As we look farther into 2015 and prepare ourselves and our organizations accordingly, it is crucial that we make technology, operational efficiency and creative organizational structure main priorities. With an almost stagnant housing sector and dismal growth projections, remaining competitive and adaptable are practically required in order to stay in business during this tenuous time. And if you think I’m being dramatic, just take a look at the numbers released by Freddie and Fannie.
Freddie Mac’s November Economic and Housing Market Outlook forecasted that the U.S. economy will sustain about a 3% growth rate in 2015 due to job growth, income growth and a decrease in unemployment. Additionally, Freddie predicts home appreciation will drop to 3% in 2015, down from 4.5% in 2014 and a whopping 9.3% in 2013.
Good news, right?
However, mortgage interest rates – seeming to have nowhere to go but up at this point – will likely rise by around 1%, from below 4% in 2014 to 5% by the end of 2015.
Additionally, single-family mortgage loan originations are predicted to decrease by an additional 8%, due in part to a steep decrease in refinancing volume. Refinancings are expected to account for only 23% of originations in 2015; they had previously made up more than 50% in recent years.
Fannie’s predictions were quite similar, with projections of GDP rising by 2.5%, home appreciation rising by 4.9%, interest rates to rise by about 0.3% and loan originations to decrease by 7%. So while purchase originations may be up, the decrease in refinancings will significantly impact overall activity.
Another obstacle faced by those in the mortgage industry is regulatory pressure. The industry will continue to face severe regulatory oversight and crippling enforcement actions this year.
In fact, in Fannie Mae’s 2014 Third Quarter Mortgage Lender Sentiment Survey of senior mortgage executives, 72% of lenders said regulations have had a significant impact on their business, and 72% reported spending more on compliance in 2014 than in 2013.
With regulatory changes brought on by the RESPA-TILA rule, companies must implement sweeping technology changes and address “big data” like never before. All of these factors are added costs and a drain on resources.
So what does this mean for lenders and those in the mortgage industry? If the words “refocus” and “innovate” crossed your mind, then you’re on the right track. Mortgage institutions need to modify their business to address new regulations, new technology and new competition. As margins decrease, decision makers need to decide whether they will refocus the company’s revenue stream and divert talent pool to that side of the business, consider variable capacity, pursue new and more efficient technology or resort to consolidation.
Emerging players in the mortgage marketplace can teach traditional players a lesson. These entrants, including Costco and Home Depot, have the existing consumer base and resources available to make the origination process seamless and efficient.
With high compliance costs and a competitive marketplace, lead generation and customer satisfaction are vitally important to gain market share. Costco and Home Depot not only have wide access to consumers, but also have the resources to implement compliance technology and big data solutions that will help them remain compliant and efficient, resulting in an excellent customer experience.
For companies unable to integrate such technologies into their processes, the option of refocusing efforts may be the next best answer. Currently, we’re seeing HELOC and home equity become more popular, while first mortgage is on the decline.
Companies must invest in training and developing their workforce, so that employees can be easily repurposed to the home equity side of the business.
Similarly, once first mortgage becomes more popular, the workforce can then be easily diverted back to that side. An added bonus is that from a technology standpoint, HELOC and fulfillment are very similar, decreasing the cost of updating existing systems.
On the other hand, since companies are already grappling with maintaining compliance, decision makers would be wise to consider refocusing efforts toward selling loan portfolios on the secondary market. This strategy will offer added revenue streams at minimal added costs.
The last two options will involve thorough research and planning on the part of decision makers. We’re currently seeing a trend of outsourcing home equity to third parties.
While outsourcing and variable capacity may sound risky – especially considering GSEs, the CFPB and the OCC requirements explicitly state that lenders are responsible for their vendors’ and outsourcers’ work from a compliance standpoint – it is an excellent option in a volatile and seasonal mortgage market.
If variable capacity is not a possibility for businesses, usually small to midsized entities, then consolidation may be the best route. Consolidating parties may be able to synergize their technologies and workforce, which will result in a more efficient and competitive force to be reckoned with.
However, the borrower experience mustbe the deciding factor. Should their joint efforts result in longer turnaround times or gaps in compliance, then the venture will be for naught.
Now and moving forward, we will find ourselves in a “survival of the fittest” case study. Referencing Darwin’s theory, “the fittest individuals are simply the ones who have the combination of traits that allow them to survive and produce more offspring that in turn survive to reproduce… What makes an individual “fit” all depends on the environment at the time and the combination of traits that are most suited to flourishing in it.”
As mortgage industry participants, we will see who the “fittest” are; the companies with the strategy and resources that allow them to adapt and prosper in our current environment. There is a widely held expectation that approximately 25% of today’s lenders will no longer be in the market by 2020; the 75% of lenders thatremain will be the ones who adapted.
