Is the mortgage origination market reverting to the mean? By that, of course, I mean the traditional 60/40 or 70/30 relationship between purchases and refinances.
It sure sounded that way yesterday when the Mortgage Bankers Association (MBA) reiterated its forecast for this year and next. According to MBA economist Mike Fratantoni, the most likely outcome for 2013 is an origination market with $835 billion in refinances and purchases growing to $597 billion.
If, as forecasted, rates rise to 4.5% in 2014, the MBA said that the refinance-to-purchase mix shift could accelerate with purchases climbing back to $700 billion levels and refinances coming in at $337 billion. This would bring the balance between purchases and refinances more in line with healthier, historical levels, and set the stage for a more sustainable market in 2015 and beyond.
Fratantoni made it clear that while these were the likely outcomes, the decline could also be more gradual (or more pronounced). He noted that new household formation was growing again, that buying versus renting was a better option in many markets and that overseas uncertainties, while disruptive to the stock market, have a positive effect on mortgage rates.
By the way, the MBA has one of the more conservative forecasts for originations this year. But suppose the MBA’s forecast is on target? What would it mean for our industry short term? Definitely hard times for originators that haven’t built out a purchase strategy. Certainly, greater competition and with it: margin compression. The shift from a less time sensitive refinance business to a faster-paced, more demanding purchase market will also be tricky. And it will occur at the same time our industry is ramping up for the plethora of new rules that are either coming or taking effect in 2014.
Are lenders ready for this scenario? The attendees I talked with at the show, and the clients I see every week, seemed to be. They’ve been investing in technology to lower their costs so that they’ll be able to compete more effectively in a smaller market and still be profitable. They are also interested in new CRM options to improve their marketing to Realtors and consumers.
Once the momentum changes from refinances to purchases, I’d expect to see more entrepreneurial players leverage technology to reposition themselves and deposition competitors.
For example, I can see aggressive mortgage banks using promises of faster decisions and closings to recruit top-performing LOs. Similarly, technology will be critical in executing lower-cost, consumer-direct strategies.
The lenders who are getting ready now will work through the downturn and be well positioned when the mortgage industry starts growing again in 2015 with a more normal 70-to-30% purchase-to-refinance mix.
