Mortgage Lending in 2007: Tough Times Ahead
This year may not be the best time to be a private-label, bad credit mortgage originator.
Such professionals will have a more difficult time selling Wall Street investors risky loans in 2007, experts say, even as they face tougher underwriting and disclosure standards from regulators.
But don’t expect “exotic” loans to become extinct as the mortgage lending industry copes with slackening demand for all types of loans through layoffs, consolidation and modernization.
The Mortgage Bankers Association projects home loan originations will fall 11 percent this year, to $2.21 trillion, followed by an additional 7.4 percent decline to $2.05 trillion in 2008.
A slowdown in home sales is likely to translate into fewer home purchase loans, while rising interest rates and slower or negative home price appreciation could also make mortgage refinancing less attractive to many borrowers.
MBA economists expect purchase originations - which reached a record high of $1.51 trillion in 2005 - to total $1.29 trillion in 2007, down 6.7 percent from last year. Inman News provided these details.
By 2008, the MBA projects refinance loans will constitute just 37 percent of the mortgage origination market, compared to 50 percent in 2005 and 44 percent in 2006. Refi’s will make up 42 percent of loan originations this year, the MBA forecasts.
“After every good party there’s a hangover,” said Amy Crews Cutts, deputy chief economist at government-sponsored mortgage repurchaser Freddie Mac. “We’ve seen a huge boom in mortgage-related employment, including Realtors.”
Now, Crews Cutts expects to see consolidation as mortgage lenders cut capacity.
“The guys who got into being a mortgage broker because easy and money fell out of sky are going to get pushed out by the ones who really know how to earn it,” she said. “I would anticipate seeing, as banks merge, and servicing offices merge, a greater emphasis on technology. But I don’t know which credit union, or which bank, is going to do the layoffs.”
Adjustable-rate mortgages will continue to lose market share this year, accounting for just 14 percent of originations, MBA economists predict. That compares to 30 percent in 2005 and 22 percent in 2006.
With the narrow spread between fixed-rate mortgages and adjustable-rate mortgages, ARMs are already looking less appealing to borrowers.
In the last week of 2006, ARM loans constituted 20.4 percent of loan applications - the lowest level since July 2003. MBA economists expect the ARM share of conforming loans, which stood at 31 percent at the beginning of the year, to remain at 15 percent or less through the end of 2007.
During the boom years, subprime and nontraditional loans such as interest-only loans and payment-option adjustable-rate mortgages were touted as a way to help buyers grapple with rapidly escalating home prices.
As long as prices kept going up, buyers could take advantage of lower monthly payments while building equity in their homes, refinancing on better terms before their payments went up. But when home price appreciation slowed or reversed in some areas, many borrowers found their homes were worth less than they owed, making it impossible to refinance on better terms.
In the last weeks of 2006 - as several subprime lenders were closing their doors because of financial difficulties - the Center for Responsible Lending issued a report predicting that one in five subprime loans originated in the last two years will wind up in foreclosure.
This doesn’t bode well for insiders that specialize in the field.