Housing and residential lending are pretty much the only sectors that have steadily improved throughout the year. We are receiving credit for helping the economy, versus 2008 when we were blamed for the economy. And lenders and vendors are trying to hire trained personnel at a torrid pace. Signing, and retention, bonuses are rampant both for sales and operations personnel. But does stealing competitor’s staff make sense, given predictions for volumes next year? Should the industry even embrace forecasts in general, or ignore them and focus on taking market share from competitors regardless of industry-wide volumes?
Nothing is more natural than speculation in the face of mystery. When uncertainty abounds, pundits strive to differentiate themselves from their peers. There’s little to be gained from saying what everyone else is saying, or, God forbid, suggesting that there isn’t enough information on which to base a judgement. Conversely, there can be huge rewards in taking a flyer on an extreme prognosis and turning out to be right. Being the single winner always entails more glory than sharing the prize.
This wouldn’t be the case if pundits suffered when their predictions proved wrong. There are forecasting professions where this happens, like stock analysts who err and then are more likely to be fired. But in the media, mistaken forecasts tend to be quickly forgotten, so there’s little downside to being bold and wrong. This tendency is exacerbated by the demands of cable news. Relying on what we know, and what we don’t know, doesn’t grab headlines.
As we enter the fourth quarter, this year is nearly “in the can.” STRATMOR Group’s clients are having fantastic years using margin and volume measures. The Mortgage Bankers Association, in its most recent forecast, believes that 2020 will prove to be the second biggest mortgage year in history. The MBA is predicting residential volumes will clear $3 trillion, putting it behind only 2003 in single family mortgage production history. But “mind the gap”: the MBA has joined the GSEs and other economists who forecast a significant drop in mortgage production in 2021, with most estimating declines in the range of $700 – $800 billion year over year.
Fannie Mae has increased its 2020 origination forecast from $3.4 to just shy of $3.9 trillion, most of which is made up of large increases in Q3 and Q4 refinance volumes. The MBA’s forecast has increased from $2.99 to $3.14 trillion, all of which is made up of a volume increase in Q4 primarily consisting of refis. In other words, Fannie’s CY 2020 origination forecast is 23 % higher than the MBA’s. MBA’s Chief Economist Mike Fratantoni commented that “We just are not seeing that level of volume in our data. And we don’t agree with Fannie’s rate path for 2021.” The MBA is forecasting a 3.30% 30-Yr FRM average rate for 2021 versus Fannie’s forecast of 2.60%.
Fannie is projecting roughly $3.5 trillion of refinances over 2020 and 2021. To put $3.5 trillion in perspective, assuming an average refi loan balance of $280K, Fannie is projecting that roughly 12.5. million loans will refinance during 2020 and 2021. Assuming an average refi interest rate of 3.0%, Black Knight estimated that roughly 18 million loans would be “in the money” as regards a refi. Thus, at 12.5 million loans, Fannie is projecting that almost 70% of “re-financeable” loans will refi over 2020 and 2021. The percentage would actually be higher if we scale back the 18 million to reflect credit worthiness and payment history.
Some suggest that beyond 2021 the volume of refinances could be far below historic averages. This being the case, consumer direct lenders, who have traditionally feasted on refinances as is currently the case, can be expected to turn their attention to increasing their capture rate of purchase loans, which has hovered in the 15-20% range. STRATMOR’s Dr. Matt Lind believes that this could threaten the viability of many retail lenders, especially small to mid-size lenders who would experience a double whammy: low refinance volume and loss of market share regarding purchase volume.
Does any of this matter to lenders hellbent on staffing up? Will newly hired employees be the first to be laid off in the event of a volume downturn in 2021? Or are lenders focused on “making hay while the sun shines,” and will deal with 2021 when it comes along regardless of predictions? I believe that latter to be the case. History is littered with famous people being wrong, the most recent well-known example was banking analyst Meredith Whitney who, in late 2010, predicted that cities across the U.S. were likely to default resulting in investors losing hundreds of billions of dollars. Forecasts by the MBA and the Agencies could very well be wrong, despite appearing to be very logical.
Nothing diminishes our appetite for dramatic predictions. We don’t like uncertainty. Closing loans now, and the full pipelines, represent certainty. It may be that the characteristics that make for more reasonable forecasts (acknowledging uncertainty, an awareness of the limits of one’s knowledge, and a willingness to speak in probabilistic terms rather than seeing everything in black and white) make us uncomfortable. Rates are stable, closings should be good into early 2021 at the least, and margins continue to be superb. In terms of lender’s philosophies, it would appear that “Fortune favors the bold.”
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