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Mortgage market unfolds as predicted

As the midway point of the year approaches, the home mortgage market has unfolded much as expected. Refinance activity has fallen steeply, particularly rate-dependent streamlined refinances that have been the industry’s bread-and-butter for several years.  

Home-purchase loan activity also has risen as expected, although analysts say the tight inventories of entry-level homes for sale and rising prices have meant that the purchase-money side of the mortgage market has not been quite as strong as expected.

mortgmarketAll of this has translated into a tougher year for mortgage companies than 2016, but not necessarily a bad year.

Mortgage executives told Scotsman Guide News they are expecting solid growth this year in production volumes, although the days when companies could meet their production goals through easy, streamline refinance volume have already come to an end.

“This year has generally unfolded like many of the experts thought it would,” said Adam Thorpe, president of Utah-based Castle & Cooke Mortgage. “Our [refinance] volumes year to date are down about 30 percent, when you compare them year over year. Again, we anticipated that. I think most companies, coming into this year, anticipated that there would at least be a 50 percent drop. So, we are a little ahead of that. Again, there has been a drop because rates have ticked up.”

Thorpe said Castle & Cooke hasn’t relied heavily on refinancing and expects to do well as the market shifts over fully to home purchase, but other companies won’t fare so well.

 “I know there are many shops that have not been that fortunate, especially the companies that are focused on refinance volume,” Thorpe said.

Declining refinance volume

Refinance volume industrywide is down about a 20 percent year to date compared to 2016, said Mike Fratantoni, chief economist for the Mortgage Bankers Association (MBA). Far fewer people can now refinance to lower their rates. As home prices have risen, however, companies are seeing an uptick in cash-out activity. Cash-outs now represent about 40 percent of all refinances, according to Freddie Mac data. Fratantoni said he expects cash-out refinancing to continue to rise.

There have been some mixed signals about refinancing lately. Fannie Mae and Freddie Mac’s first-quarter earnings reports, however, suggested that conventional refinances activity in the quarter was up by double digits compared to the first quarter of 2016. Fratantoni said those figures likely represented origination volume of late last year.

“Sometimes the GSE data lags the primary market a little bit because they are receiving the loans a couple of months after those loans are originated,” Fratantoni said. “We are really capturing loans at the application date or at the origination date. So, it is not surprising that the GSE information is lagging just a bit.”

The MBA has predicted that overall refinancing volume will fall to $500 billion this year, down from $900 billion in 2016. Overall originations, including refinance and purchase volume, will fall from $1.9 trillion in 2016 to $1.6 trillion this year.

Frantantoni said purchase volume has been increasing, but has not met the forecasted targets quite yet. The MBA has cut its original forecast for purchase-volume growth to 9 percent, down from the originally projected 11 percent growth.

“Given that the job market has been even stronger than we projected, that is a little bit surprising,” Fratantoni said. He said tight home inventories, particularly lower-priced homes under $200,000, are holding back home-purchase volumes.

“There is lots of evidence that the inventory of homes on the market just remains incredibly tight,” Fratantoni said. “So, even though the demand is there, the supply has not yet responded to the extent that we thought it would.”

As the market has adjusted, so too are companies that once relied heavily on streamline refinance volume. Carrington Mortgage Services is one such company.

“We have a servicing portfolio of about $53 billion, and a good chunk of our lending is refinances,” said Ray Brousseau, president of Carrington Mortgage Services. “Typically it has been about 60 to 70 percent of our production. We were certainly impacted as rates began to rise.”

Brousseau said the company has avoided layoffs, but shifted employees away from streamline refinance to the purchase side or on cash-out refinancing, which require fuller documentation and longer times to originate. Despite a drop in refinancing, the company has set a goal of increasing its volume by 25 percent this year over the 2016 numbers.

“Just because the refinance business is going to be tougher this year, and we could potentially do less of it doesn’t mean we are forecasting  a year where we don’t grow,” Brousseau said. “This year, instead of just doing those easy streamline refinance transactions, we knew we would have to work harder with our client base.” 


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