The joy of customer satisfaction: J.D. Power is well-known for measuring car brands that win...

THE MORTGAGE EXPERIENCE HAS DOZENS OF TOUCH POINTS BETWEEN CUSTOMER AND LENDER. It is an array of human interactions and processes, each with many moving parts. There are many third parties involved--Realtors, brokers, correspondents, title companies, closing agents, insurance companies, appraisers

that can make or break a customer relationship for a lender. And that doesn't even begin to discuss servicing. Lenders face a daunting task trying to keep everything flowing smoothly and in a timely manner, and preventing anything from going wrong that will alienate their customers. As mortgage lenders are painfully aware, there are plenty of customers who are more than willing and able to punish lenders who make mistakes by taking their business elsewhere for their next mortgage. In short, customer satisfaction is paramount. Mortgage lenders ignore or downplay it at their peril. What's even more distressing is lenders cannot address this problem by focusing just on a couple of really important transactions or steps that could go wrong. Indeed, potentially any step in the long life of a loan, from origination to closing to servicing to making the final payment, can leave a customer dissatisfied for the duration, according to Jeremy Bowler, study director for the J.D. Power and Associates Home Mortgage Survey.

The survey company, based in Westlake Village, California, will later this year report on the results of its third annual survey that rates and ranks lenders for overall customer satisfaction and a host of other measurements.

J.D. Power and Associates was founded in 1968 by Dave Power, and rose to fame with its survey of consumers' ratings of the initial quality of new automobiles. Over the years it has ventured into many other consumer products and services.

It first ranked the top major mortgage lenders in December 2001, in its 2002 Home Mortgage Study. In that survey, Countrywide Home Loans lnc., Calabasas, California, was No. 1 in overall customer satisfaction, followed in rank by GMAC Mortgage Corporation, Horsham, Pennsylvania; Bank of America, Charlotte, North Carolina; Wells Fargo Home Mortgage, Des Moines, Iowa; CitiFinancial Mortgage Corporation, Irving, Texas; Chase Manhattan Mortgage Corporation, Edison, New Jersey; Washington Mutual, Seattle; and the former HomeSide Lending.

Last year J.D. Power ranked 27 mortgage lenders in its 2003 Home Mortgage Study (see Figure 1). In that survey, USAA Federal Savings Bank, San Antonio, Texas, came out on top in overall customer satisfaction. It was followed by Branch Banking & Trust Mortgage (BB&T), Wilson, North Carolina; SunTrust Mortgage, Richmond, Virginia; Wells Fargo; First Horizon Home Loans Corporation, Irving, Texas; and GMAC.

[FIGURE 1 OMITTED]

While Bank of America from the first year's list managed to be rated above the industry average, three other mortgage companies--Countrywide, Chase Manhattan and Washington Mutual--were rated below the industry average score for overall satisfaction in the latest survey.

These top players are keen to improve customer satisfaction and their J.D. Power scores on ratings for the 2004 survey to be released later this year. "Customer satisfaction is critical to our success. It is one of the most important criteria we focus on," says Jack Rubin, senior vice president for production at Chase Home Finance, Edison, New Jersey.

Washington Mutual's Wayne Pollack, senior vice president for customer care, adds: "Customer satisfaction is absolutely central to our business strategy." Pollack explains: "It's important because we know when we offer everyone great value with friendly, top-level service, we're going to create brand loyalty and work toward retaining those customers."

A hard year to please customers

The fast pace of business in 2003 has made this a challenging year for mortgage companies to improve customer satisfaction, at least on the origination side. The crush of business has put stress on every lender's operation, which can put a crimp in customer responsiveness. While the pace is expected to slow in the second half of the year due to higher interest rates, housing-sector economists are predicting that 2003 will set a record for mortgage originations and home sales.

In its July forecast, the Mortgage Bankers Association (MBA) indicated mortgage originations will hit $3.39 trillion this year, but will then plunge to $1.9 trillion in 2004 as the refi boom comes to an end.

Freddie Mac's chief economist, Frank E. Nothaft, predicted in July that mortgage originations will top $3.3 trillion for the year, a level one-third higher than the record setting pace of $2.5 trillion in 2002.

