By SCOTT KIMBLER
Three leaders in the mortgage industry recently got together to discuss the challenges for lenders in 2023.
A webinar was hosted by Augie Del Rio, founder and CEO of Gallus Insights. It included Rob Chrisman, capital markets consultant and founder of the Chrisman Commentary, as well as Tammy Richards, CEO of LendArch.
All three lending veterans had various thoughts on what mortgage lenders need to do to not only survive in the current volatile mortgage market but also thrive in the down economy.
“We are experiencing one of the most significant downturns in decades,” Del Rio said. “We are kind of all at the crossroads of the perfect storm. We are experiencing the fastest rising rate environment in decades and, in turn, are also experiencing material volume and revenue margin compression.”
Del Rio went on to explain that the profit margin of a loan is drastically less than just two years ago and that reality is not likely to change for some time.
“In 2020,” Del Rio said. “The industry was producing $5,500 per loan and in 2021 we still had significant volumes and healthy volumes. The industry was delivering, depending on the quarter, north of $2,500 per loan in profit.”
Del Rio said the loss per loan is now $600.
Chrisman provided a layout of why the industry is where it finds itself, which is in the throes of downsizing at many levels.
“It’s a very competitive environment now,” Chrisman said. “Everyone wanted to make hay while the sun was shining during 2021 and 2022.”
Chrisman went on the reiterate what many others have said: This is like the hangover after a large party.
“Everybody knew the party would come to an end,” Chrisman said. “They just did not know how fast it would. They built up the mortgage factories in order to accommodate the borrowers that were literally falling out of the sky. It was so easy to refinance people. They built up this capacity and now we are dealing with the hangover after a couple of years of that party. And so you have lenders who are trying to get ahead of costs right now. It is very difficult to be a manager in this position. When the firehose goes down to a trickle, they are making some very tough choices.”
Chrisman went on to say some lenders were better prepared than others, were able to hedge their pipelines, and are making adjustments.
Richards explained what companies are doing to become more efficient.
“There are a lot of challenges and people could call it a nightmare, but there are also opportunities within this environment, and we cannot manage the way we’ve always managed,” Richards said. “I do think the opportunities right now are to change the model and improve automation within the companies in order to be able to come out of this a stronger company that is able to be much more elastic when it comes to different changes in the industry and in the economic environment.”
Richards said some lenders are moving to a different business model to survive.
“There are a lot of people moving from the lender to the broker model, because of costs. But there is a tighter margin on wholesale,” she said.
Richards says she expects there will be more changes, but ones that are not immediate or obvious to outsiders. One area that will likely be impacted is how lenders reach potential customers.
“As far as direct to consumer is concerned,” said Richards. “I don’t think the call center model is going to be the traditional call center model anymore. I can block any call on my phone. I can block calls that come that I don’t know the person or if the call looks like spam. Consumers are getting smarter about what calls they want to answer and what calls they don’t want to answer. So it is more difficult to get to that consumer in a direct-to-consumer model. I think lenders are going to need to continue to find ways to have organic leads and be able to work with portfolio retention.”
The pace of home sales has declined to its slowest pace since the beginning of the pandemic, but early signs of demand like online home searches and tour requests are increasing.
Easing inflation may be bolstering buyer sentiment.
“We’re entering 2023 with positive economic news: The latest consumer price index report confirms that the worst of inflation is behind us. That means the Fed is likely to continue easing its interest-rate increases, which should cause mortgage rates to continue gradually declining. This could bring back some homebuyers in the coming months,” said Redfin Deputy Chief Economist Taylor Marr.
Mortgage loan application volume saw a double-digit increase last week as sinking rates led to a purchase demand rebound. Rates fell to 6.23% last week, their lowest level since September and about a percentage point below the peak mortgage rate last fall.
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