It will be more expensive to originate loans in 2014 over 2012 and 2013 because of the
It remains to be seen if most mortgage companies have the capital on hand in order to pivot their businesses to meet the challenges of a changing market place, says Rick Roque, principal of Menlo Co., a consulting firm.
It could be at least six months for originators to be able to adjust to making loans under the new qualified mortgage rule, set to start on Jan. 10. The expectation of the regulators is for compliance right at the start.
But most of the market is figuring how to fly under the radar as they look to get an understanding of the new rules. Understanding them is one thing; understanding how to comply with them is another, Roque says. And
Introducing new products or changing existing ones is a matter of being able to quantify the risk. This is difficult right now, he says.
But the well-capitalized companies can afford to have direct relationships with the regulators, hire the best attorneys and best able to document attempts at compliance, Roque notes. Small and midsized lenders of all kinds with a net worth of under $5 billion would be at a competitive disadvantage, because they can’t afford to hire the same kinds of advisors.
As a result, Roque is being approached by lenders looking to be sold or consolidate their operations with a larger player and have those resources.
This consolidation will benefit the non-depositories whose net worth is over $5 billion because these firms will be able to grab market share, he continues.
The companies he is speaking with have the capital and are willing to take their time to evaluate good mortgage groups around the country and target specific markets for growth.
There are investment banks which have hinted that between 35% and 40% of the retail origination market is up for grabs right now. A big reason for this is that a number of depositories, such as
The remainder of the available market share will come from attrition of 30% to 40% of the remaining mortgage brokers (either leaving the business or joining a larger organization). On the independent mortgage banker side, a similar number of smaller organizations will have a similar fate.
There might not be one single issue that worries the members of the Lenders One cooperative, says Jeff McGuiness, CEO. It is a confluence of issues such as how QM will affect their operating environment. They are also worried about loan prices on the secondary market being high enough to support their operations. Then there is the uncertainty to how the market
The big word for 2014 is “ambiguity,” he declares.
How much private money will make its way into the mortgage market is one of the unknowns.
Lenders One members are focusing on what they do best, which is to serve their communities and making sure they have the best sales force for the market, McGuiness says. They want access to the purchase market and the way to get that is through the retail loan officers on the street out there knocking on doors.
There will also be a focus on finding efficiency in their operations, including reducing the cost to produce, he says.
There is one loan originator who expects his refinance business to be down 70% compared with 2013. The split for Peter Grabel a senior mortgage loan originator at Luxury Mortgage Corp., Stamford, Conn., has been 60% purchase, 40% refi.
Going forward, it will be 85% purchase and 15% refi. And whatever refi business is coming in the door, it is from people who are now confident their homes have recovered in value and now hold enough equity to seek new financing, he says.
Other sources for refi business in 2014 will include divorce or the death of a family member. But the plain vanilla refi of the last few years is gone, Grabel says.
The steady
But the area’s rental market is also playing a role in the improvement in amount of home purchases. His typical client is paying $4,000 a month in rent for a one or two bedroom apartment and they have a second child on the way. These people are discovering they can buy a house and have a lower monthly mortgage payment than what they are currently paying in rent, Grabel says.
And that market rate rents in the area are continuing to increase will get more than few people to change their minds and elect to become home owners.
During the next year, originators could opt to do fewer conforming mortgages. This is because of things like the increase in the guarantee fees which helps to make doing these loans more expensive and more onerous for originators. The rise in g-fees is one of the reasons why jumbo loans are being priced lower than conforming loans right now.
As a result, more loans of all types will be originated that will be kept in someone’s portfolio, Grabel says.
Although it might not be such a bad thing for the market as a whole to move away from a market dominated by government-owned players to one with more private investors being active, he adds.
The return of private money also means more products are available for those borrowers who do not fit inside the box, Grabel points out. This is good for his business because most banks tend to originate to tight guidelines, where the independent mortgage banker like Luxury Mortgage can underwrite using a common sense approach.
A lot of leads are coming from people who are frustrated with the big players and are looking for some hand holding and a high level of service, Grabel says.
Part of that frustration comes from the documentation requirements. Consumers are constantly getting hit for requests by the banks. While those can’t be eliminated, if the originator is able to anticipate them and get the request to the client in a timely manner it eases the process.
But the upcoming switch to a purchase-oriented market does not affect just the loan originator, says Jason Auerbach, divisional manager at First Choice Loan Services, which is part of First Choice Bank. The company is spending time making sure the processing staff and the operational staff understand the amount of time and service that needs to go into these applications.
Being a small bank means it is more nimble than its larger competitors and where it can gain share from being quick in turnaround time.
Price is another area it can be competitive in, as well as looking at origination opportunities which fall outside of the comfort zone of those larger operations. For example, First Choice focuses on the
Another outside the box product is asset depletion loans. These borrowers don’t have a lot of income on paper but they own a tremendous amount of assets. First Choice looks at those assets to see if there is enough of an income stream to pay the loan.
It is working on expanding its construction/renovation loan program. And it is willing to make loans on multifamily detached properties; these properties have multiple dwellings on the same lot (such as a main house and a carriage house).
So First Choice wants to highlight its speed and agility and take a wider view of different ways that people can qualify for mortgages. At the same time, it remains cognizant of making sure all mortgages underwritten are of good credit quality, he says.
Be willing to play outside the box but at the same time being aware of the new rules of the came when it comes to risk could be the template for smaller lenders to build their business on in 2014.
Now there is an opportunity for First Choice to be able to highlight its differences versus the larger lenders, Auerbach says.
