What a disruptive year 2016 was for the mortgage lending industry. During the first half of the year, most lenders were still dealing with the aftermath of implementing the TILA-RESPA Integrated Disclosures (TRID) rule, with all its complexity and brutal operational impact, whereas in the second half, they were more focused on preparing for the equally daunting new reporting requirements under the Home Mortgage Disclosure Act (HMDA), which takes effect January 2018. Interestingly, by late 2016, most lenders seemed to feel they had TRID relatively under control (aside from the fact that some investors still feel unsure about the safety of TRID loans), and further, most seemed confident in their ability to meet the new reporting requirements under HMDA, as well.
Helping lenders gain confidence in their ability to handle both of these complex regulations were the efforts of the mortgage software vendor community, which made great strides in developing innovative new tools to make mortgage origination faster, more efficient and more compliant. As just one small example of how mortgage software solutions are now revolutionizing the industry, First American Financial Corp. reported in December, by way of its Loan Application Defect Index, that the rate of defects in mortgage applications had decreased considerably during 2016 as a result of lenders using automated verification tools. Other innovations, such as Quicken Loans’ Rocket Mortgage and similar online platforms, continued to set a new bar for how mortgage lenders can improve the borrower experience and gain market share. Meanwhile, rising home prices, a general lack of inventory and a lack of affordability were headwinds that slowed home sales and left many potential first-time and underserved home buyers on the sidelines – despite the low, low mortgage interest rates that prevailed during the first three quarters.
But arguably, two of the most disruptive events came at the end of the year: the results of the November election – including whether the incoming Trump administration will succeed in rolling back some of the regulations that are restricting credit in the mortgage market – and, of course, the Fed’s move to raise rates in December, along with the prospect of more rate hikes coming later this year. Both will likely have a significant impact on mortgage lending in 2017 and beyond.
Despite all the disruption, 2016 was a fairly good year for the mortgage industry in terms of origination volume. According to the Mortgage Bankers Association’s (MBA) latest available estimates, mortgage originations for 2016 are on track to reach about $1.9 trillion, up from about $1.6 trillion in 2015, with refinances accounting for nearly half of all volume. Lenders saw a nice refinance “boomlet” in the third quarter, and on top of that, purchase volume increased about 10% during the year.
So, what factors do mortgage lending executives think were the most significant for 2016 – and what factors do they think will reshape the market this coming year? To find out, MortgageOrb recently interviewed Nancy Alley, vice president of strategic planning at Simplifile; Les Parker, senior vice president of LoanLogics; Pramod Karachur, project manager at IndiSoft; Eloise Schmitz, co-founder and principal at LoanNEX; and John Ardy, CEO of Resitrader.
Q: Reflecting on 2016, what would you say were the most important changes the mortgage industry saw and why?
Alley: On the origination side, the industry worked through the aftermath of TRID and moved from a “staff up to meet compliance” approach to a “technology forward” approach, leveraging tools to automate collaboration with key trading partners like settlement. Although the transition is still evolving, there has been a shift from reactive (human) to proactive (technology) that will continue to grow next year as lenders shift from a document-centric process to a data-driven process, with new data delivery requirements by the government-sponsored enterprises (GSEs).
Parker: 2016 was the year the use of automated technology to ensure loan quality truly took hold among large numbers of lenders, although it wasn’t entirely ubiquitous. The unwieldy, capricious Consumer Financial Protection Bureau (CFPB) regulatory demands and enforcement remained the biggest issue in the mortgage industry, yet the demands on people and processes rewarded entities that applied the right technology to keep cost in check and avoid a process freeze. For others, productivity suffered, and margins continued to be squeezed.
Karachur: The elections! For the first time in the last eight years, the Democratic Party has lost more than 1,000 seats to the Republican Party. Trump is now president-elect, with strong support in the House and Senate and many other places. This undisputed control of the Republican Party is going to have a big effect on the financial industry, including the mortgage industry.
Ardy: The presidential election and its impact on interest rates was definitely the biggest news of 2016. Also, we are waiting to see what changes there may be to financial regulation. If capital requirements are reduced for non-agency securities, it could have a significant impact on product expansion and overall market liquidity.
Schmitz: The most impactful change I saw in the mortgage industry in 2016 was the bottoming out of rates in July and the rising rate environment that followed. Since the low in July, mortgage rates had gone up about 80 basis points by the end of 2016. This change in rates has already had a significant impact on loan volume and is beginning to create a shift in the market toward purchase mortgage originations.
Q: 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?
Alley: Rising rates will not only lower volume projections, but also change the mix of business from refinance to purchase. Even with rising rates, people still sell homes and move. It will make the volume more seasonal and aligned with a typical purchase pattern of moving during the summer months and lower holiday volume. The product mix creates different challenges for lenders, as the Realtor will be driving settlement selection, causing lenders to relook at their processes to ensure they are working with approved vendors, as well as be needing to look at technology options to streamline collaboration of data and documents with a much wider base of settlement partners.
