Editor's note: This story was originally featured in the December issue of MReport, out now.
The mortgage industry will face several major challenges in 2018 and beyond as housing prices continue to climb, interest rates rise, and affordability challenges remain the biggest obstacle for many potential homebuyers.
Increased competition and tighter margins will lead to additional industry consolidation. Smaller firms will struggle to maintain profitability, because of increased production costs. Productivity has been a challenge for many firms, because of a regulatory environment that requires investments in underwriting and compliance staffs to reduce risk.
The increased use of technology to automate many loan processes will help reduce production costs and improve profitability, but these advances will take time.
Lenders need to enhance the mortgage-lending experience, while simultaneously improving internal productivity with technology. Companies that can’t invest in the required tech will need to partner with bigger firms that can or use third-party partners to make them more competitive. Those that can find the right balance between technology and superior customer service will be well positioned to serve the needs of more homebuyers across all generations and create customers for life.
Five trends are emerging for lenders to monitor and manage in 2018 and beyond.
- Digital Mortgages Will Become the Norm, But Human Touch Will be the True Differentiator
Our industry has seen a substantial increase in lenders of all sizes moving toward automation in the loan process. Offering a digital mortgage is becoming commonplace and is no longer the differentiator it once was. It’s now a requirement to compete for business, as most lenders currently offer some version of a digital mortgage. Those yet to implement one are in the process of doing so.
We’ve seen a push toward the 100 percent digital-mortgage process and some lenders have made e-closings a priority. Mortgage companies are working hard to make the lending process easier, faster, and more efficient. There’s a perception in the industry that most customers want the complete digital-mortgage option.
The reality is a mortgage is a complicated and sometimes intimidating process and many people have questions. Customers still want to be able to turn to a professional to get their questions answered, from making the original digital application through closing. For most people, applying for a mortgage requires a personal touch. It’s not like buying a dress, electronics, or other items online where no human interaction is required to complete the transaction. A home purchase is more complicated, with a majority wanting a high-tech, high-touch approach that combines technology with customer service from a trained mortgage professional.
More important than the expectation that technology will deliver an intuitive and secure process, online customers need to have trust and confidence in the professional and the organization. To build that trust, lenders need to better communicate with every customer, have the expertise to help them select the right product, and use the right technology to make it faster and more user-friendly.
Self-service digital applications typically offer limited choices. Beyond the asset, income, and other personal data, loan professionals take individual financial goals into consideration to sort through more complex options to find what’s right for each person.
It’s for these reasons that I don’t expect the demand for 100 percent digital mortgages to be nearly as high as some lenders think.
- Interest Rates Will Rise
After some sharp increases early in the year, interest rates mostly remained stable in 2017. Economists from the Mortgage Bankers Association have predicted that interest rates will begin to rise over the next several years, possibly past 5 percent in 2019 or 2020.
In addition to the much-anticipated hike in December, the Federal Reserve is expected to raise interest rates next year following a rebound in core inflation, making homebuying more expensive.
When interest rates rise, pricing becomes more competitive, resulting in lower margins and losses in some cases. With the high cost of loan production and declining volumes and margins, the next several years will result in increased consolidation among lenders.
In this environment, many smaller lenders will reach a point where the costs of compliance are out of balance with profitability and loan volume, while larger firms can benefit from economies of scale. Smaller firms need to determine whether or not they have the money to invest in building the staff and internal systems necessary to compete with bigger, more-established lenders. Does the firm have the management capabilities and resources to succeed in today’s competitive market?
- Purchase Business Will Remain Strong
Purchase business will continue to dominate the market in 2018. The MBA is predicting an increase in purchase business in 2018 and a drop in refinances. They anticipate $1.2 trillion in purchase-mortgage originations next year, which is a significant increase from 2017.
The challenge will be inventory shortages in major housing markets across the country. Housing demand continues to outweigh supply, and new construction hasn’t been able to keep up for years. I don’t see this trend changing any time soon.
With demand continuing to drive up the cost of purchasing a home and rising rates keeping many would-be buyers on the sidelines, affordability challenges will continue. In many cases, it will be more attractive for homeowners to upgrade the house they’re in rather than reinvest in a new home.
- Cash-Out Refinances an Attractive Option
As upgrades and renovation projects become more attractive, more homeowners will look to tap into their home’s equity. Lenders will begin to offer programs targeting those looking for a cash-out refinance option specifically for a home renovation or similar project. We’re going to see second mortgages and construction loans become much more prevalent for those looking to upgrade their homes in 2018.
We’ve heard from many of our current customers who are planning to renovate their homes, add solar panels to save on utility costs, put in a pool, or redo the kitchen. For many, investing in these upgrades makes more sense than purchasing a new home at current rates.
- Attracting Talent, Establishing Future Success
With the mortgage industry growing more competitive, we will continue to see an emphasis on attracting top talent. Further advancements in technology and compliance systems at bigger firms will make running a business easier and more efficient for loan officers, allowing them to spend more time managing their pipelines and closing loans.
The ability to allow loan officers to focus on their relationships and sell more homes will be a key differentiator. Larger firms with the capacity to invest in the right tools and in back-office support will have a distinct advantage. These lenders will be positioned to pair experienced loan officers with industry knowledge, proven sales skills, and established relationships with younger professionals who have the technology know-how, but may still need to learn the business.
This type of relationship will benefit everyone and allow more loan officers to provide the ideal high-tech, high-touch solution that customers are looking for. Each individual brings a unique skill set to the table, allowing teams to learn and benefit from each other. Pairing experienced salespeople with new talent helps provide the best possible service to the customer.
With rising interest rates, short inventories, and more competition for every loan, lenders will be required to come up with creative offerings to differentiate themselves. Some will turn to technology, believing that more tech-savvy customers are looking for a completely digital solution. Others will develop unique products to target certain segments of the market.
The mortgage industry remains a people business. Many purchase buyers—especially first-time homeowners—want a streamlined process backed by skilled loan officers ready to answer any question and solve problems. Experienced loan officers who connect on a personal level and are committed to finding the right solution for each customer will stand above the competition, helping more people get into homes and stay in their homes, and becoming key contributors to the growth of any mortgage lender.