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   ARTICLE   |   From Scotsman Guide Residential Edition   |   October 2003

Consumers, Mortgage Industry Should Begin Preparing for Slowdown in Mortgage Market

With the recent increase in mortgage interest rates, there’s been some talk that the “boom” we’ve seen over the past few years in the mortgage industry is coming to an end. The end, it appears, is now.

It’s certainly true that the past few years have been extraordinary for mortgage companies, as well as for consumers. And it’s certainly true that there’s going to be some slowdown as interest rates rise. 

However, as the president and CEO of a mortgage company, I’ve seen a lot of ups and downs in the industry over time. I believe we’re seeing the change in the market we’ve known would eventually come. Mortgage companies can prepare for this change if they act wisely and think hard about the future. 

With rates as low as they have been, refinancing has accounted for as much as 80 percent of a lender’s volume. Normally, in times with higher interest rates, refinancing accounts for between 17 and 21 percent of a lender’s business. 

In 1994, the number of people refinancing was very high before dropping abruptly. Clearly, we will go back to traditional levels of refinancing again in the future, as we did then. The question is, will it be abrupt as it was in 1994? The market will dictate that. But regardless, the industry will lose a good share of the current refinancing market, and lenders are going to have to learn again how to survive in a “normal” market.  

Still, in order to accommodate the boom we’ve seen as the result of low rates, the industry has expanded dramatically. Financial institutions, mortgage bankers and brokers all have expanded their physical plants and hired more staff to “seize the day” and push through as much available volume as the market can produce. This includes increasing business debt and long term liabilities in the form of long-term and expensive leases, furniture, equipment, and other forms of infrastructure. 

When the industry drifts back to its more common refinancing volume, it will result in tremendous excess capacity, capacity that has a price tag attached. Many lenders will struggle in an environment where volume shrinks, while much of the “boom” period infrastructure must be paid for. And all the while margins will compress as existing lenders chase fewer and fewer loans. Many originators, who have thrived in the largest refinancing boom in history, will not survive in the post-refinancing market. 

So what do mortgage companies have to do to stay ahead of the curve? 

If they haven’t been properly planning for the future, there may not be much lenders can do now—except cut, cut and cut some more, as volume begins to evaporate. 

The one thing lenders and many other mortgage professionals should be doing now is to prepare their game plan for the future. They should be stress testing their financials with a variety of scenarios and “what if’s?” What if volume drops 25 percent and margins compress 30 percent? What if volume drops 40 percent and margins compress 50 percent? 

With every realistic scenario, there should be a plan outlined with specific actions that will be taken when the triggers hit. Do it now because the reality is that it is very difficult to dismantle what you just spent the last three years building. That is tough to do in the best of conditions and significantly more difficult when you are on the “bubble” and in the midst of chaos trying to do so.     

The winners over the long haul will be the companies who have a business model that is built with great elasticity and where significant increase of volume can be absorbed without increasing basic infrastructure and cost. 

It may be a long time before mortgage professionals and consumers alike reap the benefits of the kind of lending environment we’ve seen over the past few years. But while the consumers will be there the next time we have a cycle like this, only the best-prepared companies will be there to help them meet their mortgage needs. 


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