Today's origination marketplace seems to be lacking in opportunity for many mortgage brokers. Yet it's important to remember that the business remains large and is basically healthy.
Ongoing demand for homes is a positive factor. "Household growth between 2005 and 2015 should exceed the strong 12.6 million net increase in 1995-2005 by some 2 million," according to Cambridge, Massachusetts-based Harvard University's Joint Center for Housing Studies' State of the Nation's Housing 2007 report. "Together with the enormous increase in household wealth over the past 20 years, healthy income growth will help propel residential spending to new heights."
Residential originations this year are forecast by the Mortgage Bankers Association (MBA) to reach $2.57 trillion--a 9 percent drop from 2006 totals. But after a string of record-breaking results, mortgage industry capacity is still geared up for higher loan volume. Production issues should quickly resolve themselves, though, as loan officers who can't make a living look for new careers.
A crucial question for mortgage brokers who remain in the business is what new opportunities will emerge. Both real estate sales and refinances are predicted to drop this year, driving home the point that the real estate boom, which began in 2001, now is truly over. MBA forecasts a further drop in residential originations next year of 11 percent.
New products will become more important as lenders look for ways to boost production in a changed environment. Subprime lending, for instance, established itself as a profitable niche right after the 1992-1994 refinancing boom ended.
Currently rising delinquencies, tighter underwriting and new regulatory guidance for lenders are combining to limit subprime lending. A boost for originators could come from Fannie Mae and Freddie Mac. Both government-sponsored enterprises (GSEs) have announced plans to pilot alternatives to subprime mortgage products. Longer initial fixed-rate periods for adjustable loans and 40-year mortgages will be featured in these new loans, according to company statements.
Automated underwriting, which Fannie and Freddie made ubiquitous in the mortgage world, gave the industry the ability to handle the record loan volumes seen in recent years. "It was the little-noticed tool of automated underwriting software that made [the housing] boom possible," notes The New York Times.
In "Pop! Why Bubbles Are Great for the Economy," a May 2007 article in Slate, author Daniel Gross contends that American excess leaves a positive aftermath. He cites the dot-com mania, which produced numerous Silicon Valley bankruptcies. Yet "without the disasters of Global Crossing and WorldCom, would we still have Google[TM]?" Gross asks.
Just as the Internet boom and subsequent bust brought some lasting benefits, automated underwriting also will continue to be the backbone of the lending process. Mortgage brokers will benefit, because automated underwriting allows them to quickly start originating emerging loan products. Yet the widespread rollout of new mortgage types also will put pressure on loan margins.
Demographics rule
Reverse-mortgage originations should continue to surge, although they currently are still a relatively small market niche. Last year Federal Housing Administration-insured (FHA-insured) reverse-mortgage originations jumped by nearly 50 percent--although that still amounted to just about 72,000 closings.
As baby boomers move into retirement, many will look to their real estate equity to help with living expenses. Reverse loans let homeowners pay off their existing mortgage and have cash without being required to make monthly payments or leave their homes.
Yet reverse-mortgage lending offers several challenges for many mortgage brokers. One issue is that lenders are rolling out proprietary products, and large lenders have national retail sales forces that can help them reach consumers.
Charlotte, North Carolina-based Bank of America and Calabasas, California-based Countrywide Financial Corporation both are pushing reverse mortgages. Bank of America is offering a jumbo reverse mortgage of up to $10 million. In contrast, FHA is restricted by its $363,000 loan limit. Countrywide now is selling its "simple equity" program--which has no set loan limit--in 46 states.
Nontraditional lenders could become another threat to mortgage brokers. Virgin USA Inc., New York, the North American arm of Sir Richard Branson's Virgin Group Ltd., London, recently bought a controlling interest in CircleLending Inc., Waltham, Massachusetts, an online firm that helps family members and friends to fund reverse mortgages as personal loans.
The REX Group, San Francisco, recently unveiled an alternative to reverse mortgages. Borrowers receive cash now by agreeing to forfeit up to half of their home's future increase in value. Instead of paying interest, homeowners are pledging a portion of their sale profits. AIG Financial Products Corporation, Wilton, Connecticut, a subsidiary of insurance giant American International Group Inc. (AIG), New York, also is backing the project. Mortgage brokers will be the primary sales force for this product, say REX Group officials.
But mortgage brokers will need to become much more adept at providing financial counseling before they can properly sell these products. After all, reverse mortgages share some traits with subprime loans--they often have high fees and complex features that many consumers find difficult to understand. Building an industry infrastructure of knowledgeable originators will ensure the success both of these products, and the loan officers who originate them.
Howard Schneider is a freelance writer based in Ojai, California. He can be reached at howard@mmnl.net.
No comments:
Post a Comment