Change is coming.
Very recently, the U.S. 10-year Treasury yield touched 1.187%. In spite of a great, albeit volatile, year for many investors, there are plenty of indicators suggesting inflation will make some kind of return later this year. We have a new administration, which may have a very different approach to the market than we’ve seen for the past four years. And yet, the mortgage and housing industry is still feeling the positive effects of a historically profitable 2020.
It won’t last forever. Nor will historically low interest rates.
It feels like we’ve been experiencing a refinance wave for 20 years. Thanks in no small part to Federal Reserve policies leading to unbelievably low interest rates, originating refinance mortgages has become one of the easiest and most profitable ways to mortgage lending success. Many of our industry’s newer or youngest professionals can’t even remember what a true default cycle or purchase cycle looked like. And when, for just a moment, we anticipated the rise of a purchase cycle around 2018, it was almost as if the sky were falling.
Once upon a time, ours was an industry that could thrive through multiple cycles. We simply anticipated them and prepared. But now, I’m seeing and hearing too many who believe that the inevitable end of the refinance surge will mean difficult times.
Challenging? Yes. But the opportunity for profitability and success would remain. I’d argue, in fact, that a purchase market is an excellent way for the best-prepared lenders to differentiate from the competition and grow market share. Some of us seem to have forgotten that.
It’s time for those who truly fear the cyclical nature of our industry to toughen up. A purchase market means opportunity, but only if you’re willing to put the work into it. We have become an industry that’s far too dependent on federal interest rates. And why not? Every time we think this cycle has run its course, yet another spark comes along to prod even another round of refinancing. It’s not sustainable, but that doesn’t mean the mortgage industry should fall on hard times when it does end.
An impending purchase mortgage market is not the ominous sign some make it out to be. It’s simply a signal to shift gears. Is a purchase mortgage as profitable as a refinance? Of course not. Can a smart business do exceedingly well in such a market? Of course. Remember, we saw interest rates around 16 percent in 1981. And yet, the best prepared lenders still sold mortgages. They even made a profit. And their weaker competitors disappeared.
Part of the challenge may be that we’ve grown to overvalue “process.” One could argue about how well the mortgage industry has done to streamline our process, but the fact remains that a refinance mortgage is more process-oriented than the traditional purchase mortgage. It’s less messy. There are fewer actors. Fewer variables. The borrower is far less emotional. There are far fewer surprises or unexpected occurrences impacting the transaction — like a lower-than-anticipated appraisal or a bad home inspection. It’s easier to predict and cheaper to produce. What originator wouldn’t love that?
That doesn’t mean, however, that we should be battening down the hatches when purchase mortgage volume rises. Even though the mortgage world is (rightfully) working toward a better production process with the use of technology and automation, this will always be a people-focused transaction, especially on the residential side. It costs more to ramp up staff and marketing. That’s simply an investment. We can also use emerging technologies to ease the cost and shorten the time it takes to make that transition. Just because it’s less predictable to get out into the marketplace with real estate brokerages and borrowers doesn’t mean it’s not worth it. Good businesses take qualified risks. Sure, it’s a little messier when we have to juggle vendors and partners; communicate with them and collaborate on the closing. Yet, at the heart of it, that’s really what mortgage lending is all about, isn’t it?
It’s time for us to stop treating the purchase mortgage as some kind of market impediment or red flag for our forecasts. It’s not time to cut costs, hunker down and wait for the next refinance cycle. The great lenders will have long since passed you by. Instead, let’s get back to our industry’s basic purpose and prepare to meet that challenge. There’s still a lot of success to be had, and a lot of people to put into homes.