After US mortgage lenders took the $ 3 trillion refinancing wave to their best year to date in 2020, they hit a snag: rising interest rates.
That's humble for Thuan Nguyen, a mortgage broker at the San Jose, California loan factory. He sold roughly $ 2 billion worth of mortgages last year – more than any other sales rep in at least a decade. Now the phones are getting quiet.
"I expected the good times to continue," said 48-year-old Nguyen, who quadrupled his workforce and expanded to nearly 20 states last year. “Interest rates have risen and all refinancing has almost disappeared. Everyone was shocked. "
The US mortgage business reckons with the reality that last year's easy money is running out. After falling to an all-time low of 2.65% in January, the 30-year fixed rate mortgage hit 3.17% last week, its highest level in more than nine months. This is already reducing profit margins in an industry that set a record in 2020.
Prices can continue to rise. Federal incentives and rising vaccination rates appear to create the conditions for historic economic expansion – and the prospect of higher inflation.
There is evidence that mortgage brokers and lenders are having a difficult time. This year, mortgage companies are expected to borrow 13% fewer home loans from a record $ 4.5 trillion last year, Fannie Mae predicts for refinance and purchase volume.
The number of homeowners who could benefit from a refinance has dropped nearly 40% to 11 million in about a month, according to Black Knight Inc.
Kevin Peranio, chief lending officer at Paramount Residential Mortgage Group Inc., began asking loan officers last year to turn to less volatile home sales. According to the Mortgage Bankers Association, less than 61% of mortgage applications last week were for refinancing, up from 75% in January.
"I've been in business for 20 years and every time a refinancing boom ends it ends violently and suddenly," said Peranio.
Lenders had easy loans last year because there were so many, said Jim Cameron, a senior partner at the Stratmor Group mortgage adviser. According to Attom Data Solutions, mortgages on nearly 400,000 apartments were refinanced at least twice in the past year.
Now that rates are rising, the industry seems to be embarking on a familiar cycle. First, companies are lowering new loan standards to make up for lost business and expand the pool of potential customers. Then they sacrifice margins before finally laying off workers. If business remains sluggish, the lenders will be acquired or closed.
It's already starting. According to the Federal Reserve Bank of New York, new loan profit margins have fallen 27% from their peak last August. Hot-shot underwriters who received a signing bonus of up to $ 20,000 for changing jobs are nervous about being in the line of fire, mortgage recruiter Tony Hanson said.
Industry executives also said competition is tougher this year after a number of lenders went public in recent months. United Wholesale Mortgage, ranked the fourth largest lender in the country by Inside Mortgage Finance, recently said it would not partner with loan brokers who do business with Rocket Cos., The No. 1 firm. These companies need to grow while chasing after a shrinking customer pool.
"I'm glad we're not public right now," said Michael Oursler, chief operating officer of NewDay USA, a veteran military lender.
Investor enthusiasm for some newly listed companies is waning. Shares in Rocket and LoanDepot Inc., a lender that went public in February, have fallen since March 1. As the business is less resilient, loan officers may need to start tracking sales leads and quickly befriend real estate agents and builders.
"Everyone wants to go to the customer first," said Barry Habib, CEO of analytics company MBS Highway.
Also, as refinancing problems, lenders have to compete for a limited number of purchase deals unless there are more listings. U.S. home sales fell to a six-month low in February, driven by a record annual decline in the number of homes available.
Even so, not all is bad for the industry. Mortgage companies are projected to borrow $ 3.9 trillion this year. If the market recovers, formerly unemployed borrowers on government-secured loans could be eligible to refinance and withdraw equity from their homes. Many of them used the government's leniency program to delay payments.
To keep credit flowing, lenders are easing credit standards after tightening them for much of last year, according to the Mortgage Bankers Association. Typical credit scores for new loans are falling, data from the Urban Institute shows. Paramount Residential has cut its minimum FICO score from 620 to 580, almost as low as it was before the pandemic.
Patrick Flanagan, LoanDepot's chief financial officer, and others expect lenders to drive pay-off refinancing and second mortgages to attract those considering renovations or paying off credit card debt. Homeowner debt is the lowest relative to property value in 30 years, equating to around $ 21 trillion in home equity, Federal Reserve data shows.
Nguyen, the broker for the credit factory, never had time to celebrate its record year. Last year, it sold 5,216 loans, nearly all refinances, and its total volume was the highest in at least a decade, according to industry publication Scotsman Guide. This year he expects his loan sales to decrease by half.
"When there is less business out there, you just have to compete harder," said Nguyen.