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No one owns a crystal ball. Five years ago, nobody answered the interview question, “Where do you see yourself in five years?” with anything close to what is happening around the world. Five months ago, who foresaw COVID sweeping the world, wreaking havoc on economies and driving down interest rates?
The most recent forecast from the Mortgage Bankers Association (MBA) predicts a strong continuing purchase volume that supports a positive outlook for the industry, but a sharp drop in refinances starting in Q3. The forecast is a relatively positive view of the go-forward impact of the pandemic and the re-opening of the economy. But what if world events take a turn for the worse?
STRATMOR research did some “what if” scenarios and put together an alternative model of what the rest of the year might look like if all things don’t go as well as we all hope. They put these scenarios in context that works with, and not against, the MBA’s forecast.
On the positive side, the MBA’s mortgage finance forecast calls for $792 billion in originations during Q2 2020, falling to $575 billion in Q3 (a 27 percent decline) and $509 billion in Q4 (a 36 percent decline relative to Q2). Virtually all of the decline can be attributed to “burnout” of the Q2 refinance boom ($444 billion in Q2). In Q3 and Q4 refinance volumes are expected to fall to $267 billion and $174 billion, respectively). The projected purchase volume of $348 billion in Q2 is forecast to decline to $308 billion in Q3 and then rebound to $335 billion in Q4 (as of 6/16/2020).
To meet the projected $792 billion origination volume in Q2, many lenders have increased overtime and incorporated technology. Given the steep projected declines in origination volumes projected for Q3 and Q4, a good portion of lenders operated understaffed in Q2, expecting that workload during Q3 and Q4 to normalize. Plus, to manage volume during the peak in Q2, many lenders prudently raised the “quality” of loans through tighter credit guidelines on top of Agency standards to help limit forbearance.
As we watch COVID-19 cases surge again across the United States, STRATMOR contemplated these “what if” scenarios. What if purchase volume tanks in Q3 and Q4 and we see refi burnout? What if COVID-19 cases continue to surge in both Q3 and Q4? What if income and support stimuli are not renewed by the U.S. Government after running out in July, and more borrowers enter into forbearance with their lender while simultaneously putting their home on the market?
What if Democrats sweep the 2020 elections and restore corporate taxes to pre-Trump levels (e.g., corporate taxes increase from 21 percent to 35 percent) and re-regulation of many industries including environmental, energy and labor regulations, etc., increases corporate costs, causing a significant systematic drop in the stock market?
If all of these “what ifs” come to pass, they add up to economic strain for the economy and tough times for most lenders, but especially lenders that have relatively high fixed costs in relation to their origination volume along with relatively high variable costs (e.g., commissions, fulfillment costs, etc.). Such lenders would include smaller independent mortgage bankers, lenders that have not adopted/implemented digital mortgage processes that reduce both fixed and variable costs, lenders with limited capital, and lenders who are behind in deploying a reasonably developed consumer direct channel.
These “what ifs” would likely cause some lenders to fail or be forced to sell-out to stronger competitors, resulting in accelerated consolidation of the industry. Lenders could see lower fulfillment, post-closing and servicing costs, and a potential increase in Consumer Direct share of purchase originations. Hang onto your staff — talented LOs will be in high demand. Lenders who measure metrics relentlessly, keep abreast of technology, and are well capitalized should thrive.
Arguably, we could see more M&A transactions and lender shutdowns, resulting in increased industry concentration and continuing low interest rates. Perhaps we will see increases in lower-price housing inventory (since unemployment at lower income levels is coupled with forbearance) which incents unemployed homeowners to put their homes on the market, and these houses possibly snapped up by large venture capital funds as we saw in 2009-2013. Normally, high inventories and low prices might increase demand, but the impact of the pandemic may take large swaths of potential borrowers out of the market.
And what if the MBA’s forecast is exactly as predicted?
STRATMOR clients are currently reporting record volumes. Many have successfully transitioned to productive “remote” working environments and/or created safer “in office” work experiences to protect their staff. E-closing and overall digital technologies are being adopted at a more rapid pace than in mortgage industry history. These are great steps toward encouraging on-going productivity and ensuring a continuously improving borrower experience. We would all love for the MBA forecast to be as predicted, but STRATMOR recommends lenders continue to hope for the best while planning for the worst
The only “what if” we can be sure of — Q3 and Q4 2020 will be quite a ride.
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