The likelihood that we are facing yet another refinance volume spike in the wake of Brexit is a good news/bad news scenario for many mortgage lenders.
Of course, any surge in orders means a surge in revenue, which is generally very good news. However, if one considers the mortgage markets to have been a roiling seascape for several years, this unexpected boom could amount to a rogue wave.
Most banks and lenders, in reliance on almost homogeneous forecasting that this would be the year that refinance applications plummeted, are duly prepared for a year of purchase transactions. Few are ready to take on a high capacity of refinance transactions without the sometimes painful process of ramping up staffing, reworking workflow and the like.
An even more delicate consideration comes into play when lenders attempt to decide just how much of a boom we may soon see. If one ramps up staffing and resources for a lengthy surge of orders, the lender runs the risk of overestimating its return and allowing the cost of that ramp-up to eat into the already less-than-forecasted profits.
On the other hand, the lender that refuses to prepare for a refinance surge risks leaving money on the table — and possibly, quite a bit of it.
So how does a mortgage lender ready itself for whatever is next in the wake of Brexit?
The potential size and duration of any refinancing spike is currently being debated widely. While most see some potential for a significant surge, not everyone does.
Brian Levy, a partner with Chicago-based Katten & Temple, believes (like more than a few in the industry) that any spike will be short lived:
“I don’t think Brexit itself will have much more of a long-term impact on the U.S. mortgage market than the immediate bump to rates caused by the classic ‘flight to the quality’ to the U.S. Dollar. What Brexit reflects in terms of geopolitics, however, is immense. It is those forces (seen also in our own elections) that will have the greater long term impact on the mortgage business here.”
Others, however, see a seismic shift in the market. Marx Sterbcow, managing partner with New Orleans-based Sterbcow Law Firm, offers this analysis:
“Several issues are at play and you can expect the rates to go even lower in the fall, fueling another wave of refinance activity. Why?
The Pound still has not fully rebounded from hitting a historic 50-year low recently, which has put downward pressure on the Euro as well as the Pound. Brexit only compounds the ongoing international financial crisis across the globe. That global turmoil, in combination with an aging workforce in the U.S. and an inadequate job base, is severely dampening any U.S. economic rebound. The Federal Reserve can’t risk raising rates at all for fear that such cuts would spur a rise in value to the U.S. Dollar (making the Dollar too expensive to export our goods internationally, while simultaneously spurring an influx of cheap goods from overseas — all of which would further decrease the employment crisis the US faces.
The value of the Chinese Yuan has also been tumbling. This comes, in part, from the Chinese central bank intentionally allowing the Yuan fall to 6.8 per dollar (at one point) in an effort to spark the struggling Chinese economy. We have indicators that Chinese exports — at least to the U.S.— are down as well. In 2015 the Chinese economy dropped 4.5% YOY and while the 2016 numbers haven’t come out yet (at the time of this article), the NY/NJ Port Authority reported in May that imports fell over 268,000 units (which is down another 4.7% from last year’s dismal numbers). The volume of containers passing through the New York port alone fell by 6.1% in May, 2016. Georgia’s Port Authority reported a 7.3% decrease in containers in May.
Because of these factors, I’m confident the Fed will actually lower interest rates even further this fall (expect another interest rate cut to prevent the U.S. dollar from getting too strong at the expense of other currencies as others flee to the U.S. as the safe haven for currency). The risk of U.S. businesses pulling back on investment in response to any interest hike is simply too risky because it would likely discourage consumers further in the home purchase market (already at 50-year historic lows). It could also mean more job cuts domestically.”
Whether one agrees with the first round of analysis or the latter, one thing is clear: mortgage lenders are currently faced with a dilemma. Ramp up and risk corroding margins should the spike be short-lived; or hunker down and leave money on the table for, perhaps months…losing market share in the process.
One solution to said dilemma is surprisingly simple: neither option.
In a market that demands flexibility, the variable cost model always makes sense. It bears repeating that outsourcing some (or all) of the functions involved in fulfilling a refinance order can help a lender manage volume surges.
Where possible, use vendors who charge only for what you “use.” Simple title searches are among the many otherwise costly, time-consuming that can bog down a lender’s production workflow. Even simply ramping up vendor management capabilities can be a drain in times of rapid market turns, spikes and dips.
If indeed we are on the cusp of a significant refinance boom, now is the time to review your workflow processes, technology and personnel (training).
The discovery of significant glitches in one’s refinance process in the midst of a surge, when diverting resources to solve issues could further constrict the production process, could mean leaving money on the table and possibly even damage to the lender’s brand.
The heightened emphasis on vendor selection and oversight in the past two years can play a role in any refinance boom as well. Some lenders may be working with new service providers based upon their levels of compliance and security.
But how are those providers performing on key factors such as turn- around time and accuracy? Take one more look at the service providers in your refinance pipeline. Are they up to the task? Have they handled high refinance volume in the past?
Don’t wait until your business is knee-deep in refinance applications to learn that your service provider’s biggest flaw is managing high volume refinance orders.
Similarly, double check that the vendors of your third-party providers (fourth-party providers such as abstractors, appraisers, data storage solutions, etc.) are prepared for a boom as well — and that they can handle it cost-effectively without sacrificing turn-around time, quality or compliance.
The bottom line, as it has been for some time, is that flexibility and scalability are critical for exactly the type of surprise a Brexit-driven refi-spike would be. Vet your vendors carefully, but lean on them as well. They could be your key to capturing a hailstorm of refinance volume without costing you on the margin.