Despite all of the headwinds caused by BREXIT, the Fed’s December rate hike (and rising interest rates, in general), rising home prices, and the outcome of the presidential election, 2016 was a fairly good year for the mortgage industry. As of press time, it appeared as though mortgage originations were on track to reach about $1.9 trillion for the year – up from about $1.6 trillion in 2015 – with refinances accounting for nearly half of all volume, according to the Mortgage Bankers Association’s (MBA) latest available estimates. Lenders saw a nice refinance “boomlet” in the third quarter, and on top of that, purchase volume increased about 10% during the year.
But it was also a year of change – or perhaps “disruption” is a better word – due mainly to increased regulation and the subsequent scramble to adopt technology and automation to originate loans compliantly and efficiently. During the first half of the year, many lenders were still focused on dealing with the TILA-RESPA Integrated Disclosures (TRID) rule, with all its complexity, ambiguity and brutal operational impact, whereas for the second half of the year, they were more focused on preparing for the daunting new reporting requirements under the Home Mortgage Disclosure Act (HMDA), taking effect in January 2018.
By late 2016, most lenders seemed to have TRID well under control (aside from the problem that some investors still feel unsure about the safety of TRID loans due to TRID-related defects), and based on recent interviews, most lenders seem fairly confident in being able to meet the upcoming new reporting requirements under HMDA, as well. So, although 2016 started with a lot of trepidation regarding these two new regulations, by the end of the year, most lenders (and their vendor partners) had gained confidence about their ability to handle both.
Of course, absorbing the cost of dealing with these regulations is another topic.
The other two big changes for the mortgage industry in 2016 – and how disruptive these will be is, of course, yet to be fully realized – were the results of the November election and whether the incoming Trump administration will succeed in rolling back some of the regulations that are restricting credit in the mortgage market and the Fed’s move to raise rates, along with the likelihood of more rate hikes coming later this year. These factors, although potentially offsetting in their effect, could significantly reshape the mortgage market – maybe not immediately, but certainly by the end of 2018. Will the Trump administration seek to scale back the Dodd-Frank Act? Will it weaken or dismantle the Consumer Financial Protection Bureau (CFPB)? And, importantly, will it finally come up with a plan to get Fannie Mae and Freddie Mac out of conservatorship? Or will this administration have much, much bigger issues to deal with?
Secondary Marketing Executive recently interviewed a slew of top mortgage executives and housing experts to get their perspectives on what events most impacted the mortgage industry in 2016 and what factors will likely have an impact this year. The response rate to our late December email survey was so fantastic that we could not include everyone here on these pages; so, we encourage readers to check out the remaining responses on MortgageOrb.com.
In this round of responses, we have Ruth Lee, senior director of mortgage services at Titan, a MetaSource company; Mark Milam, regional vice president for Northpointe Bank; Daniel Jacobs, executive vice president of retail at MiMutual Mortgage; Kevin Wall, president for First American Mortgage Solutions; Rich Swerbinsky, executive vice president of national sales and strategic alliances for The Mortgage Collaborative; A.W. Pickel III, president of the Midwest division for AmCap Mortgage Ltd.; Matt Clarke, chief operating officer for Churchill Mortgage; and Rick Roque, founder of Menlo, a consultant for companies in the mortgage industry.
SME: Reflecting on 2016, what would you say were the most important changes the mortgage industry saw and why?
Lee: For much of 2016, the industry enjoyed relatively robust origination volume. However, the election and the Fed’s raising of interest rates signal the end of an era. The industry is now a full political and economic cycle from the 2008 meltdown. Since the election, we have seen a surge in bond yields and a concomitant increase in interest rates. Although higher rates and higher yield may court investors, they will also make loans less affordable for borrowers. This has typically been met with looser underwriting and more aggressive product development.
Milam: One of the biggest shifts to occur in our industry was the consolidation of jumbo lending to big banks, while smaller correspondents and community banks gained traction in conforming and government offerings. Leveraging low cost of funds and cross-selling capabilities, larger players such as Wells Fargo, Suntrust and Bank of America were able to capture higher net worth clients. But, the smaller, more agile entities gained traction with conforming and government loans, including renovation products. In the past decade, we have not seen such a divide between jumbo and conforming lending.
Jacobs: 2016 really had two major themes. TRID dominated the first half of the year with the practical implementation of the sweeping changes it presented and required of us. The latter part of the year was a moment of reality and adjustment to the rising rate environment we’ve been anticipating for several years. It’s a little unusual to experience a year that presents equal part operation and equal part sales challenges, but nothing about 2016 – in or out of the mortgage business – was typical, I think we can agree.
Wall: Regulatory reform, in particular TRID, caused a big distraction leading up to and through 2016. Now that the dust has settled, there are mixed reviews as to how much this well-intended rule actually enhanced or improved loan quality and consumer experience, though our industry’s increased focus on these areas has encouraged innovation.
