Residential Magazine

A Light Shines Through Even on the Darkest Days

In a declining market, opportunities are emerging for those who embrace technology

By Jim Paolino

The shift in the mortgage market could be seen for at least a year in advance. Sure enough, the end of the historic refinance boom that the industry began experiencing late last year has resulted in an inevitable decline in overall mortgage origination volume.

Never mind that the Mortgage Bankers Association expects $2.34 trillion in originations this year, with a healthy $1.64 trillion coming from purchase mortgages. Naysayers will point out that the mortgage business has lost nearly half of the (record) volume seen in 2021. They forget that home values remain historically high and have failed to depreciate nearly as fast as interest rates have climbed. In fact, average home values are still climbing. Yet mortgage professionals are reminded again and again that the U.S. is facing a (mild) recession.
While nobody will deny that the mortgage industry is facing a decidedly more competitive market than it did in 2021, too many are letting the bad news blur the larger view. The headlines in the mortgage media are led by stories about mass layoffs, businesses shuttering operations and hefty interest rate increases. At times, it’s difficult to find some positive news out there. But it exists.
Let’s remember that even if forecasts are a bit off (although there’s no reason to believe they are), the industry is expecting a year with more than $2 trillion in sales volume. Additionally, the headwinds aren’t expected to be permanent. As a matter of fact, economic headwinds are almost never permanent.
Many forecasters believe that interest rates will peak in early 2023, right around the same time that inflation should plateau or begin to recede. It’s time for everyone to remember that this is a cyclical industry. If anything, the outlier has been a cycle comprised of a historic refinance boom that seems to have lasted for 10 years. Let’s collectively take a breath, step back and take the long view. There are opportunities in every cycle.

Historical perspective

If you take a quick glance at Freddie Mac’s average annual 30-year mortgage rate since 1971, your eye will immediately gravitate to the left side of the chart, or the period from 1971 until roughly 2000. That’s where the trend line hovers at a towering rate compared to the plunge that occurred near the turn of the millennium.
Just imagine the headlines and discussions you’d hear today if the 30-year fixed interest rate exceeded 18%. Yet that occurred in 1981. The last major down cycle many experienced during the Great Recession still meant average rates of about 6%. In fact, the average 30-year fixed mortgage rate since 1971 is 7.77%.
The fact is, homebuyers have benefited from historically low interest rates for the past 20 years. That’s the span of more than a few decisionmakers’ careers. Many in this business have never truly experienced average rates that have exceeded 7%, the long-term historic average for 30-year fixed-rate loans.
Rates have been much, much higher in the past. And yet the mortgage industry adapted and survived. Many even found a way to thrive in these conditions. The current conditions are no worse than anything the industry has ever seen, despite the hyperbole. There are ample opportunities to manage a successful origination business.

Efficient automation

The well-prepared lender in today’s market has a few advantages over the banks and nonbanks of the 1980s. The most obvious is the wide adoption of increasingly interconnected automation, which has streamlined and accelerated the production process while mitigating margin compression.
The lenders most equipped to compete for their share of what should be healthy purchase mortgage volumes will be those who spend virtually no time mashing buttons or rekeying data. Data will be exchanged throughout the production process without using a phone or email, and many times, it will automatically populate electronic forms.
The mortgage industry is still battling application-to-closing periods that average about 50 days. As more lenders automate all elements of their workflow in a way that eliminates production silos, and as more service providers do the same, the 50-day average will begin to plummet industrywide. Until then, lenders with automated processes will maintain a competitive advantage.
This also may be the beginning of the end to the mass hiring and mass layoff strategy employed throughout the industry for decades. Unfortunately, many companies are currently undergoing mass layoffs. This is the natural conclusion as a bloated market — which expanded to ingest the historic refinance volume — regresses to the mean. The next time there’s a volume spike, many more lenders will hire cautiously.
The most tech-savvy lenders will already be experiencing better productivity because they’ve automated, so they won’t need to close the cycle with mass layoffs. If anything, their improved scalability and flexibility will allow them to focus on things like employee retention and engagement, which will become increasingly important as the industry’s workforce ages.

Substantial need

The mortgage industry has always experienced its share of ups and downs. The overall market conditions facing mortgage lenders and originators will improve — maybe as soon as 2023. Of course, no one really knows when conditions will improve, and it won’t happen on a single date.
But there is something that is known. People will always need housing. The mortgage industry is a business that isn’t likely to grow obsolete, although it will experience volatile cycles and, above all, change. If anything, maybe the mortgage industry was lulled into a false sense of security after decades of surefire refinance volume and artificially facilitated interest rates below 6%.
Maybe that’s why mortgage professionals are so shocked to see some of today’s headlines. But if you take a step back and view these developments with perspective, you’ll realize that the world is not ending. Even better, you’ll recognize the substantial opportunities ahead and start the process of adaptation. ●


  • Jim Paolino

    Jim Paolino is CEO of LodeStar Software Solutions, which develops loan estimator, sales-management and closing-portal technologies. In this role, Paolino manages the company’s day-to-day operations, and oversees business development and long-term strategic direction. He has a decade of experience developing software solutions specifically for the mortgage and title-insurance spaces. Paolino speaks frequently about technology trends as they relate to compliance, operational efficiency and sales growth.

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