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   ARTICLE   |   From Scotsman Guide Residential Edition   |   December 2013

Weaving Your Way Through What’s Next for the Industry

Review the intricacies of 2013 to prepare for the twists and turns of the coming year

Weaving Your Way Through What’s Next for the Industry

This past year has been a riveting ride for the mortgage industry. Changes in the economy, surging home prices and shifting government regulations have all come together to reshape the lending landscape.

There are varying predictions about the coming year and how the industry will be further changed. To get a better idea of what’s in store for mortgage lending in 2014, it may help to reflect on the tapestry of the market right now — and to consider the twists and turns that got the industry here in the first place.

Throughout 2013, the mortgage industry underwent a variety of changes, many of which were tied to improvements in the economy and the housing market. By the middle of the year, the long-awaited housing recovery seemed to reach full stride, with improvements in home values bolstering the buying and selling power of borrowers who were previously underwater. The move-up market was stimulated and a new inventory of attractive homes opened up to interested buyers.

Even as home prices increased, interest rates remained relatively low throughout the first half of the year, allowing many long-term renters to consider entering — or in some cases, re-entering — the market. During this time, there was also a refinance boom. The Home Affordable Refinance Program and streamline refinances from the Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) were all the rage. These refinances of current FHA and VA loans did not require appraisals and allowed owners to lower their payments by refinancing into lower interest rates.

By the year’s mid-point, interest rates began to creep up again in conjunction with continuously rising home values. There were reasonable expectations that the Federal Reserve would begin tapering the amount of Treasuries and mortgage-backed securities it was — and is — purchasing on a monthly basis with its third round of quantitative easing, aka QE3. Although the effect of this was short-lived and rates began to level out again, predictions across the market continued to point at interest rates increasing at a moderate pace.

This looming threat of progressively rising interest rates has taken a noticeable toll on the refinance market. Mortgage banks — and borrowers — already have begun to witness a reduction in the tangible benefits of available refinances, such as FHA and VA streamlines. Add in the effects of the upfront mortgage insurance premium for FHA loans and suddenly the refinance market has taken a double hit. As expected, the number of applications for refinances has declined compared to previous years.

These realities have played a key role in redefining the mortgage industry, forcing it to shift its focus away from refinances and concentrate instead on the burgeoning purchase market. In the second half of the year, many lenders and mortgage brokers began to do just that, while others simply took it as a sign to exit the business.

That brings up a pressing question: What might be in store for the lenders that remain? Let’s take a look.

The next chapter

Moving into 2014, mortgage professionals must remember that change is inevitable — and in many cases, a positive thing for their businesses. It may be a challenge to reset your thinking to view refinances as a secondary product. For years, they have been the bread and butter of this business. It’s important to note, however, that this shift toward concentrating on purchases has emerged in large part because of positive changes in the economy and the housing market, both of which have been struggling for some time.

Suddenly, many Americans have the flexibility to do more — whether that means buying their first home, investing in a second home, or simply trading up to get into a larger house or one more suitable for their changing needs. The job of mortgage professionals is to help these people navigate the new lending environment and guide them toward options that enable them to make the most of their financial prospects.

With a goal of extending the availability of various programs targeted at first-time homebuyers and those who didn’t qualify previously for loans, mortgage banks and lenders should familiarize themselves with available government programs and then market those programs to reach a larger pool of potential borrowers. New government programs have emerged and guidelines have been modified to assist potential borrowers who have been impacted by the weakened economy and the related job market challenges of recent years.

One program that mortgage professionals should be familiar with is the FHA’s “Back to Work” initiative, which could provide new opportunities for borrowers who lost their jobs and homes during the recession. According to a mortgagee letter released this past August, this program aims to help borrowers who are ineligible for FHA-insured mortgages because of the agency’s waiting period for bankruptcies, foreclosures, deeds-in-lieu and short sales, as well as those whose eligibility has suffered because of delinquencies or indications of derogatory credit, including collections and judgments. With the assistance of this program, these borrowers could be eligible for FHA-insured mortgages even with these knocks against them.

In addition to taking stock of all available government programs, mortgage banks and lenders should take a fresh look at their own qualification requirements and make sure that they’re keeping pace with the current lending landscape. Otherwise, they could be overlooking groups of borrowers who are eligible for certain government program.

