The following piece is a print feature from MReport's September 2014 issue.
The U.S. market for originations remains the ugly stepchild of the mortgage industry as it constantly faces the uncertainty of future growth, while simultaneously experiencing stalls and starts during certain parts of the year.
The beginning of 2014 stunned mortgage professionals, leaving them hanging on the housing vine, so to speak, as interest rates hovered below 5 percent, consumers stayed on the sidelines, and the influence of new mortgage regulations stymied robust growth.
"First quarter was universally painful for everyone in the originations business," explained Brian Voss, EVP of Mortgage Network, Inc.
And Voss is not alone in that assessment. Most of the industry described Q1 as a comedy of errors defined by bad weather and economic uncertainty, both of which dampened demand for purchase mortgages and refinancing products at a time when regulations continued to pinch loan processing speeds and demand.
"The new regulations had some impact on the first-quarter slowdown, no doubt, but as lenders find their comfort zone, that will begin to fade," said David Williams, VP at RightStart Mortgage, "We're already seeing a certain comfort level in the new regulations, and this will only improve as the year continues."
"That said, credit has tightened, and some applicants on the bubble, so to speak, may not be able to qualify for a mortgage they would have easily gotten under less scrutiny," he added.
Rick Hogle, chief strategic officer of Supreme Lending, shared a similar experience, saying, "Perhaps 20 percent of the slowdown can be attributed to QM and regulations. At this point, everyone seems to have been able to comply with the new rules, granted it added time and cost."
But even with a slow start to the year, the second quarter of 2014 offered some signs of reprieve, and it seems the mortgage industry is latching onto every silver lining that it can find, all the while keeping fingers crossed for a stronger second half.
No Refinance Rebound
Refinance originations dropped in the first half but fell back to historic norms, representing approximately 20 percent of originations, said Voss with Mortgage Network.
Williams lauded second-quarter improvements overall.
"[T]his situation is improving as lenders grow accustomed to the new environment. Also, I do regard weather as a factor in the first-quarter slowdown. Not only did we see snow in the colder states (and droughts in the warmer states), but the snow took place nearly every weekend, which kept homebuyers inside and unable to look at houses," Williams added.
Williams' cautious optimism is not unwarranted. The second quarter of 2014 delivered a few doses of good news as the Mortgage Bankers Association reported improvements in credit availability for the months of May and June. Not to mention, a declining unemployment rate— with the nation's unemployment rate reaching its lowest level of 6.1 percent in six years. And lower unemployment generally equals more employed consumers, who are then able to begin playing more heavily in the economy.
"Originations improved during the second quarter," Williams said. "May and June are typically the best months for the residential mortgage market because it's the best time for families to move. The kids are out of school, the transition to a new home is easier, and parents are looking for areas with better school systems. Frankly the weather is much better during the spring and summer months too. For these reasons alone, the second quarter fared much better for us."
Still, the pain of Q1 left a lasting impression on the originations sector. Harsh weather conditions during that first period, continued shock from the implementation of mortgage regulations, and risk-conscious home buyers stifled demand for purchase mortgages.
Voss with Mortgage Network said the process became "so heavily compliance-oriented," and the burden of proving ability-to-repay slowed down efforts dramatically in Q1.
Voss remembers the processing of each loan feeling as if his staff was in effect processing three or four mortgages when, in reality, it was just taking longer to complete one loan. Still, he saw the second quarter as "stronger," but limited by a lack of inventory. "We did get a significant pop," he added encouragingly.
Still, the second quarter did little to curve overall expectations of an originations slowdown from 2013 to 2014. The MBA concluded in July that despite an improved second quarter, the trade group expects a 42-percent drop in overall mortgage originations for 2014. Refinance originations, which drove a demand surge in 2012 and 2013, are expected to fall 60 percent this year, while purchase originations could drop as much as 10 percent, according to the MBA.
Call it a psychological need for inspiration or something to hang their hats on, but mortgage origination professionals are still trying to focus on what went right in the second quarter, while hoping the first quarter is simply an outlier period.
"Mortgage rates remain low, which is providing potential homebuyers with opportunities for good deals," added Williams with RightStart Mortgage. "Based on second-quarter results, we're finding that low interest rates continue to help the housing market gain traction. Interest rates are at record lows, but they're not going to stay that way forever. Homebuyers realize this, and, for that reason, it will have a positive impact on market flow into the third quarter."
Williams believes interest rates will remain below 5 percent, giving consumers enough incentive to jump into the market. "If rates moved higher than 5 percent—up to 6 percent or even 7 percent—they would still be low from a historic standpoint," the originations executive added.
Hogle with Supreme Lending said his company is not expecting interest rates to move much over the next six months.