It’s official. The cake is baked.
We must now find success in a post ability to repay/qualified mortgage (ATR/QM) world.
To top it off, the Mortgage Bankers Association (MBA) expects refinances to drop by a third compared with last year due to rising rates.
Given these challenges, the menu for success won’t be a replica of 2013, but instead will morph in response to four major changes:
Originators have placed their bets and modified their offerings to comply with the new rules. A survey of small to large scale originators conducted by Informa Research Services in December 2013 suggested that most intend to offer some form of non-QM products.
The most common exception features included interest-only periods, limits to origination fees and points, and debt-to-income ratios greater than 43%. Most will not charge a premium for non-QM products, nor will they limit their availability to existing clients.
Wells Fargo, for example, has assigned about 400 underwriters to originate mortgages for the bank to retain, with as many as 40% of those loans likely to be non-QM.
That segment will be increasingly sought after at a time when rising interest rates are curbing borrowing demand and financial institutions are facing the biggest regulatory overhaul since the Great Depression.
Non-QM could be between 25% to 40% of lenders’ total nonconforming loans, or about 5% of all mortgages.
2. Rising rates
The MBA expects the average 30-year fixed rate mortgage to climb from 3.5% in 2013 to 5.1% in late 2014. The expected rise in the 30-year fixed rates should increase adjustable-rate mortgage market share.
Additionally, MBA projects the 10-year Treasury yield to climb from 2% to 3.3% on the back of improving macroeconomic conditions and the Federal Reserve’s decision to taper its bond-buying program.
3. Favorable housing measures
Consensus forecasts, including the MBA, suggest single family starts will grow by 10% to 15% in 2014, and total existing home sales will climb by around 5%.
4. Declining originations
Favorable housing measures will prove inadequate to offset the impact of rising rates, with the MBA forecasting a 33% decline over 2013 due to a dramatic drop in refinances and the refinance share dropping from a high of 74% in 2013 to a low of 36% in late 2014.
While daunting, these changes actually create opportunities for the opportunistic lender. Many will overreact or be forced out of the marketplace by these events.
By focusing on these strategies, you can win in 2014:
• Sharpen your pencil. Recognize that you compete against every financial institution and broker/banker in your market and on the Internet. Know your competition and ensure you are competitive in terms of price.
Margins will compress—don’t cling to old norms. Pay special attention to your existing clients and how to offer meaningful relationship discounts that will keep them with you.
• Know your costs. Understand your cost structure, focusing on what is fixed versus variable.
Invest in technology to reduce your production and compliance costs. If you can’t make the numbers work, consider outsourcing originations to a third party to support your members yet still generate revenue.
• Seek profitable niches. These changes create opportunity for innovative portfolio product strategies that focus on potentially out of favor features (e.g., non-QM; construction).
By carefully structuring your programs, you may be able to command higher prices while appealing to lower-risk borrowers.
• Be realistic. Set expectations for the long haul. If you’re not a Realtor-centric shop, don’t fool yourself into thinking you can create those relationships overnight and command their purchase business.
The 2014 mortgage landscape doesn’t have to be bleak. While these challenges seem daunting, opportunity abounds for the disciplined and creative credit union.