MReport September 2021

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18 | M R EP O RT FEATURE I don't know exactly when and how fast refinances are going to go away. I only know they will, and pretty much everybody I've talked to agrees. Some say refi- nances won't dry up that fast, but nobody is saying, "Nope, rates are going to drop some more." As far as predictions go, Fannie Mae thinks the percentage of purchases will be about 58% in the fourth quarter of 2021, and the MBA says 72% will be purchase business. Whether it's the third or fourth quarter of 2021 or perhaps the first quarter of 2022, it doesn't change the fact that lenders need to be planning for a purchase market. Fortunately, history has taught us a few things about purchase markets that we can use to our benefit as we roll into this one. Higher Costs in a Declining and More Competitive Market I t's a fact: people who are able to source purchase loans often require higher compensation because they spent years develop- ing relationships with real estate agents and others who provide them with referrals. Because inde- pendent mortgage bankers (IMBs) tend to do more purchase loans, they devote years to developing a salesforce focused on real estate agents and homebuyers. When recruiting in a purchase market, I don't want originators who have only feasted on refinances. Purchase loans are more compli- cated transactions, so I need loan officers who have relationships that bring in referrals—and I'm willing to pay more to get them. In a purchase climate, we're also more likely to see mul- tiple loan officers fighting over the same deal. Just like today's real estate market, where mul- tiple buyers fight for each home because there is not enough inventory, in a purchase market, loan officers will fight for each loan, so they are more likely to compete on price to get the deal. Sales costs will go up (in order to get the good LOs) and revenue will go down because you have to fight on price a little more. The Pattern to the Refi/Purchase Cycle Hasn't Changed I n the last 10 years, there has not been a single year in which refinances have not gone up or down by at least 20%. In fact, in 2019 and 2020, the number of refis rose 100% each year. That's a stag- gering number. Every single year, we end up having a huge, mostly unpredicted whiplash in refinance transaction volumes. On the other hand, purchase loans have merely bumped along. For a decade, we have not had a year where purchase loan volume went up or down by more than 15%, and a 15% purchase increase only happened once. Most years, purchase volume fluctuations are 10% or less. So, we know it's going to be painful in the next year because we're going to see a big drop in refinance volume. But we're probably going to have a good purchase market, and purchase volume is going to be within a predictable range. Good lenders will at least be able to build a plan to grow purchase volume in their marketplace, and transactions are likely going to be pretty darn close to what they expect. I know some reading this article will say, "Not in my market. We're getting hammered on inventory, and we're not sure where our next purchase is going to come from." That might be true. Certain pockets may continue to see everybody bidding on multiple properties, which will make it hard to get the deal, or inventory may remain low. Perhaps the first- time homebuyer market will col- lapse due to rising prices. In some local markets, there could be some macro impact, but it isn't going to be 100% a year, year over year. Staff Will Be Significantly Less Productive T hink about it: with a refi- nance, the borrower usually talks to one loan officer, and maybe checks out rates online. That loan officer asks a couple questions, tells the borrower what the new, lower monthly payment will be, and asks, "Do you want to refinance your loan?" If the answer is yes, the process is not much more complicated than that. As long as the loan officer can get the loan to the borrower at the What to Expect as the Market Pivots Regardless of when it happens, lenders need to be planning for a purchase market. By Garth Graham

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