So, it is unsurprising that this year, with volume estimates closer to $2.5T, it feels as though dark clouds are crowding in. In the wake of two years of churn, many companies will naturally struggle with the reduction in revenue paired with a higher cost to originate. Rates have spiked in 2022 by over 1.5% due to Fed interest rate hikes and the dramatic, but expected, end of quantitative easing. Industry experts project a 64% year-over-year decrease in refinance volume this year alone. That is sobering news for any mortgage professional trying to balance a growth strategy with the hard choices of right-sizing transactional support.
1. Purchase-Market Opportunity
And that is where we find our first silver lining. There is always opportunity in the mortgage industry for those willing to pivot, and there are two major sectors projecting massive opportunity for origination. Everyone has been talking about the shift to purchase, so there is no newsflash there. But it is important to really point out the size of that opportunity.
What 2020 and 2021 were to refinancing is what 2022 is to purchase money. The purchase market is projected to be its highest volume on record at $1.69T in originations! And those numbers are sustained for the coming few years. But it is important to ask whether this is just a bubble.
The economics are strong. Housing prices are responding with strong upward pressure from real market forces – pent-up demand, a supply chain issue, a labor shortage, and the maturation of the largest cohort of first-time homebuyers in history, Millennials. Millennials play an important role in the debate because the average age for a first-time homebuyer is 34. And riding hot on their heels into homeownership is Gen-Z, who just overtook Millennials as the largest generation in the US.
The strained housing supply isn’t going to get any relief. People are going to buy homes, regardless of the interest rates, because they must live somewhere. When there are not enough homes on the market, sellers ask for more and get it. So, while the real estate market may exhibit some cooling from this dramatic price appreciation, a chill in the rate of appreciation is not the same thing as depreciation.
2. Tappable Equity
The second silver lining is in the $11.2T of tappable equity in the current housing market. That home equity just increased by $2.8T in the last year alone. So, while recessions and talk of bubbles make headlines, the professionals get back to work in providing solutions. Homeowners are going to require access to that trapped equity, and origination needs to know the products and options available to them.
On the opposite end of the population spectrum with the third-largest generation by size are the Baby Boomers. There is an important concept in the elderly community called aging in place. This refers to a person living in a residence of their preference while they are physically able to. For some this is a choice, for other seniors it is due to a scarcity of affordable options to downsize in a location near family or support. This can leave seniors with a lot of trapped equity and a decreasing capacity to qualify or repay a mortgage on a fixed income.
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Tappable equity will play a major role in the future of mortgage origination. Trapped equity and aging in place points squarely at reverse mortgages, or home equity conversion mortgages (HECMs). These aren’t the product they used to be, having gone through a major overhaul in 2014 by FHA. They are a true win-win, being a strong financial product with a lot of protections baked in for seniors and a very compelling product for mortgage companies – low risk, government insured, with a lot of profit in them to buoy a sagging bottom line. There is even a reverse purchase product, HECM for Purchase (H4P).
3. Opportunity to Enhance Operations
Another silver lining is the industry has a moment of reprieve to improve our business model, productivity and employee satisfaction. The last two years provided a practical laboratory to examine and problem-solve the cumbersome and analog process friction that still demands attention and automation. FinTech has been ubiquitous as lenders tried on new technologies to wrangle these unprecedented volumes. The goal remains the same, building a profitable business with strong sticky relationships with consumers, realtors, investors and employees. There have been some high-profile winners and losers, but progress has inarguably escalated in user adoption and customer expectations.
Across the industry, there are a lot of new super-users who rely on these innovations. Very few companies survived or thrived without embracing the tools required to manage their production (data, documents and process) and the business of mortgage banking (productivity, accounting).
FinTech Will Help the Mortgage Industry Endure
High-performing originators now rely on best-in-class origination technologies, such as point of sale (POS), data, and customer relationship management (CRM) tools. Digital automation is literally pushed into the hands of the loan officer with an app as an extension of the mortgage company’s loan origination system (LOS.) Instantly accessible data and documents obtained as close to the source as possible and securely delivered directly to the lender for underwriting? That’s Star Trek awesome.
The impact of FinTech has been a slow, but mind-blowing professional experience, which may feel slow for the consumer but escalates every year. Every dinner party mortgage bash session used to start with, “they asked me for my [insert name of document] four times.” Now they are about bidding wars and appraisals. So that is the last silver lining. There was a time in 2008 and 2009 when it was open season on the mortgage industry. It is a testament to our industry that we were able to absorb the criticism and the regulatory tsunami. Then we tested it over the last two years as the industry just knuckled down and refinanced everyone… in a pandemic. There were a lot of stressors, but borrowers were protected, good loans were originated and mortgage originators were successful.