While refis are fading fast, housing sales are, nevertheless, expected to remain strong. MBA predicted new and existing-home sales to rise to 6.83 million this year before falling to 6.58 million next year. Separately, the National Association of Realtors[R] (NAR), Washington, D.C., is predicting existing-home sales will reach 5.73 million for the year, a pace 2.9 percent higher than 2002. New-home sales will hit 985,000, a 4 percent rise over the prior year, according to the National Association of Home Builders (NAHB), Washington, D.C.

"Housing ... has been keeping the economy afloat," while the rest of the economy has faced "serious shocks" such as the lull in economic activity that preceded the run-up to the Iraq war, according David Seiders, NAHB's chief economist.

Retention rates

Lenders have been working frantically just to handle all the incoming business--both purchase and refinance. It's been hard to make sure basic things are not falling through the cracks, let alone monitoring extra efforts to keep customers happy. Ironically, customer retention this year may have actually increased in the midst of the boom, according to data from Mortgage Guaranty Insurance Corporation (MGIC), Milwaukee.

Michael J. Zimmerman, MGIC's vice president of mortgage banking strategies, said for first quarter 2003, 29 percent of borrowers returned to the same lender when they prepaid a loan (whether for a refinance or new home purchase). This retention rate comes from a survey of MGIC's 12.5 million Lender Landscape[SM] database of borrowers.

"This represents a high-water mark for retention rates in the last four years," Zimmerman says.

In November 2002, the retention rate was 24.2 percent, and a year earlier it was 21 percent, according to MGIC's data. But Zimmerman says the rate may go down in the future as the refi boom subsides. The survey finds that the retention rate is higher for refinances than for purchase mortgages.

Half of the lenders surveyed by MGIC use Defender (TM), a voice recognition system that Zimmerman says can improve customer retention. He adds that the retention rate for his database may be higher than the retention rate for the entire industry.

Before the industry pats itself on the back for building better customer loyalty, this year's improving retention rates may just be a factor of whom borrowers could get to answer the phone. In many instances, it's easier to get your current servicer on the phone when you need a refi than just cold calling another lender.

Borrowers were not that selective when it came to who was going to do their refi, as long as they were able to lock in these incredibly low rates. Measuring customer satisfaction with a lender is quite another matter.

Homeowner anxiety

The importance of homeownership in the life of the consumer is the key reason why consumers have higher anxiety levels over problems that emerge with their mortgage lender.

After J.D. Power published its first ranking of mortgage lenders in December 2001, it was inundated with comments from mortgage borrowers at a pace 10 times the level J.D. Power experienced when rating other products and services, according to Bowler. In letters and comments from those borrowers, Bowler and his team found mortgage customers were far more anxious about their mortgage than they had found consumers to be when they rated other products and services.

Some of those comments have come from very unhappy customers. "[Some] people tell us that even though it will take thousands of dollars to originate a new loan, they've already begun the paperwork because they are so disgusted with their current service providers," Bowler says.

And while it is a "significant cost factor for them, they're just not sleeping at night and it's worth it for them to just buy peace of mind and go to a provider they have more confidence in," Bowler says.

The mortgage borrower's anxiety derives from "the fact that your very livelihood, your dwelling, your castle, depends upon staying current on your mortgage," Bowler says. "If your cable TV provider makes a billing error it's irritating, but it's only your cable TV. On the other hand, if your mortgage company makes an error, the level of anxiety that you experience is much, much greater," Bowler explains.

As a result, the mortgage customer has a much shorter fuse. It does not take much in the way of things going wrong "to upset the apple cart," Bowler explains.

More and more, it is becoming easier for consumers to act on their dissatisfaction with their mortgage lenders, Bowler says. He points to the fact there are 7,000 to 8,000 lenders, and consumers can access a range of rates either on the lnternet--at such sites as bankrate.com--or in the real estate section of their local newspaper.

Are things getting better or worse?

Is overall customer satisfaction with the industry improving or declining? According to J.D. Power's surveys, there was, in fact, a slight improvement between the first and second surveys.

Both measured overall customer satisfaction on a range between one and 10. In the inaugural survey conducted in 2001, the industry average was just below 7.0. However, in the second survey conducted last year, the average had risen slightly to just over 7.1 (10 being the best service possible).

