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A New Year A New Attitude

Editor’s note: This feature originally appeared in the January issue of MReport.

As the CEO of a mortgage-banking firm with six distinct lines of business, I have to take a broad view when planning for the coming year. And while the complex world of mortgage finance makes offering predictions about what will happen in 2019 virtually impossible, there are some areas where change seems imminent. Here are a few areas where I think we can expect change and how you can position yourself to take advantage of market inflections.

The Economy Will Slow Down (or Maybe It Won’t)

I am not an economist, but there are three major areas I follow:

  • Recession—For at least three years now, most Mortgage Bankers of America (MBA) forecasts have warned of an economic slowdown, if not recession, sometime in 2019. MBA cites that a recession will be primarily fueled by the effect of tax cut stimulus losing impact over time. Although the stock market this month is giving indicators of a “recession ahead,” the reality is probably a marginal slowdown but not recession.
  • Trade Wars—No one knows when a trade war resolution will come. It could be tomorrow; it could be never. At some point, we’ll likely see actions that will stimulate a settling will be a panacea to a slowing economy.
  • Fed Action—The Fed is signaling one to three increases in interest rates this year. After a decade of suppressed rates, we can count on it happening. For the Treasury curve, that means flat to inverted. For the long rates, we’ll probably end up higher in a range of 75 to 100 basis points.

Once we take those predictions for recession, trade wars, and Fed Action into account, we can consider how they might influence our industry. First, the industry will continue to face the challenge of maintaining volume as the market shifts from being driven by refinances to being dominated by purchase home loans.

Second, higher mortgage rates will further erode refinance volume at the same time they constrict homebuying. That’s because asset prices rise and fall based on the ability to finance home purchases. When consumers have to finance homes at a 5 percent to 5.5 percent rate, rather than the 200 basis points lower rates they had in previous years, they simply don’t qualify to spend as much on a home.

Unless wages rise in tandem with the rates, we’ll see a decline in volume. There is a Wall Street adage that the Fed does not usually stop a rate hike path until “something breaks,” which translates into a not-so-good environment. In summary, during 2019, we can also reasonably expect lower origination volumes due to falling home values in many markets.

Correspondent Lending

The rising rate environment will lead to a lot of consolidation in the market. By the end of the year, we may see fewer investors, overall, in the correspondent business. As volumes fall, we may also see fewer lenders. The investors who stay in the market will step up with new offerings, which is good news for the surviving originators. To be successful in this market, the remaining correspondent lenders will need to offer innovative and niche products that will help meet the needs of the market. Some of those products could include:

  • 203(k)—A 203(k) home loan gives homebuyers money to buy and renovate in a single loan. Where there’s a shortage of new and turnkey existing homes, buyers can use 203(k) to buy and modernize older housing stock.
  • Lock and shop—This type of loan allows preapproved homebuyers to lock an interest rate for up to 120 days while they shop. This is of particular interest to those consumers who believe rates will continue to rise before they have a chance to find the home they want to buy.
  • 2/1 buydowns—Buydown borrowers pay two points below the note rate for the first year and one point below during the second year. These loans give homebuyers the flexibility to buy high-dollar items, such as furniture and appliances. This can be attractive to consumers because of the rising cost of appliances. However, buydowns are challenging to explain to borrowers. Therefore, it is essential to understand how to comply with TRID requirements.
Technology and the Personal Touch

Consumers will continue to use technology as a yardstick for differentiating among lenders in 2019. Consumer-facing technology, like digital personal mortgage assistants, will be the most visible change. And back-office technology will move forward, too, such as blockchain driving increased efficiencies in title and servicing, and artificial intelligence in everything from ad placement to lead identification.

It’s a more risky prediction to make, but 2019 may be the year we see more adoption of e-signatures. This added point-of-sale convenience for consumers could change the industry. Consider that online remote eNotarization is legal in four states and that number will grow in 2019. This means (even though we have been saying this for several years) eMortgages may reach a tipping point in 2019. This has been a long time coming in an industry that is heavily regulated. But consumer demand, investor receptivity, and advances in technology may finally drive this to be a reality.

At the same time advancements in technology have made us less likely to need to actually speak to customers, 2019 will also be the year lenders remember that customers still want to have conversations. This is why it is important to “show them some personalized attention during certain parts of the origination process” through phone calls. Speaking to customers and answering questions directly can go a long way in improving the borrower experience.

Portfolio Retention

Cash out refinancing will grow because more consumers have equity they can tap for remodels, to pay bills, or for large purchases. Lenders that have the analytical capability and the dataset to predict the behavior of specific segments of their portfolio will have the best shot at retaining their existing customers and providing borrowers what they need. These efforts mean more servicers will look to technology, such as analytics systems and customer relationship management systems, to help in that process.


Sales of mortgage servicing will continue to increase as consolidation accelerates among mortgage servicers. With gain-on-sale margins reflecting less cash and more mortgage servicing rights (MSR) value, servicers will sell to boost liquidity. Any price impact from those increased sales will likely be offset by demand as larger aggregators using MSR purchases to offset their reduced origination volumes.

No matter what happens in these and other areas of the industry, the smartest way to grow during a changing market is to run a diversified business model. Adopting a multichannel platform gives mortgage bankers diversified revenue sources that provide the best possible hedge against market changes. For us, that’s servicing, retention, distributed retail, correspondent, commercial and renovation lending.

Whatever strategy you choose, you must manage the business carefully and deliberately because there is a lot of this cycle left to go. The challenges of rising rates, falling home sales, and global uncertainty will continue not just into 2019, but well beyond.

About Author: Michael Dubeck

Michael Dubeck is President and CEO of Planet Financial Group, a financial services firm headquartered in Meriden, Connecticut, and the parent company of Planet Home Lending, LLC. Dubeck started his career in the mortgage industry with First Boston Corp. as a trader on the mortgage desk. Since then he has worked successfully at Morgan Stanley, its Saxon subsidiary and Hudson Advisors/ LoneStar Funds.

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