A $3 Trillion Year?
It sounds implausible to suggest that we may see $3.2 trillion in home mortgage originations this year. But that's what economists at Fannie Mae are predicting. And before you scoff at the idea that lending volume this year might be nearly equal in size to half of all outstanding mortgage loans, please remember how unlikely a $2 trillion year seemed at the beginning of 2001. None of the major industry economists predicted that rates would go low enough and stay low enough to generate $2 trillion in 2001. Not only did rates go that low, they went even lower in 2002, creating a record $2.5 trillion year and shattering the 2001 record.
So we aren't prepared to discount the possibility of a $3 trillion year. Among mortgage servicers, even those that have managed to weather the impairment to their portfolio caused by rapid loan prepayment rates must have started to sweat a little bit when 30-year mortgage rates dipped below 5.7% on Freddie Mac's weekly survey in mid-March. With refinancing accounting for as much as 80% of all loan applications some weeks, it's clear that impairment woes for mortgage servicing rights are not a thing of the past.
So what's a servicing executive to do? Obviously, hedging is not a thing of the past. We've been hearing economists predict that an economic recovery, and with it higher rates, is just a quarter or two away for over two years now. Just when it seemed like rates couldn't go any lower, they edged down some more. The trend has been a boon for loan originators, but it's a bane for servicers. And a repetitive reminder that nobody knows for sure which direction rates will go and when they'll move. Someday, rates will stabilize and lenders will find themselves with some very attractive MSR portfolios to manage. But it probably isn't a good idea to bet on it happening now.
So what will happen when rates rise? Servicing departments will become the star performers at mortgage companies again, providing an income boost to offset lost loan origination income. And the market for trading MSR portfolios should pick up nicely. But we hope the industry won't get complacent just yet. With an uncertain economy and a war underway in Iraq, nobody knows for sure which direction rates are going to move.
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