Compliance, Competition High on the List of Worries for Lenders

While 2015 was a prosperous year for lenders, a tougher mortgage market lies ahead in 2016. With the Fed hanging at least four rate hikes over the industry, this could place damper on origination business operations.

Last year's mortgage market was filled good news and positive reports including a rise in home sales and housing starts not witnessed since pre-recession times. In addition, accelerated home price appreciation increased purchase mortgage originations year-over-year, while refinance volume increased due to historically low rates.

Despite 2015's positives, the outlook for 2016 is not so bright for lenders. Fannie Mae's quarterly Mortgage Lender Sentiment Survey Wednesday, which questioned senior mortgage executives in November 2015 about their plans for their origination and servicing businesses in 2016 and concerns they gave moving forward, believes that rising rates from the Federal Reserve will negatively impact lenders' businesses.

According to Fannie Mae's Senior VP and Chief Economist Doug Duncan, home sales, home prices and homebuilding trends will continue to be positive, but rising rates will hinder refinance originations by more than the projected rise in purchase originations, which will ultimately limit the pie for lenders.

Fannie Mae projects that mortgage lender competition will increase due to an expected 11 percent decline in single-family mortgage originations, bringing the total down to $1.51 trillion.

"In our view, the shift in focus to a purchase mortgage market puts a priority on shoring up builder and real estate relationships," Duncan stated. "The expected volume decline, if it occurs, will likely bring some downsizing and merger and acquisition activity. However, layoffs and rehiring are expensive, so there is usually a several-month lag between significant volume turns and staff reductions. Additionally, rates have fallen since the Fed raised rates in December, so there is no sign of a rate rise yet."

The survey found that 88 percent of the lenders reported that they are looking to grow their mortgage origination business, while 12 percent reported to maintain, and no lenders reporting to downsize or exit the origination business. The top two strategies lenders plan to use are "increasing the number of retail branches/loan officers" and "expanding marketing outreach" to grow origination business.

Of those surveyed, 76 percent of the lenders have plans to grow their mortgage servicing business, but only 22 percent expecting to maintain and 2 percent expecting to downsize.

"Depository institutions and smaller lenders are more likely than mortgage banks and larger institutions to cite "cross-sell opportunities to other financial products" as a key reason, while mortgage banks and larger institutions are more interested in hedging against declining origination volumes," Duncan stated.

In terms of compliance risk, 89 percent of lenders say their concerns with compliance risk have increased since the previous year and 88 percent say compliance risk will be a key area of focus in 2016. Concern over volume decrease risk has fallen compared with one year ago. However, about half of lenders still expect it to be an area of focus in 2016.

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