It’s no secret mortgage refinance volumes are falling, leaving lenders to make up for the loss through purchase mortgages.
During the Mortgage Bankers Association Secondary conference in New York City, MBA Chief Economist Mike Fratantoni discussed falling refinance rates, saying the blanket that helped with seasonality drops is now being lifted.
Previously, even during the slower winter months, refinance volume served to make up for the loss in purchase mortgage originations, Fratantoni explained in the Market Outlook session. However, as mortgage rates rise and refinance volume falls, that blanket is being removed.
During the session, panelist UBS Chief Economist Seth Carpenter forecasted that the Federal Reserve will raise rates a total of four times in 2018, and three more times in 2019. The MBA predicted this will mean the 30-year mortgage hits 5% this year, and 5.5% by the end of 2019.
The good news? We are close to the floor for refi volume, or so Fratantoni said. In other words, it can’t get any worse. And while refinance volumes are falling, purchase markets are set to soar as more Millennials form households and begin to move into the home-buying market.
Currently, mortgage rates are running about 5% ahead of 2017 at any point in time, Fratantoni said. This year’s numbers are expected to show a 75% purchase market, and 25% refinance.
And as Fratantoni put it, “This is the new normal.” The first and fourth quarts will be lower, followed by stronger volume in the second and third quarters as purchase volume picks up for the home-buying season.
But as refis drop and purchase mortgages drop for the winter months, lenders might see their profit margins drop, even into negative numbers.
In fact, Fratantoni predicted profit margins are, in fact, going to be a negative number for the first quarter of 2018, creating a very challenging environment for lenders. While not all info is in yet, Fratantoni predicted it will be a low-single digit to mid-single digit number.
In the fourth quarter of 2017, net production income dropped from 40.5 basis points on nearly $600 million average production volume to 9.3 basis points on about $500 million average production volume.
The last time there was a negative quarter was in 2014 with the implementation of the Dodd-Frank Act, Fratantoni explained during a press conference at the conference. Back in 2014, there were not only added costs to lenders, but also mortgage volume dropped as lenders struggled to cope with the new regulation requirements.
Fratantoni explained some lenders may begin to take more advantage of temp hires during busy times. The changing environment could also lead to lenders consolidating or even pulling out of some channels to try to get costs under control.
Other experts also voiced this same opinion, as HW Content Solutions Managing Editor Sarah Wheeler covered during one of the first sessions at the conference, a shakeout is coming.
Of course, decreasing refinance volumes isn’t the only reason for this drop in profit margins. The cost of mortgage loan production increased significantly over the past few years, nearly doubling since 2008 from about $4,500 to about $8,475 on average.