TheMReport — News and strategies for the evolving mortgage marketplace.
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feature W ith the boom in refis apparently winding down, industry experts say that lenders would be sage to formulate a plan synchronized to roll with the changing times. Thing is, some observers add, it's not always the way lenders, well, roll. Companies aren't doing nearly enough, said Joseph Garrett, partner at Garrett, McAuley & Co. in Berkeley, California. "They're acting as if the tree's going to grow to the moon," he said. That's largely due to their roots, meaning that many mortgage company owners are one-time loan officers or came up through the ranks, rather than some type of management training program, he said. Therefore, the majority of lenders might lack an aptitude for longrange planning, he added. Consequently, he said, only a small percentage of mortgage companies have formal business plans, budgets, or budget processes. "They typically don't think along the lines of having a strategic plan for all sorts of contingencies," continued Garrett, who specializes in banking and mortgage banking. "Banks tend to; it's sort of in their DNA. Mortgage banks are great sales people, but aren't necessarily great at management." Added Accenture Credit Services' Henry Santos: "While some lenders take time to do a lot of strategic planning and thinking about tomorrow, I don't think that happens as often as it should." Instead, most of the large shops across the country, as a practical matter, have a "laser focus on the here and now," noted Santos, a managing director who oversees the firm's residential mortgage outsourcing service. Furthermore, "nearly all leaders of large mortgage banks, lenders, and servicers express concern over not knowing where the regulatory pieces are going to fall," continued Santos. Until that's settled, "they're a little skeptical of investing and thinking too much about their future operating models." Downward Data S till, ready or not, the Mortgage Bankers Association's (MBA) seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, was down 4.8 percent in the week ended Oct. 26, 2012, reported Reuters. The MBA's seasonally adjusted index of refinancing applications dropped 6 percent while the gauge of loan requests for home purchases, a leading indicator of homes sales, edged up 0.5 percent. Mortgage applications decreased 12.3 percent from one week earlier, according to data from the MBA's Weekly Mortgage Applications Survey for the week ended December 14, 2012. The Market Composite Index, a measure of mortgage loan application volume, decreased 12.3 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 13 percent compared with the previous week. The Refinance Index decreased 14 percent from the previous week to the lowest level since the week ending November 2, 2012. The seasonally adjusted Purchase Index decreased 5 percent from one week earlier. The unadjusted Purchase Index decreased 8 percent compared with the previous week and was 9 percent higher than the same week one year ago. "Despite the Federal Reserve's announcement that it would purchase an additional $45 billion in Treasury securities per month as part of its continuing quantitative easing effort, rates increased in the second half of the week," said Mike Fratantoni, MBA's VP of Research and Economics. As a result, refinance applications dropped sharply to the lowest level in more than a month, he added. The refinance share of mortgage activity decreased to 83 percent of total applications from 84 percent the previous week. The HARP share of refinance applications fell to 25 percent. The adjustable-rate mortgage share of activity increased to 3 percent of total applications. Setting Their Strategies F or his part, Jim Blatt, founder of St. Louis-based Mortgage Returns, believes many lenders are locked and loaded—having devoted ample time to strategizing, including marketing— for whatever comes. They're preparing for the eventuality of refis diminishing and asking themselves what their primary sources of leads are, said Blatt, who spelled them out: referrals from past customers, conversion of prospects into customers, and a lender's referral partners. "We see people looking at those three sources and planning a strategy for each," especially with the MBA predicting a "pretty steep" decline in total originations, noted Blatt. "I don't know any lenders that aren't worried—at least to some level— about what they'll look like, profitability wise, if they lose 40 percent of their volume." Last October, the MBA reported it expected to see $1.3 trillion in mortgage originations during 2013, largely driven by a spillover of refinances into the first half of the year. The MBA also upwardly revised its estimate of originations for 2012 to $1.7 trillion. It expects to see purchase originations climb to $585 billion in 2013, up from a revised estimate of $503 billion for 2012. In contrast, refinances are expected to fall to $785 billion in 2013, down from a revised estimate of $1.2 trillion in 2012. "We expected 2012 originations to be front-loaded in the first half of the year, with refis falling off with rate increases. Instead we saw the refinance market grow during the year due to a combination of low rates, thanks to QE3 and slowing global growth because of continuing problems in Europe, and adjustments in the HARP and FHA refinance programs," said Jay Brinkmann, the MBA's chief economist. "We expect 2013 refinance originations to play out like our original expectations for 2012, with a long tail of refis extending through the first half of the year followed by a rapid drop-off in the second half." In contrast, Brinkmann said the organization expects a 16 percent increase in purchase originations in 2013 over 2012, with every quarter in 2013 exceeding the same quarter of 2012. The increase in purchase volumes will be driven by continued modest growth in the economy, an increase in owner-occupied sales financed with mortgages as opposed to cash purchases by investors, an increase in new home sales, and a small increase in average home prices. This assumes that changes in the regulatory environment during 2013 are not unduly disruptive in terms of their constraints on available credit, and FHA and/or Fannie Mae/Freddie Mac do not notably tighten their credit policies, he added. FHA and other government programs accounted for 43 percent of The M Report | 35