It’s already clear just how competitive the mortgage market is at this moment. Lenders that did well with refinance business are now pivoting to purchase-money lending and finding that competitors are already there, doing all they can to forge or strengthen their relationships with real estate agents.
The Mortgage Bankers Association (MBA) continues to forecast a strong purchase-money mortgage market. As of this past January, the refinance share for full-year 2021 was expected to finish at 59% once all of the fourth-quarter data has been processed, down from 71% in the first quarter. By the end of this year, MBA expects the purchase business to account for 67% of all mortgage volume.
This will be a big shift for refinance lenders, but it’s only part of the story. After 2020 saw $4.1 trillion in originations and 2021 looks like it will come in at about $3.9 trillion, MBA expects industrywide volume this year to fall to $2.6 trillion. You could call this significant, but some lenders will see it as horrifying.
Mortgage lenders and the originators they work with know that achieving growth is going to be extremely challenging in this environment. But it won’t be impossible. There will still be some innovative lenders that will continue to grow in the year ahead. How will they accomplish this?
It stands to reason that the lenders that offer a product menu capable of serving more borrowers will be in the running to win more business. Therefore, expect leading lenders in 2022 to have a broad product mix available to borrowers and third-party originators.
In the past, when sales volumes fell, lenders focused on borrowers who had difficult income scenarios and/or moved down the credit spectrum to make up for lost volume. This was problematic in the past, but with the current presidential administration focusing on affordable housing and homeownership for the traditionally underserved, it stands to reason that more lenders will advance products to meet the needs of these borrowers.
With the Great Resignation and the unstoppable rise of the gig economy, more borrowers than ever are creditworthy but still incapable of meeting the requirements of a qualified mortgage. Nonqualified mortgage lenders — lenders that have products that can’t be purchased or insured by institutions such as Fannie Mae or Freddie Mac — have been serving this growing market segment for some time. Many of them are offering their loan products to brokers and correspondents.
With America’s seniors holding a record amount of equity in their homes as they approach the high expenses that come with old age, more lenders are looking at reverse mortgages as a viable product alternative. Seniors want to age in place and remain in their homes. These loan products can make that possible.
Finally, with housing prices still on the rise, many homes are now priced above the conforming loan limits and are driving borrowers to jumbo loans. A good selection of such loans will help lenders compete effectively for this business. Leading lenders will offer a full range of products to meet the needs of the largest groups of prospective borrowers.
Homeowners are currently sitting on more tappable equity than ever before. The most recent data analyzed by Black Knight in third-quarter 2021 placed tappable home equity (the amount that borrowers can access while retaining at least 20% of the home’s value) at $9.4 trillion.
Rising interest rates will make it less attractive for borrowers to access these funds with a cash-out refi. And this means more consumers will turn to home equity loans. There are reasons why independent mortgage banks have largely ignored these loans in the past. It may be time for them to find a way to help their clients access equity, even if this means brokering these deals to depository lenders.
This is a great opportunity for community banks and credit unions because it allows them to gain more business from existing clients and may lead to cross-selling opportunities. For diversified lenders that also service their own loans, home equity will be a no-brainer by year’s end and is a good way to earn cross-sales income while they deepen the relationships they have with current clients.
Thin margins are atypical when lending volumes are high but become serious problems when volumes decline. Reducing the cost to manufacture a loan will be a top priority for all lenders this year. One key to accomplishing this will be completing the journey to digital lending that companies started over the past few years.
Digital lending makes it possible to streamline production costs because it takes the paper out of the process and uses smarter, artificial intelligence-driven automation to speed up the process. It is going to be important to lenders this year as lower volumes highlight every part of the process that is costing the lender money.
Digital lending offers many advantages that lenders have been seeking for a long time, and lower costs is just one of them. Another big advantage of digital lending is higher borrower satisfaction. Going digital makes loan processing faster and easier while electronic closings offer much-appreciated flexibilities for the borrower.
The majority of lenders already have the tools required to complete this journey. If they haven’t invested in these tools yet, they are certainly available. What many have not yet done is to complete their journey by perfecting their e-closing process. This is important now because borrowers have been ready for this for some time.
A 2020 Stratmor Group and ClosingCorp. survey found that 79% of recent borrowers felt that technology played a larger role in closing their new loan compared to any prior transactions — and 90% said they were satisfied with the result. Consumers are quickly adopting the technologies that will allow lenders to complete their journey to digital. That’s one key to higher efficiencies that will serve the nation’s leading lenders and originators well this year.
It’s true that not every municipality is ready to handle completely electronic real estate transactions, but it’s very close. It’s certainly close enough for lenders to shift to e-closings as a rule of thumb and a hybrid model as the case requires, which is the opposite of how many lenders are currently treating this.
Over the past few years, lenders have invested in many tools that promised to make it easier to attract, engage and transact with borrowers in the age of COVID-19. Some of these tools added efficiencies and even enhanced the lender’s reputation in the marketplace. Others did not.
Leading lenders are already taking a closer look at the tools in their technology stacks. This will help them determine which ones are actually increasing bottom-line revenues and which are simply whittling down the company’s margin on each loan.
At the same time, they are checking to make sure that they are using a modern loan origination system that allows them to quickly and easily configure the platform for any product they want to originate through any channel they choose. New origination platforms make this possible at the same time that they reduce the need to depend upon external technologies to originate loans.
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Lenders and originators with plans to grow this year are going to offer a wider range of products, including second-lien loans, to a larger group of borrowers using a streamlined digital process that saves time and money while increasing borrower satisfaction. Leading lenders will accomplish all of this by using only the technologies required and nothing else. This is the formula for growth in 2022 and some lenders will use it to great effect. ●