Swerbinsky: I think we’ll look back at 2016 as the year that the mortgage industry caught up to the rest of the world, from a technology and innovation perspective. After years of being forced to react to major regulatory changes, technology providers introduced some very compelling products and services, and lenders were able to allocate resources to assessing them.
Pickel: One of the most important changes in 2016 was the continued forward press into better customer-facing tools at the beginning of the loan application process. These products are intuitive, easy to fill out and easy to understand. Along with that was Fannie Mae’s announcement of its Day 1 Certainty initiative. This type of program improves the mortgage experience for borrowers by allowing for much faster approvals. I would expect to see more programs like this in the coming year. Finally, the MBA has seen continued growth in membership and has been able to speak with one voice as it has grown. I think this trend in association growth will continue.
Clarke: I believe TRID – and the uncertainty surrounding the enforcement of it – was the most significant change in 2016, along with the introduction of other regulations. The changes to TRID resulted in further difficulty surrounding selling loans in the secondary market, which ultimately drives up the cost for consumers – albeit that increased cost was masked by continued low rates. The cost to originate loans also continued to increase as a result of compliance costs, and although more technology and automation is available today, the efficiency gains haven’t fully materialized to offset the cost of compliance. Meanwhile, all of the regulatory constraints, although challenging for many companies, have driven the industry to produce a higher-quality product – and the good companies are experiencing success despite these changes. In fact, the combination of a strong housing market and continued low rate environment has been beneficial to most lenders, but that most likely won’t continue into 2017. We’re already seeing rates begin to rise and housing begin to slow due to a lack of inventory.
SME: Looking forward to 2017, what are your predictions for home sales and origination volume? What impact do you think rising mortgage rates will have on volume and operations?
Lee: Although American workers have finally seen some income growth, after a decade of stagnation, is it enough to encourage them to invest in homeownership? Will it be mitigated by the strong appreciation of housing values? Of concern, much of the improvement in the job market is in lower-wage, service industry jobs and housing construction, while higher-income tiers have seen more modest income growth. If Washington fiddles with or eliminates the mortgage interest deduction, it will significantly impact the cost-benefit calculation of homeownership across the board. Although refinance volume will be negatively impacted by rising rates, we should see significant growth in second-lien and home equity line of credit (HELOC) originations. The purchase market promises a strong showing in 2017, with housing starts projected to increase through 2020.
Milam: If the economy continues to improve, it bodes well for home sales, and we do expect to see purchase originations increase. That being said, overall volume will decline due to a significant reduction in refinance originations (40% to 50%).
Jacobs: For the industry, I see origination volume remaining flat in 2017 compared with 2016. But the rising rate environment will create some real winners and losers in its wake. Lenders whose businesses have primarily been focused on purchases and cash-out refinances will come out ahead with models positioned to capture the business available in 2017. However, we are going to see a lot of consumer-direct refinance shops merge or shutter in 2017, as the rate and term refinance market will dry up quickly.
Wall: Originations, especially refinance volume, are very dependent on interest rates, and with the unexpected lows in 2016, we saw a dramatic increase in refinance volumes. With interest rates now rising, the expectation is the refinance market will slow significantly, while opportunity around home equity and HELOCs will increase. When there’s rapid change like this, vendor selection becomes more crucial. As lenders revise their strategies for targeting customers and delivering home equity products efficiently and profitably, having the right tools and support can make all the difference. Advanced data and analytics will become increasingly necessary for lenders to make informed decisions quickly.
Swerbinsky: Despite what is likely to be a higher interest rate environment, I see home sales increasing by 10% to 15% in 2017, compared with 2016, due to increased consumer confidence around the value of real estate and the economy in general. With refinance volume likely to be cut to close to half, I see total mortgage originations for 2017 coming in at around $1.7 trillion.
Pickel: As job growth increases, so does the purchase mortgage market. I believe we will see $2 trillion in mortgage volume in 2017 due to stronger job growth. Refinancing will slow, but we will have pockets of increased activity due to an expected increase in home values. With rising rates, companies will focus on increasing efficiencies, as a purchase money mortgage market will decrease profit margins. This will also severely hamper companies that have focused most of their attention and efforts on refinancing.
Clarke: Looking to 2017, I believe home sales will continue to grow, as there is significant pent-up demand due to a shortage of inventory in many major markets. We hope that the new administration will begin to loosen the regulatory noose, provide corporate tax relief, and create incentives for companies to invest in people and a stronger job market. This will lead to a spark for housing as people move to better jobs and relocate, which puts more homes on the market and opens up inventory for new home buyers. As far as rates go, I think they will settle down in the first quarter of 2017 and then will most likely fluctuate throughout the year. Still, I think they’ll level off slightly higher than where they have been for the last few months.