Does the slight improvement reflect, in any way, the advent of the customer satisfaction surveys by J.D. Power? Bowler thinks it's too soon to know if that is the case. He does, however, point out that J.D. Power's surveys involving the auto industry have shown a definite improving trend line in customer satisfaction.

For example, Bowler explains, over time there has been a steady improvement in quality and a reduction in the number of "things gone wrong" in J.D. Power surveys of initial quality studies of new cars, especially in the last decade.

Bowler is based in Michigan, where he has previously spent many years working on automotive-industry surveys. "When we meet with various car manufacturers, a great many of them have literally built business strategy to understand what drives customers to such quality as reported in our statistics. In simple terms, what that means is, they're trying to understand how to influence the score," he says.

Executives at J.D. Power have, in fact, been asked sometimes whether companies are "chasing the score" or if they genuinely care about the customer. Echoing points chairman and founder Dave Power has made in the past, Bowler says, "At the end of the day we like to imagine we're shining the spotlight of the customer on an industry, whether it be the mortgage industry or the car industry, because we feel that the provider in the industry really should care about what customers should expect and how happy they are with the performance of that industry."

When industries improve their ability to meet customers' expectations, whether out of care for their customers or because they are trying to win awards, "the outcome is still the same if at the end of the analysis, the customer gets a better product or a better service experience," Bowler says.

A work in progress

The second survey produced a much larger list of mortgage companies that were rated. When asked why, Bowler explains J.D. Power learned from its first survey how it could improve its survey methods to be able to report the results for more companies. When Bowler and his team did their survey in 2001, they garnered sufficient valid survey returns to rank only eight lenders.

Two years ago J.D. Power mailed out 18,527 surveys to households from a big national research panel of 250,000 households that was demographically and geographically dispersed so that it would be broadly representative of the whole country. The company received back 11,222 surveys, Bowler explains, but many were for households without mortgages or who could not identify their mortgage holder or had some other problem.

J.D. Power ended up with 6,871 surveys, which were then separated into groups by the name of the mortgage company that was the "service provider," or the mortgage servicer. In order to be seen as statistically valid, the sample for each company needed to contain at least 100 valid survey returns, Bowler says. That eliminated a lot of companies that received fewer than 100 survey returns. In fact, only eight companies representing about 2,200 of the surveys were part of the officially released list of ranked companies.

Another 4,600 surveys came for a group of mortgage companies labeled "other." Among these, no single company had the required 100 surveys to be ranked, Bowler says.

In the survey's second year, J.D. Power adjusted its survey methods to get more valid returns for more companies. The first step was to send out a simple preliminary questionnaire to every one of the 250,000 households on the research panel that J.D. Power regularly uses. The survey simply asked if the household had a mortgage and, if so, what is the name of the company that received their mortgage payments.

From that initial mailing, J.D. Power was able to identify 65,000 mortgage-holding households that had an identifiable lender or service provider. From the group of 65,000, J.D. Power restructured the list of households to create a "quota sample" for each lender so that the distribution of surveys mailed out would reflect the market share in the outside marketplace held by each mortgage company.

After creating a 15,800-household mailing list that reflected the market share of each mortgage company, J.D. Power mailed out surveys to the list last year and received back 10,800 valid returns. That produced a large enough response to rate 32 different mortgage brands. Some of those brands disappeared over the year, due mostly to acquisitions by Washington Mutual, so 29 lenders appeared on the final list released with the 2003 survey results, Bowler says.

While all mortgage lenders face the same challenges trying to keep customers happy, there are widely differing approaches. Some companies, such as Wells Fargo, which ranks above the industry average for customer satisfaction, consider its strategies and methods proprietary and declined to discuss them in detail. However, the No. 1 lender according to J.D. Power's rankings for overall customer satisfaction--USAA--was quite willing to discuss the factors behind its success.

USAA Mortgage

USAA's mortgage business is part of the USAA Federal Savings Bank, an affiliate of USAA (United Services Automobile Association), a large casualty and property mutual insurance company based in San Antonio, Texas. The savings bank and its various operations serve the military community and its families.

