Fluctuating interest rates that have trended higher, thinner margins and fast-paced changes in secondary market appetites are driving retail home loan lenders toward multiple loan buyers and potentially more economies of scale through consolidation.
“You have to have a lot of irons in the fire,” said Brian Koss, executive vice president at Mortgage Network, noting that there is a growing need to have agency, bank and securitization buyers.
“One of those will be the most attractive bid, and it can change in 48 hours,” he said, noting that the changes can be dramatic.
Contending with this and managing secondary market relationships requires time and effort, Koss noted.
There has been some growing secondary market appetite for jumbo and hybrid mortgages that can provide a lower fixed rate to a borrower for five or seven years before adjusting, appealing to borrowers who are put off by higher rates for fixed-rate product and can deal with the shorter-term fixed period.
But Koss said the jumbo market is generally somewhat skittish.
When asked about the business’ thinner margins, he said he believes “the ante will continue to rise for our industry.”
Although “size is not everything” and some niche lender strategies may still be possible, this means anyone who wants to compete with players of size will feel pressure to have economies of scale and “continue to force consolidation,” Koss said.
Ultimately this may mean the industry has to rethink what constitutes a “small” mortgage lender as pressures to be sizeable increases, he said.
When asked about the extent to which the trend toward higher rates is affecting consumer buyer appetites and loan volume, Koss indicated that as industry forecasts suggests volume is decreasing due to declining refinancing, but some purchase and Home Affordable Refinance Program demand persists.
The move toward higher rates “has turned off the nozzle” when it comes to rate-sensitive refinancing, and while sometimes higher rates spur some origination activity as borrowers seek to get into the market before rates get any higher, it has caused even non-refi consumer mortgage shoppers to pause.
This is in part because borrowers have gotten used to historically unusual record-low rates in recent years, and there have been some small downward moves in rates since they began more generally trending upward, he said.
Koss said the shift in rates seems to have helped cool a bit some of the homebuyer bidding frenzy complicated by lower housing inventories in hot markets such as those found in some metropolitan areas and along the coasts, although not necessarily prices.
He said this “may not be a bad thing” as, in the end, it got borrowers out of the emotional bidding process often complicated by competition from cash buyers, giving them pause and more time to think clearly about their homebuying decision.
Bidding wars, he said, have been “definitely discouraging people and frustrating them.”
Appraisals that come in lower than current home prices continue to be a challenge, Koss said, but with enough work he said borrowers can find financing.
“The big thing is the appraisal,” he said. “Every day there is a house that did not appraise for what it sold for.” As a result, borrowers can find themselves needing a larger downpayment than expected.
Mortgage insurers have been increasing what they will accommodate and state bond programs in some cases may offer better terms that Federal Housing Administration loans or private mortgage insurance, Koss said.