SME: What other factors do you see reshaping the mortgage market in 2017?
Lee: Although the future of the CFPB and Dodd-Frank is uncertain, there are certainly more changes for mortgage bankers on the horizon. Much of the industry is working to insulate their profits and losses against leakage and risk with “fintech.” Growing investor demand for quality data and more transparent origination will ensure fintech is a major winner in 2017. Both the election and the recent PHH ruling suggest there may be significant changes in the regulatory environment. There are miles to go in the appellate process for PHH, and the industry will have to wait and see what changes Washington will make to both the CFPB and Dodd-Frank. Of specific note, will the new attorney general and leadership at the U.S. Department of Justice be more friendly to mortgage banking?
Milam: The biggest will be the impact of any deregulation or restructuring of Dodd-Frank. Mortgage companies and banks have invested an extraordinary amount of resources into staff and technology to meet the demands of this legislation. Reshaping to make “common sense” will be welcome. Scrapping it or deregulating a la early 2000s could likely cause short-term pain (e.g., extensive layoffs and software upgrades) and, potentially, long-term pain.
Jacobs: I think 2017 will be a breakout year, with mortgage technology focused on an improved consumer experience. We continue to interact with our borrowers and referral sources like the Flintstones, while other industries have been working like the Jetsons for several years. We have seen some innovative technology providers emerge that are focused on improving how we interact with our customers, how we leverage reputation management in the digital age, and how we create a more modern and higher-level experience for our customers. They are able to do this despite the arduous requirements of obtaining a mortgage in today’s environment. Lenders will not compete on product differentiation in 2017. They will compete on delivering a better experience, and there are now technology choices available for progressive and competitive mortgage originators to leverage to achieve this.
Wall: There’s the unknown of what changes the new administration under President-elect Donald Trump will bring, particularly to address regulatory and compliance requirements. Regardless of what happens, quality will never go out of style, so we should remain committed to the pursuit of certainty in lending and improving the home buying experience for consumers. There’s also an evolution unfolding with the government-sponsored enterprises to simplify and speed up the mortgage underwriting process. Both Fannie Mae’s “Day 1 Certainty” and Freddie Mac’s “Loan Advisor Suite” share similar objectives to improve quality and consumer experience. These initiatives are offering some representation and warranty relief to lenders, starting with verification services and collateral valuation. As an industry, it’s time we look at opportunities to transform and evolve processes.
Swerbinsky: There are never any dull years for the mortgage industry, but 2017 promises to be a very interesting one, especially with a pro-business, anti-regulation president with a real estate background taking office in January. I expect proposed changes at the CFPB, Fannie Mae and Freddie Mac to dominate the headlines early and often in 2017. Mergers and acquisitions, cybersecurity, paperless closings, and the continued influx of technology and innovation providers and products also are likely to reshape the mortgage market in 2017.
Roque: This may surprise a lot of people, but I think refinances will be back in six months. Why do I think that? Mortgage lenders are making high-rate deals right now and are, therefore, planting the seeds for the next mini refi boom. They’re making loans today at 5%, but there is a big enough price premium in these deals that they can call the borrowers back six months from now and offer them a 4.25% rate and still make money. But, in order for this to work, rates will largely need to remain where they are. The only thing that would jeopardize this scenario is if rates go higher. If that happens, all bets are off, and there could be even bigger problems. Mortgage refinances drive auto purchases, home improvement, vacations and everything. A serious headwind rate-wise creates a ripple effect across housing, auto finance and even student borrowing. Rate increases seriously undermine the growth of the economy. But I’m optimistic that rates will stay roughly where they are now, if not move a little lower.
Pickel: I think we will see the role of the mortgage loan officer (LO) continue to evolve from simply an order taker into a customer experience manager. This trend is already happening; however, the upcoming purchase market will accelerate it. In a purchase market, it is vital that customers close on time. A more diverse LO population will help provide a better experience for a variety of borrowers. Also, invisible, behind-the-scenes technology will continue to improve customer-facing application products at point of sale. As for regulations, some relief is likely, though the focus will not be on this. The industry has shown it can adapt to the regulations, but the regulators need to show that they can adapt to provide clarity to lenders. This will be accomplished by providing policies that issue clear guidance, not by issuing enforcement to illustrate an unclear policy.
Clarke: One obvious factor for the mortgage market in 2017 will be the direction the incoming presidential administration takes on the regulatory environment. Providing a little relief on enforcement may spark creativity in the market and generate some options for people who qualify for mortgages but do not fit into the highly regulated small box that exists today. Positive change could also potentially stem from the efficiencies that are the by-products of a greater adoption of technology. Technology is becoming more affordable and accessible, as the competition for automated solutions has increased – more advanced systems are now being made available to companies at very affordable price points.