As a mutual company, it is owned by its customers, which are called members. USAA's mortgage business model is strikingly different from that of most other mortgage banking companies. For one thing, there are no loan officers, according to Jim Jandrisevits, USAA's senior vice president of mortgage services. Because USAA is a federal savings bank, it is open to do business with anyone who wants to apply for a mortgage, Jandrisevits explains. However, the company does not solicit business outside its own members.

This distinction is important to USAA's ranking by J.D. Power, according to Bowler. Because the mortgage business is open to customers outside its membership, the company is eligible to be ranked with other mortgage companies in J.D. Power's customer satisfaction surveys, Bowler says. By contrast, USAA's other lines of business--such as its auto insurance--are not open to outsiders. For this reason, USAA is not eligible to receive the J.D. Power award for best in customer satisfaction in those lines of business, says Bowler.

Jandrisevits, who ran the wholesale and correspondent division of Fleet Mortgage for 13 years before coming to USAA, identifies the absence of commissioned loan officers as a key difference between USAA and most other mortgage companies. USAA does not have branches, either, and communicates with its customers by phone, the Internet and U.S. mail. Jandrisevits believes this different business model generates a different and better attitude toward customer satisfaction. Employees are trained to understand the USAA corporate culture that customers are members and they are there to serve them, he explains.

"While we don't service the loans ourselves, we do retain the servicing interest so the servicing can't be sold. We operate in one of two ways. We originate some of the loans in San Antonio in 17 states and we close them in our name. In the other 33 states, we have an alliance partner. After we take the initial phone call from the member and screen them, we hand them off to our alliance partner, who would then close the loan and service the loan. But they won't resell it," Jandrisevits says.

When USAA originates a loan, the servicing is passed on to GMAC or Cendant Corporation's PHH Mortgage Services while USAA retains ownership of the servicing rights. Neither Cendant nor GMAC can resell the servicing or solicit USAA's customers. The decision not to sell servicing was made, in part, after a survey of USAA members found they were opposed to it, Jandrisevits says.

USAA has about 120,000 loans in its $20 billion servicing portfolio. Only a small portion of its loans, from those originated in San Antonio, are held in portfolio by USAA Federal Savings Bank.

For most mortgage lenders, selling servicing to another company creates conditions that may tend to increase the number of dissatisfied customers, according to J.D. Power's Bowler.

In its first survey, J.D. Power found 37 percent of borrowers whose originating company retained the servicing "definitely would use their existing lender" again when getting another mortgage. That percentage climbed to 41 percent, when the borrower originated a loan with a lender who retained the servicing, and later refinanced the loan with the same lender that again retained the servicing. Only 19 percent of customers whose servicing had been sold by their originating lender would go back to the same company for another mortgage, the survey found.

Jandrisevits says USAA has been able to overcome the apparent customer satisfaction jinx associated with using outside servicing operations by actively monitoring how its subservicers perform and interceding on behalf of customers when a problem emerges.

Customer satisfaction in servicing is the responsibility of an internal unit at USAA called MAGIC, which stands for Members Always Get Incredible Care (not affiliated with Westport, Connecticut-based service and training consultant Communico Ltd.'s program of the same name).

"They can call us if they have any trouble with the servicer," Jandrisevits explains.

USAA keeps tabs on customer quality by sending out performance evaluation questionnaires (PEQs) to a broad sample of thousands of customers a month. "On the mortgage side, all our management reads every one of those, and we really go through them. Anytime we turn up anything that really isn't right, we do go back and make it right for the member," says Jandrisevits.

If the problem can be traced to a single employee, USAA will then counsel the employee about handling such problems in the future, he adds. USAA will also go in as an intermediary to resolve a conflict with any third party involved in the mortgage, he says. The initiative for that action can come either from a PEQ or a member calling in to report a problem.

USAA also took steps to deal with the surge in originations. When applications began to rise to levels greater than what USAA could handle on a monthly basis, the company began to extend rate locks for customers from 30 days to 60 days. At peak times, even this was not enough to handle volume.

"For a while we had to turn away some members if it was a refi and we did not hold their current loans," says Jandrisevits. "We would tell them they could get a streamlined refi with their original lender easier than coming to us."