Some lenders, for instance, recently have expanded their credit requirements on all government products, reducing minimum FICO scores and making the qualification process easier for borrowers. To further extend lending opportunities among consumers, some lenders also have modified their guidelines to include manufactured houses as eligible properties for FHA and VA loan programs, omitted overlays for FHA first-time homebuyer loans, and added nontraditional credit guidelines for FHA borrowers with limited or insufficient credit.

Expanded guidelines like these increase the borrowing potential of consumers while also widening a company’s pool of applicants. Heading into 2014, mortgage bankers and lenders should be sure that they’re current with their competitors’ evolving guidelines, as remaining stagnant could mean falling behind.

Challenges for lenders

The coming year likely will present mortgage professionals with a number of new and continuing challenges. The most obvious of these is how to grow purchase-based business amid predictions that interest rates will continue to rise throughout 2014. Although predictions concerning mortgage rates are merely educated guesses based on current market conditions and related expectations, many economists seem to agree that rates will be in the 5 percent range at some point next year.

In a forecast published this past September, the Mortgage Bankers Association predicted a gradual rise in30-year fixed mortgage rates that would settle at 5.1 percent by the end of 2014. This is a relatively conservative prediction compared to that of Freddie Mac Chief Economist Frank Nothaft, who has stated that he thinks rates for 30-year fixed-rate mortgages will approach 5 percent as early as the mid-year point. Complicating the issue is the question of how high rates may climb and whether QE3 could end completely in 2014.

Will potential borrowers view all of this as a sign to buy now, or will uncertainty over varying predictions have a paralyzing effect on consumers? Either way, mortgage professionals should ramp up their marketing efforts and get to work on establishing new connections to reinvigorate their professional networks.

The refinance market

Based on current and past events, it’s likely that the refinance market will separate into two camps. The first will include borrowers who are not looking to cash out and are driven solely by rates. Logic dictates that if rates continue to increase through 2014, this market will decline, requiring lenders to lower fees or costs to facilitate these loans.

The second group may bring to mind some of the market conditions that occurred around 2005 and 2006, when a large portion of refinances were cash-out transactions in which borrowers took advantage of rising home prices to help them finance other purchases. These borrowers may be less focused on rates and more driven by favorable timelines and loan-to-value ratios that help them leverage the value of their homes.

Complicating matters further is the fact that a fair amount of uncertainty still surrounds the qualified mortgage (QM) rules set to take effect in January. With the goal of discouraging carelessly liberal underwriting standards, these rules have been created to stop the history of the recession from repeating itself. Although these rules may be essential in terms of protecting borrowers and lenders alike, the industry needs more clarity on precisely what these rules entail and how definitive they will be moving forward.

For instance, how many new categories of mortgages will result from these guidelines, and related, how difficult will it be to categorize them all? How much documentation will be necessary for compliance, and more importantly, how will this affect the choices that mortgage professionals can offer potential borrowers? Although many lenders intend to include only QM loans in their portfolios, other entities such as credit unions already are making plans to focus on the non-QM loan products that remain attractive to eligible borrowers. This presents a substantial opportunity for lenders who are willing and able to assume the associated risk.

All lending origination — QM or otherwise — comes with an ongoing challenge to mitigate risk. Although 2014’s lending environment may call for a more flexible approach, mortgage professionals still must have the proper fail safes in place. Diligence must be practiced in qualifying borrowers and ensuring that the programs suggested for them are well matched. This is especially true with government programs, since failing to meet the guidelines of these organizations could jeopardize a company’s government-lender status.

Directly associated with these new challenges is a much higher cost of doing business. This may prove to be a difficult circumstance for some companies to accommodate, especially if market dynamics call for lower fees. Mortgage bankers and lenders need to come to terms with the possibility that remaining competitive in this market could mean reducing their revenue per loan, and it also may mean lowering broker and loan-officer compensation. This could be a hard pill to swallow for many, but it also may be a motivator to improve efficiencies and keep operating costs financially manageable.

•  •  •

As the industry heads into 2014 amid varying predictions for what the future may hold, one thing seems relatively certain: The mortgage business is headed for a bit of a shake up. But with those changes will come new opportunities for mortgage banks and lenders to extend their capabilities, enhance their efficiencies and approach things differently. For those dedicated to meeting the challenge, the future is rife with opportunities to grow business and get people into the homes that they want. 


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