How the new portfolio Re-Fis can help banks close more loans

Real Estate Weekly, June 23, 1999

Bankers looking for a new way to cultivate customers are turning to the portfolio re-fi loans. These aggressive products act like home equity loans, but are really first mortgage re-fis. Why the appeal?

"Bankers see portfolio re-fis as inexpensive ways to attract more loans, generate new relationships with customers and attract borrowers from a larger geographic market," said Michael Kaprove, regional vice president of Integrated Loan Services (ILS). "Once these customers get to know the institution through the product, bankers have the opportunity to offer them other products like home equity loans, car loans, IRAs and checking."

Portfolio re-fis open these opportunities because their flexible underwriting guidelines allow banks to do more loans for people they would previously have denied due to low LTVs or property values. "Because they are not covered by Fannie Mae guidelines, banks can be more discretionary in their lending decisions with these products," said Kaprove. "Of course, the drawback is that they are not saleable until they are seasoned."

How does a bank make these loans profitable? By making the processing as simple as possible, according to Kaprove, who works with bankers across the Northeast. That means simplified underwriting, electronic or "drive-by' appraisals, no points, no closing or application fees, and the use of a home equity-type back-room processes. This includes things like the use of merged in-file credit reports and limited title searches.

"To simplify the procedure, our clients have been outsourcing the processing to us from application to closing," said Kaprove. "That means they can offer the products without staffing up for times when they promote them heavily, handle high volume as needed and still meet the tight turnarounds that makes these products attractive to consumers. It also allows them to utilize the advantages of bundling the services together to streamline the process. That way, we use all the information on the borrower for all the processing needs, from title searches to credit reports to exterior valuations."

Bankers know that consumers find these loans attractive. "The appeal is quicker processing, approval and closings," said Kaprove. "Consumers appreciate the simplified applications that are the hallmark of these loans and the limited (or nonexistent) application fees and closing costs."

He recommends the following tips to make portfolios work for banks: First and most important is putting the infrastructure in place to handle volume before the bank announces the program. Once that's in place, the institution just needs to take the applications and organize the ordering of the processing services. "Successful institutions also know that the key to success with these products is marketing them steadily," said Kaprove. "Our experience is that they have to be on the street all the time." Their pricing must also be competitive.

Institutions that take this to heart do constant rate surveys against other banks. They also cross-sell both ways, Kaprove explained. "These institutions make sure current customers know about the product and make sure that any customers brought in by the re-fis are exposed to the bank's other services," he said. The most important point is that the banks must provide a good level of service to retain the business. "That means making the process as hassle-free as possible for the customer - fast closings, low or no fees, limited documentation and accurate statements," he explained. "Smooth closings and glitch-free loan servicing are the keys to making portfolio refis show up as a big plus on the bottom line."

Kaprove and the loan servicing professionals at ILS foresee a bright future for banks in the portfolio re-fi business. "We expect the ones that do it right to command the lion's share of this profitable business," he concluded.