Parker: Fortunately, the purchase money market is fundamentally strong, so mortgage rates will have little impact. Wage gains and job stability provide a good backdrop for a healthy number of qualified borrowers. “Volatile” is the watchword for 2017. Origination volume is going to be wild due to a hot and cold refinance market. Mortgage rates will not take a calm and stable single-direction path – especially if the disparity in central banker policies continues and currency devaluations persist. Due to a strong dollar, a significant drop in yields should occur in the first quarter of 2017, followed by a significant investor allocation into riskier assets in the second half of the year, which is referred to as risk on investments. The rate declines will lead to a nice resurgence in refinance activity, which will test short-term operational capacity. But it will also lead to liquidity problems with margin calls from hedgers using forward mortgage-backed securities sales. Some operations that depend on leverage to finance servicing acquisitions will feel the bite of debt as mortgage servicing rights values decline. The risk on investments will catapult U.S. interest rates higher and drive ineffective hedgers and non-scalable platforms out of business. Refinance activity will virtually disappear, falling to 20%-10% of total production volume.
Karachur: Home values and the economy will grow moderately. But this small growth will be good enough to boost confidence in the real estate market. Interest rates have started to rise, which will make home investment a safe investment, and potential home buyers sitting on the fence will want to buy a house sooner rather than later, even with higher interest rates.
Ardy: Naturally, increased rates mean a reduction in refinance volume, but housing starts continue to be strong, home sales are much higher than in prior years, and the gap between housing prices along the coasts and the middle of the country is widening. That said, I’m very bullish on home sales and purchase loan volume. I think any relaxation of regulatory requirements, in combination with continued job growth and consumer optimism, will result in expanded loan guidelines, more adjustable-rate mortgages and cash-out refinances. This means strong lending volumes through 2017 and 2018.
Schmitz: I believe rates will continue to rise during 2017, further shifting origination volume toward purchases, and we will see the highest level of purchase activity since 2007. The MBA forecasts purchase loan volume will total $1.10 trillion during calendar year 2017 – an 11% increase from 2016 – and it predicts purchases will comprise 75% of the mortgage market in 2018 and 2019. Given that the market is emerging from over six years of historically low mortgage rates, the refinance market will not be a driver of loan volume over the next few years. That, coupled with the largest population of home buyers coming into the market since the housing crisis, will skew the mortgage market toward purchase originations.
Q: What other factors do you see reshaping the mortgage market in 2017?
Alley: With the recent change by the GSEs to no longer require a paper copy of the security instrument if it is e-recorded, there is an opportunity to reshape a lender’s post-closing operations, driving out paper and shipping costs and achieving almost immediate insight into the recording status of mortgages and other trailing documents.
Parker: The mortgage industry is on the verge of a great renaissance, with fundamental, disruptive changes to plumbing, which is being driven by intense dissatisfaction with current loan origination technology. In fact, a recent STRATMOR survey indicated that 30% of lenders are unhappy with their current loan origination systems, which I believe is tied to the propagation of bad data within these systems. Eventually, the demand for better technology will transform productivity in manufacturing mortgage quality and within secondary market delivery mechanisms. But sadly, we will see little effect of this in 2017. More likely, the increased volatility will force liquidation and consolidations among depositories and non-depositories.
Karachur: President-elect Donald Trump has opposed some of President Barack Obama’s policies, including the Dodd-Frank Act. He says that it hinders the growth of banks and the overall economy. We can expect major changes in Dodd-Frank and the CFPB, resulting in additional changes to current and future regulations.
Ardy: The biggest factor outside the basics of interest rates, jobs and consumer sentiment will be any changes to regulations. We are an industry driven by the regulatory environment, so if aspects of Dodd-Frank and the associated regulations are eased, depending on the degree of easing, that could have substantial impact across the mortgage banking industry.
Schmitz: I see millennials making up a larger percentage of the purchase market in 2017. Baby boomers will, likewise, make up a good portion of the purchase market as they retire and downsize. Together, boomers and millennials will make up roughly 60% of the purchase market in 2017. Yet, millennials’ and boomers’ credit profiles don’t always fit nicely into the standard credit box. I believe lenders wanting to maintain volume and market share will need to be prepared to serve these borrowers with products that cover a wider range of credit profiles. Demand for programs that don’t fit the agency credit box could reach $100 billion in the next year and is expected to continue to grow in future years. There are a few forces I see at work behind the growing demand for alternative loan products. Often, millennials’ ability to make a down payment is challenged while they are paying off student loans and are just starting their careers. These factors put pressure on their debt-to-income ratios, as well as their loan-to-value ratios. Similarly to retired or self-employed borrowers, many boomers will need alternative income documentation, putting them outside the standard loan box, as well. One major stumbling block to serving these non-standard, or “left behind,” borrowers has been a manual process lenders must undergo to find the programs that meet those borrowers’ credit profiles. Fortunately, technology is starting to catch up. We’re seeing the emergence of more loan programs and technology platforms to serve out-of-the-box borrowers. Originators can leverage their existing relationships and use these new tools and technology to efficiently serve this market. For lenders seeking new ways to boost their purchase originations, the non-standard market is worth taking a second look.