A Bloomberg story by Carmen Arroyo today highlights the cost-cutting focus I’m hearing more and more from mortgage lenders this month. Mortgage layoffs and cost cuts are normal as rates rise, but lenders will still fund $2.6 trillion in 2022. Here are some things lenders will thrive on as they struggle as it will happen.
– 30-year fixed rates have jumped 1% since December – to 4%, the highest since May 2019 – and while a Russia/Ukraine war may help rates, the surge is significantly slowing lending volume.
– Requests for refinancing have fallen by 45% in the past 6 months, according to the Mortgage Bankers Association (MBA). And refis mainly generated a record volume of loans in 2020 and 2021 (see below).
– Arroyo astutely noted that BLS employment data shows that “the number of people working as mortgage and other loan brokers, an indicator of total employment in the mortgage lending industry, jumped by more than 50% to reach around 130,000 since the end of 2019”.
– So, mortgage jobs jumped 50% to match the record volume of the last 2 years, and now the refis that generate that volume are down 45% in the last 6 months.
– Most headlines writers aren’t used to this extreme mortgage cyclicality, but most of the mortgage industry is.
– Moving mortgage operations (and jobs) up and down based on rate market conditions is shocking to the uninitiated, but it is a normal function of the mortgage lender.
– The U.S. mortgage industry funded $4.1 trillion in new loans in 2020 (64% refis, 36% purchases) and $3.9 trillion in 2021 (57% refis, 43% purchases ), by MBA.
– This was fueled by lower rates in response to the pandemic.
– A more normal mortgage market is about $2 trillion in newly funded loans per year.
– For example, total mortgage financing in the United States was $1.68 trillion in 2018 (28% refis, 72% purchases) and $2.25 trillion in 2019 (44% refis , 56% purchases), by MBA.
– Now the MBA forecasts $2.60 trillion in new mortgages in 2022 (33% refis, 67% purchases) and $2.53 trillion in 2023 (27% refis, 73% purchases) *).
– It is therefore normal that lenders had to increase employment and other operational costs to manage the peak in volume of 2020 and 2021.
– And it’s also normal for lenders to adjust costs – including mortgage layoffs – when markets change.
– It should also be noted that the retail lender and brokerage models prove resilient in cost-cutting cycles, as they rely on highly experienced, full-commission loan officers (with commissions highly regulated at the federal level) so there are fewer fixed costs for lenders.
– Direct lending models typically employ salaried loan officers and result in increased purchase costs in market shifts from refi to purchase.
– Direct lending models are therefore under severe strain. Lead costs are rising. Buying leads are more difficult/takes longer to convert. Balancing these priorities often leads to mortgage layoffs.
– Many VC-backed mortgage startups – primarily focused on direct lending models – have created many smart headlines about “fixing a broken system” in recent years.
– But long-term mortgage deals are now in the headlines.
– HERE ARE 4 MORTGAGE TRENDS TO WATCH:
– Look for early-stage startup lenders with high cost models to be strained.
– Look for “boring” retail and brokerage models to pave the way for full-cycle success.
– Look for well-capitalized multi-channel strategies – which have or seek to simultaneously run retail, brokerage and direct models – to strike smart M&A deals.
– And finally, look for fintech (aka digital native) banks to participate in mergers and acquisitions to acquire great mortgage deals at low prices during this cycle.
I will comment more on these 4 trends shortly.
Please comment below or ask me questions.
– EXCELLENT: Job growth in 2022 — NOT EXCELLENT: Mortgage rates 1% higher
*CRITICAL TREND NOTE: In 2018, when the market was 72% purchase loans, purchase volume was $1.21 trillion. In 2023, MBA’s projected 73% purchase market is made up of $1.85 trillion in purchase loans. This represents an additional $640 billion in buying volume in a majority buy-side market, implying healthy home sales to come (the MBA forecasts 7.6 million new and existing home sales in 2023). And retail/brokerage models are more effective at converting much longer purchase loans than direct models. Refis and buys are different sports and generally retail lenders/brokers excel at buys while direct lenders excel at refis.