight-banking-2016-next-generation-banking-summary.aspx

New Talent Dynamic http://www.accenture.com/us-en/Pages/insight-going-above-beyond-banks-optimize-talent.aspx

http://www.accenture.com/us-en/Pages/insight-global-analytics-shortage-banking-summary.aspx

Optimal Financial

Strategies

http://www.accenture.com/us-en/Pages/insight-basel-consequences-summary.aspx

http://www.accenture.com/us-en/Pages/insight-cfo-catalyst-change.aspx

Optimization &

Simplification

Channel Fulfillment https://kxws.accenture.com/Repositories/C23/54/24/Accenture_Banking_2016_v14_PRINT.pdf

http://www.accenture.com/us-en/Pages/insight-power-online-banking-channel-summary.aspx

Streamline & Simplify http://www.accenture.com/us-en/Pages/insight-banks-rise-global-transformation-challenge-summary.aspx http://www.accenture.com/us-en/Pages/insight-banking-2016-next-generation-banking-summary.aspx

https://kxws.accenture.com/Repositories/C25/99/9/WSS153_CoreBankingTop3Reasons7.pdf https://kxws.accenture.com/Repositories/C22/96/48/WinningInNewBankingEra.pdf https://kx.accenture.com/repositories/contributionform.aspx?path=C25/93/90&mode=read

Manage Regulations http://www.accenture.com/us-en/Pages/insight-dodd-frank-act-strategic-tactical-implications.aspx

http://www.accenture.com/us-en/blogs/regulatory_insights_blog/archive/2011/11/16/information-management-impacts-of-recent-financial-regulation.aspx

Manage Enterprise

Risk

http://www.accenture.com/us-en/Pages/insight-rethinking-risk-financial-institutions-partnership.aspx

http://www.accenture.com/us-en/Pages/insight-acn-2012-risk-analytics-study-insights-banking-industry.aspx

Capital & Funding

Strategies

http://www.accenture.com/us-en/Pages/insight-capital-optimization-summary.aspx http://www.accenture.com/us-en/blogs/regulatory_insights_blog/archive/2012/03/19/regulation-in-the-news.aspx

http://www.accenture.com/us-en/Pages/insight-navigating-complexities-liquidity-risk.aspx

3. Continuous innovation

2. Agility




http://www.accenture.com/us-en/Pages/insight-banking-2012-revenue-growth-innovation-summary.aspx






























https://kxws.accenture.com/Repositories/C25/73/9/Accenture Interactive_Banking_Social Engaging_Banking_3_14_13.pdf



https://kxws.accenture.com/Repositories/C25/17/54/Accenture Interactive_PoV_Banking_on_Digital_1_8_13.pdf

https://kxws.accenture.com/Repositories/C25/17/54/Accenture Interactive_PoV_Banking_on_Digital_1_8_13.pdf

https://kxws.accenture.com/Repositories/C23/82/64/12-1315_BankingCloud_v5.1_Final_May2012.pdf



https://kx.accenture.com/repositories/contributionform.aspx?path=C25/89/26&mode=read


https://kx.accenture.com/Repositories/ContributionForm.aspx?path=C26/36/72&mode=Read

https://kx.accenture.com/Repositories/ContributionForm.aspx?path=C26/36/72&mode=Read



































http://www.accenture.com/us-en/Pages/insight-going-above-beyond-banks-optimize-talent.aspx





























































http://www.accenture.com/us-en/Pages/insight-banks-rise-global-transformation-challenge-summary.aspx






























https://kxws.accenture.com/Repositories/C25/99/9/WSS153_CoreBankingTop3Reasons7.pdf

https://kxws.accenture.com/Repositories/C25/99/9/WSS153_CoreBankingTop3Reasons7.pdf

https://kxws.accenture.com/Repositories/C22/96/48/WinningInNewBankingEra.pdf

https://kxws.accenture.com/Repositories/C22/96/48/WinningInNewBankingEra.pdf



http://www.accenture.com/us-en/Pages/insight-dodd-frank-act-strategic-tactical-implications.aspx































































http://www.accenture.com/us-en/Pages/insight-capital-optimization-summary.aspx









http://www.accenture.com/us-en/blogs/regulatory_insights_blog/archive/2012/03/19/regulation-in-the-news.aspx





















• www.insidemortgagefinance.com/topics/mortgage_banking_profitability.html

• www.mba.org/files/Bulletin/InternalResource/86348_.pdf

• www.nationalmortgagenews.com/mortgage-technology/2013-top-tech-savvy-lenders-and-servicers-

list-revealed-1038346-1.html?pg=2

• www.nationalmortgagenews.com/mortgage-technology/25_tech_savvy_lenders.html

JD Power:

• www.jdpower.com/content/press-release/c6oSdyC/2013-u-s-primary-mortgage-servicer-satisfaction-

study.htm

• www.jdpower.com/content/press-release/guM7kPe/2013-u-s-primary-mortgage-origination-satisfaction-

study.htm

Reference Links


http://www.insidemortgagefinance.com/topics/mortgage_banking_profitability.html


http://www.nationalmortgagenews.com/mortgage-technology/2013-top-tech-savvy-lenders-and-servicers-list-revealed-1038346-1.html?pg=2























http://www.nationalmortgagenews.com/mortgage-technology/25_tech_savvy_lenders.html





































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