Now that residential application volumes are on the wane—thanks to rising mortgage rates—the obvious question becomes the most gut wrenching: When will mortgage bankers begin cutting heads and which firms will bite the dust?
Almost every executive and loan officer I’ve interviewed in recent weeks is aware that a day of reckoning is on the way, but most believe that it will be the “other guy” that gets hurt and not them.
Indeed, LOs, at times, can be an optimistic lot, but if there’s a doubt that a slowdown is on the way, JPMorgan Chase CEO Jamie Dimon made it clear when he recently told analysts and reporters that residential loan demand probably peaked in the fourth quarter and that it’s highly unlikely that his firm will match 4Q’s production total of $56 billion. “Last month (December) application volumes were pretty low,” he said. “That number (the $56 billion) has to come down.” It’s no secret that when the yield on the benchmark 10-year Treasury neared 3.6% in early January that refi applications dried up and telephones stopped ringing.
Bill Dallas, CEO of Skyline Financial, a nonbank lender based in Agoura Hills, Calif., said that during the first half of January applications at his shop were off 35% with originations dropping 25%. Since then rates have fallen slightly and it looks as though applications are once again picking up.
Many lenders are hanging their hopes on purchase money loans increasing significantly this year. But as one West Coast-based mortgage banker told me, “When you go from $1.5 trillion in production [in 2010] to $1 trillion [in 2011] there are going to bodies lying in the street,” he said. “I’m sorry,” he said, “but not everyone is going to make it onto the lifeboat.”
This executive, requesting his name not be used, raised another point: that even if the job picture improves dramatically this year purchase money loans won’t increase enough to make up for the decline in refis. (Over the third and fourth quarters refis accounted for about 75% of fundings.)
And the biggest complaint being heard around the industry centers around tight underwriting guidelines. In years past, when volumes were slated to fall, many lenders—as though on cue—loosened their guidelines in an attempt to spur applications. But that tactic works only when the housing market is healthy, and few believe that rising home values are right around corner.
Jon Daurio, a top executive at Kondaur Capital of Irvine, Calif., an investor and servicer of nonperforming mortgages, believes home values, nationwide, will slip another 10% this year and maybe by 20% over the next three years. “Tight credit is further exacerbating this mess,” he said.
As for layoffs, large reductions have yet to occur at many of the top-ranked shops, and most firms have enough loans in their pipeline to get them through the first quarter, at the very lest. And in some cases, lenders such as Flagstar and Ally Financial/GMAC are looking to hire new loan officers. (One California account executive offered this qualification about the job market: “Generally, firms are looking for sales people on a commission-only basis. That means no salary.”)
So, does that mean all this talk of a production disaster for 2011 is off base? Craig Cole, the head of loan fundings at Union Bank of San Francisco, said at this bank application volume was down during the first 10 days of the month but is now picking up steam. “We are seeing some purchase volume inching up,” he said, adding that refis are still “heavy.” Stay tuned.