Because USAA is not a servicer, it is free to concentrate more of its energies on seeing that the whole mortgage relationship gets off on the right foot, and that means matching the customer's needs with the right loan product. Jandrisevits believes USAA's business model makes it more likely this will occur than with a traditional mortgage company.

"When our members come to us, they're really coming to us for advice, and we're really trying to put them into the best product that suits their needs. We're not trying to sell them something, which I can say is not the case for a lot of mortgage companies around the country because they've got originators that are on 100-percent commission," Jandrisevits says.

USAA relies almost entirely on its call center for business. There are no retail offices except the bank's branches in San Antonio. There are no loan officers calling on Realtors to get them to refer homebuyers. Nearly all of the contact between its members and USAA occurs by phone and over the Internet.

USAA may represent a unique case and one that other mortgage companies probably will find hard to surpass in customer satisfaction, according to Bowler. "An organization [like USAA] that's been crafted and designed to cater to the needs of such an exacting audience or customer group necessarily has to excel," Bowler says. "That's because their customers expect nothing but the very, very best."

Furthermore, its members usually have come to USAA prior to applying for a mortgage after having already been a USAA customer for auto or home insurance. In this case, USAA's reputation for customer satisfaction and its sense of trust has already been established for most members before they make their first inquiry about applying for a mortgage, Jandrisevits says.

First Horizon Home Loans

Ranked an admirable No. 5 in customer satisfaction in the 2003 J.D. Power survey, First Horizon Home Loans is in the fourth year of a new system it adopted to promote and monitor customer satisfaction. The system is dubbed Make a Great Impression on the Customer, or MAGIC, and was developed for First Horizon by Communico Ltd., Westport, Connecticut.

MAGIC measures customer satisfaction from origination to closing to servicing, says Marion McDougall, executive vice president for operations. Unlike USAA, First Horizon services its own $64 billion portfolio of 480,000 loans.

McDougall identifies five key areas in First Horizon's MAGIC customer satisfaction approach that apply to all contacts with the mortgage customer. They are: (1) Make a connection with customers. Have the right greeting and express that you are there to help them solve whatever issue they have called about. (2) Act positively. (3) Get to the heart of the matter. Be sure to listen carefully. (4) Interpret the facts. (5) Close with an agreement.

The MAGIC system has worked out well for First Horizon, which is able to resolve customer calls on the first contact in 95 percent of the cases. Its goal is 98 percent. First Horizon began the MAGIC program three and a half years ago.

"It took about a year to embrace, but is now well-established in the organization," McDougall says. As part of its customer satisfaction program, First Horizon monitors phone calls and uses the MAGIC scoring method to rate the response. The monitoring system is designed to "inspect what you expect" to provide in customer care, McDougall says.

Because First Horizon had been working hard to improve customer satisfaction and was aware of the results internally from its MAGIC system, its management team was not surprised that the company did well in the J.D. Power survey. It was, how ever, surprised to rank so high among its competitors.

First Horizon did not know it was being rated, McDougall recalls, until "I got e-mails from peers in the industry asking, 'Marion, what are you doing [to promote customer satisfaction]?'"

Shortly after hearing of the results from the survey, First Horizon asked J.D. Power to send a team to Irving, Texas, and spend a couple of days going over the findings in detail. "How do we get from No. 5 to No. 1?," the managers at First Horizon asked.

The J.D. Power representatives told First Horizon that households in the survey found the lender's No. 1 a gap in service was in managing expectations--that is, letting the customer know how long it would take to resolve a particular problem or issue. First Horizon has, since last year, set about closing that gap.

"It's the No. 1 focus today," McDougall says. "If it is going to take a week, tell the customer it will take a week. Once the customer understands it takes a week, they're OK with it."

First Horizon is not resting on its laurels, but working diligently to improve its ranking. "It was a tough year for everyone because of high volume. I'd like to say we provided perfect customer service, but it hasn't been easy. Customer service levels are not always where I want them to be," says McDougall.

Despite rising volumes for two years, First Horizon has maintained its customer-satisfaction standards without turning away new business. The burden of maintaining high service while business is booming has come "at a huge personal cost" to the workers who handle the queries and complaints, says McDougall. Many have worked longer and longer hours, she says.

