Happy New Year from Secondary Marketing Executive! We look forward to bringing readers more in-depth coverage of the mortgage lending industry in 2017.
This should prove to be an interesting year for the industry, not just because there is a new administration in the White House – one that could end up scaling back some of the onerous regulations that have restricted lending since the financial crisis – but also because of the unique set of circumstances the industry is facing. Never before has there been a housing market where regulation is so strict, credit so tight, rates so low, home prices so high, inventory so low, and technological innovation so profound.
On the negative side, one could argue that home sales are relatively stagnant, which, naturally, is causing a decrease in mortgage volume. On the positive side, one could argue that although volume is decreasing, the industry as a whole has never operated so efficiently: Mortgage delinquencies and defaults are back at pre-crisis levels, fraud rates have fallen dramatically, and thanks to technology and automation, lenders have been originating “pristine” (i.e., nearly defect-free) products.
Although this push to meet compliance has come at a tremendous cost – mostly in the form of increased investment in technology – it has also been a boon, in that lenders have cut operating costs and significantly reduced the risk of loan buybacks. What’s more, this investment in new technology has brought many lenders’ systems into the 21st century – not only has it helped them meet compliance, but it has also helped them vastly improve the customer experience. SME expects to see even more innovation in the mortgage technology space in the coming year.
At this point, the biggest concern for the industry is whether rising rates will significantly slow volume. Most economists are forecasting that rising rates will decimate the refinance market in 2017, but not everyone agrees on how much of an impact rising rates will have on purchases.
In fact, some feel rising rates might not even take that big of a bite out of the refinance market. In our end-of-year review (see page 16), Rick Roque, president of mortgage consultancy Menlo, says lenders could end up creating a second “mini boomlet” for refinances by midyear simply by “making high-rate deals right now” and then calling borrowers back six months later with rates lower than the market average. Roque, however, concedes that rates “will largely need to remain where they are” in order for this to work.
With the Fed expected to raise short-term rates at least two more times in 2017, it seems more likely that the refinance market will dwindle to just a tiny fraction of what it was in the first three quarters of 2016.
But what about the impact of rising rates on purchases? Some economists point out that the Fed is basing its decision to raise rates on improvement in certain macroeconomic indicators – in particular, job and income growth, which, in turn, should offset the impact from rising rates. Although this makes practical sense, an almost indeterminable factor is whether rising rates will impact home buyer sentiment. There is a psychological factor to rising rates: Will prospective home buyers continue to view the U.S. real estate market favorably, when everyone else is “freaking out” over rising rates?
On the flip side of that is the fact that buying a home is one of the most important decisions a consumer will make in his or her lifetime – and the timing is often based more on a borrower’s individual circumstances than the strength of the overall economy. Yes, people still buy homes in the worst of times. They just tend to get less house for their money.
Still, the psychological impact of rising rates shouldn’t be underestimated. A survey conducted by real estate brokerage Berkshire Hathaway in December shows that more than three quarters of prospective homeowners feel increasing rates will have a negative impact on home sales this year.
If they already felt that way just weeks after rates began to rise, how will they feel six months from now?