(Bloomberg) — After riding the $3 trillion refinancing wave to its best year ever in 2020, U.S. mortgage lenders have hit a snag: rising rates.
For Thuan Nguyen, a mortgage broker at Loan Factory in San Jose, California, it’s humbling. He sold about $2 billion in mortgages last year — more than any industry sales person in at least a decade, by one ranking. Now the phones are going quiet.
“I expected the good times would continue,” said Nguyen, 48, who quadrupled his staff and expanded to almost 20 states last year. “Rates went up and all refinance almost disappeared. Everybody got shocked.”
The U.S. mortgage business is reckoning with the reality that last year’s easy money is coming to an end. After falling to an all-time low of 2.65% in January, the 30-year fixed-rate mortgage hit 3.17% last week, the highest level in more than nine months. That’s already crimping profit margins in an industry that had a record in 2020.
Rates may increase further. Federal stimulus and rising vaccination rates appear to be setting the stage for an historic economic expansion — and the prospect of higher inflation.
There are signs mortgage brokers and lenders are in for a tough period. This year, mortgage companies are projected to originate 13% fewer home loans after last year’s record $4.5 trillion, FannieMae forecasts on refinance and purchase volume show.
The number of homeowners who could benefit from refinancing has dropped by close to 40% to 11 million in about one month, according to Black Knight Inc.
Kevin Peranio, chief lending officer for Paramount Residential Mortgage Group Inc., began asking loan officers last year to pivot to the less volatile home sales business. Less than 61% of mortgage applications last week were for refinancing, down from 75% in January, according to the Mortgage Bankers Association.
“I’ve been in the business 20 years and every single time a refinance boom ends, it ends violently and suddenly,” said Peranio.
Lenders last year feasted on easy loans because there were so many, said Jim Cameron, senior partner at mortgage advisory firm Stratmor Group. Mortgages on almost 400,000 homes were refinanced at least twice last year, according to Attom Data Solutions.
Now, as rates increase, the industry appears to be starting a familiar cycle. First, companies lower standards for new loans to try to make up for lost business and widen the pool of potential customers. Then, they sacrifice margins before they eventually dismiss workers. If business still stays slow, lenders end up being acquired or shut down.
It’s already starting. Profit margins on new loans have fallen by 27% since peaking last August, according to Federal Reserve Bank of New York data. Hot-shot underwriters who took signing bonuses of as much as $20,000 for switching jobs are nervous they’ll be on the firing line, said mortgage recruiter Tony Hanson.
Industry executives also said competition this year is tougher after a clutch of lenders went public in recent months. United Wholesale Mortgage, which Inside Mortgage Finance ranks as the nation’s fourth-largest lender, recently said it wouldn’t work with loan brokers who do business with Rocket Cos., the No. 1 firm. Those companies will need to show growth while chasing a shrinking pool of customers.
“I’m glad we’re not public right now,” said Michael Oursler, chief operating officer of NewDay USA, a lender to military veterans.
Investor enthusiasm for some newly public companies is waning. Shares of Rocket and LoanDepot Inc., a lender that went public in February, are down since March 1. With business less robust, loan officers may need to start chasing sales leads and make fast friends with real estate agents and homebuilders.
“Everybody wants to get to the customer first,”said Barry Habib, CEO for analytics firm MBS Highway.
As refinancing fizzles, lenders will also have to compete over a limited number of purchase deals unless there are more listings. Sales of previously-owned U.S. homes declined in February to a six-month low, reflecting a record annual drop in the number of available properties.
Still, all isn’t dire for the industry. Mortgage companies are projected to originate $3.9 trillion in loans this year. As the market rebounds, once-unemployed borrowers with federally-backed loans could become eligible to refinance and draw equity from their homes. Many of them took advantage of the government’s forbearance program to delay payments.
To keep loans flowing, lenders are relaxing credit standards after tightening them for much of last year, according to Mortgage Bankers Association data. Typical credit scores for new loans are ticking down, Urban Institute data show. Paramount Residential has dropped its minimum FICO score to 580 from 620, almost as low as it was before the pandemic.
LoanDepot Chief Financial Officer Patrick Flanagan and others expect lenders to push cash-out refinancings and second mortgages to draw those considering renovations or paying off credit card debt. Homeowners’ debts are the lowest relative to property values in 30 years, equating to roughly $21 trillion of home equity, Federal Reserve data show.
Nguyen, the Loan Factory broker, never had the time to celebrate his record year. He sold 5,216 loans last year, nearly all refinancing, and his total volume was the most in at least a decade, according to industry publication Scotsman Guide. This year, he expects his loan sales to fall by half.
“When there’s less business out there, you just have to compete harder,” Nguyen said.
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