Countrywide Home Loans

Countrywide Home Loans is looking at customer satisfaction in a holistic fashion, according to Andy Bielanski, managing director of marketing for Countrywide. By that, he means the company looks at its relationship with the customer from the initial marketing effort through the final payment on the loan.

Traditionally, that has not been the approach in the mortgage industry, Bielanski says. There has been a wall between the sales culture on the production side and cost-control culture in servicing that leads the two areas to have a different perception of the customer, he explains. As a result, customer satisfaction was not the priority it should be. This is especially true in servicing, where it can help in retaining customers for refis, snagging new mortgages and cross-selling.

Countrywide, Bielanski says, has made a commitment to make customer satisfaction an integral part of the strategic thinking of every part of the company. "The vision behind this is to enhance and optimize a customer culture at Countrywide," he says.

Countrywide identified customer satisfaction among its top 10 corporate strategic planning goals, Bielanski says, At that level of priority, senior management and every business unit must develop tactics and a strategy toward improving customer satisfaction, he says.

To set goals for various areas of the business and to measure performance against those goals, Countrywide has formed a group called Proudly Achieving Customer Excellence (PACE). Within that group it has customer-satisfaction experts who provide tools to the business units that allow them to create measures of customer satisfaction and monitor them. PACE is responsible for "pushing and prodding" senior management "to enhance and maximize" the customer culture, not just for mortgage borrowers, but other groups that have a relationship with Countrywide, from investors on Wall Street to Realtors, says Bielanski.

In its 2002 proprietary survey of customer satisfaction, Countrywide measured the number of touch points the company has with the customer and where things can go wrong, as well as the level of anxiety that customers attach to different parts of the mortgage experience.

The survey revealed that the average life of a loan was three years and that 60 percent of the touch points during that experience--from loan application to loan payoff--were in the servicing area. However, Countrywide learned that it's in origination "where most of the emotion happens."

Echoing a point made by Bowler, Bielanski notes "there is a lot of anxiety" about origination, and the closing process is "the most damaging overall to the mortgage industry" in terms of customer satisfaction.

Customers are most unhappy about unforeseen fees and costs, Bielanski says.

Countrywide is determined to make all those transactions seamless and smooth, and leave the customer happy enough to refer someone else to Countrywide. "You have to do something excellent to get someone to refer you," says Bielanski.

Countrywide's task is to create brand loyalty to Country wide when a loan is being serviced, according to Bielanski. This is more attainable for loans originated at Countrywide's retail branches and more difficult for customers who originate with brokers and correspondents but whose loans are serviced by Countrywide, Bielanski says.

Two-thirds of Countrywide's originations come from outside its retail network, Bielanski says. As J.D. Power's Bowler has noted, those customers who were originated elsewhere and come to another lender for servicing tend to be among the least satisfied mortgage customers. This suggests a lingering problem for the industry when the business model used is wholesale originations to feed a large servicing operation.

Using the ability to get repeat business as a measure for success, the industry's performance is fairly dismal, Bielanski says. Countrywide scores much higher than industry norms on a study of retention and recapture of mortgage business done regularly by PricewaterhouseCoopers, New York. "We have been among the top three of 15 peers" in the industry, Bielanski says.

Countrywide faces the task of getting the customer who originally went through a broker or correspondent to instead apply directly to Countrywide for his or her next loan. "Our job in marketing [to] our portfolio is to beat them at their own game," says Bielanski, referring to the brokers and correspondents.

Countrywide has found it's easier to get repeat business in refis. For example, in early 2002 Countrywide sent out 30,000 personalized e-mails to customers with higher interest rates, telling them how much they could save with a refi, and got more than a 20 percent response. The phone banks were inundated, and Countrywide had to modify that program to send out the e-mails in smaller batches.

But Countrywide is also trying to improve its repeat business in home purchase lending. When servicing first learns of a loan payoff, for example, Countrywide tells them about the "seller's advantage program," which is targeted to people who are selling their home.

"I don't think Countrywide has figured out the consumer yet," Bielanski admits. "Nor do I think the industry has figured out the consumer. We all have a long way to go." But, he adds, Countrywide is "feverishly working on it."

Robert Stowe England is a freelance writer based in Arlington,Virginia. He can be reached at rengland@us.net.