The reinvention of the mortgage industry continues in 2013. The New Year brings with it even more uncertainty than in past years. What is fairly certain, however, is that regulatory and structural changes will reshape the industry. These significant changes will require adaptation by lenders and vendors that wish to survive in the new environment.
1. Residential mortgage origination volume will drop abruptly from 2012 levels. The Mortgage Bankers Association is projecting a 24% projected drop in mortgage origination volume from 2012 to 2013. Given the length of time that historically low rates have persisted, the potential market for refinances has diminished significantly – many that are able to refinance have likely already done so. While purchase business is anticipated to grow by 16% in 2013, it will not nearly offset the loss of refinance volume.
The interest rate environment has a massive impact on mortgage volume.Â The longer that 30-year fixed rates stay below 4%, the longer the volume will remain high. Additionally, the relative strength or weakness of the U.S. economy will impact volume directly.
Rising employment and wages, while supporting the residential real estate market, will also help to push interest rates higher and cut refinance volume significantly. While the economic stagnation we experienced in 2012 was unfortunate, the lack of growth helped to keep rates at or near record lows. By mid-2013, stronger growth will likely lead to higher rates, which will, in turn, cause an abrupt drop in origination volume.
2. Rates will rise above 4% in the second half of 2013. Consumers have enjoyed record-low mortgage rates for much longer than was anticipated a few years ago, but it is a reasonable bet that we will see rates begin to rise by the second half of the year.Â
The ‘fiscal cliff’ negotiations put the full depth of our nation's debt crisis on display for the world to see. Consequently, global investors may make a more realistic, risk-oriented valuation of U.S. Treasuries and other government guaranteed bonds such as mortgage-backed securities. This, combined with a slowly improving economy, will cause interest rates to rise.
3. The mortgage industry will shrink by a significant margin. Mortgage industry employment has experienced modest growth over the past year after reaching its post-crash low point in mid-2011. For 2012, mortgage industry employment grew by 7% after declining by 51% between 2006 and 2011, according to the U.S. Bureau of Labor Statistics.
Unfortunately, the lower volumes forecast for 2013 suggest a significant decline in industry employment is on the horizon. The current industry employment of approximately 280,000 will decline by almost 100,000 over the next 12 to 18 months. A combination of lower volumes, industry consolidation and greater operational efficiencies will result in a 30% to 35% drop in industry employment.
4. Purchase mortgage origination will become the primary foundation of the industry. The significance of the shift from refinance orientation to purchase orientation cannot be overstated. Much of the existing mortgage industry is built on the dominance of mortgage loan refinancing.Â Its diminishment and eventual status as a minor piece of the business represents a structural change of the highest magnitude.
The vast majority of mortgage originators are wholly unprepared for the unique requirements of sourcing and servicing purchase borrowers. The ability to build relationships over a much longer sales cycle will separate the survivors from the pack of those soon to be ‘pursuing other options.’
5. The ‘graying of the mortgage industry’ poses real challenges for the future. The reduction in employment totals will expose a new problem: the graying of the mortgage industry. With the most likely victims of the industry's reduction in force being younger, less experienced workers, the problem of replacing the older, more experienced workers will begin to be felt.
The problem is likely to be most acute in highly technical positions in operations, secondary marketing and senior management, though it will even be felt in the originator ranks. Companies must be cognizant of the damage that the loss of industry and institutional knowledge can have and begin to develop training and recruitment strategies to address the issue.
This will likely be the year in which the ‘new’ mortgage industry truly begins. The question is this: Are you a part of the industry's future or of its past?
John Walsh is president of Total Mortgage Services, based in Milford, Conn. He can be reached at email@example.com.