A Case for Optimism: Why the Origination 'Cliff' May Be Avoided

The way things stand today residential lenders are on track to fund upwards of $1.75 trillion in mortgages by the time 2012 ends. Image: Thinkstock.

Forget the "fiscal cliff"–what about the origination cliff?

Several months back mortgage bankers from coast to coast were fretting about the inevitable: that when interest rates finally rise the refinancing gravy train that’s been sustaining mortgage bankers for the past 12 months will finally grind to a halt.

Of course, all that was before financial conditions worsened in Europe, sending investors worldwide into the safe haven of U.S. Treasuries–in particular, the benchmark 10-year bond which is watched religiously by mortgage bankers.

Then along game "QE3" and the Federal Reserve’s commitment to keeping rates low into 2015 and suddenly mortgage bankers aren’t so gloomy anymore. Selling 30-year FRMs at 3.25% can do that to you.

The way things stand today residential lenders are on track to fund upwards of $1.75 trillion in mortgages by the time 2012 ends, a 20% increase from last year, according to figures compiled by National Mortgage News and the Quarterly Data Report.

Depending on the statistics you subscribe to, 70% of the activity has been refis. Refis can’t last forever, can they?

Well, actually they can, or at least self-perpetuate to some degree. As we’ve noted before, we’ve heard plenty of anecdotal stories from lenders who are refinancing customers they wrote a new loan to last year or in 2010.

The decision to refinance is usually purely mathematical: can a decent amount of money be saved each month by getting a mortgage with a lower rate? The equation hinges on loan size. Higher balance loans are more economical to rewrite because the larger the loan balance, the less of a rate change it takes to greatly affect the monthly payment.

Refis would be even greater if it weren’t for such ultra-tight underwriting standards ushered in during the post-housing crack-up era.

Still, mortgage bankers are feeling somewhat optimistic about what’s left of 2012. The Mortgage Bankers Association recently hiked its production estimate for 2012 to $1.7 trillion. A year ago it was forecasting a depressing $900 billion for this year–quite a sea change. (MBA cited QE3 and the Fed’s "Operation Twist" for the about face.)

Next year will be a different story. Even if rates stay low, refinancings cannot last forever. MBA is forecasting $1.3 trillion in new loans next year, praying the purchase money business will finally pick up a head of steam.

Meanwhile, a new report from Bank of America/Merrill Lynch notes that the current refinancing wave is still rising. Recently collected figures reinforce their view that it will be a “slow and steady” refinancing wave with a “long duration.”

And a new loan officer survey from the Federal Reserve found that demand for prime and nontraditional home loans rose during the third quarter – even with banks reporting little or no change in their underwriting standards, which are still quite conservative.

But, yet there’s hope–and it hinges on improving home prices and the belief that private-label originations (non-jumbo) might finally take off (to some degree) next year. Then again, some of this depends on the yet-to-be released qualified mortgage rule and the ability of some nonprime lenders to obtain financing from private equity money.

In other words, there’s light at the end of the tunnel. But hopefully for mortgage bankers it’s a way out and not a train coming down the tracks.