The refinance boom-bust theme has been sounded so often that it now ranks with death and taxes as one of the axioms of life. But the reports of the industry's impending death from refi anemia are premature.
Certainly, refinancing as we know it today - the 60% of mortgage production that comes from refis - will subside as interest rates rise. But there will be healthy refinancing volumes and robust revenues for the foreseeable future;
Although the situation may change, we see little in the current economic environment that would cause sharply higher interest rates. Economic growth is plugging along at an annual rate of about 2 1/2%, not enough to fuel inflation. interest on bonds continues at near-record lows, and may lead to slightly lower mortgage rates. Growth of the budget deficit is being contained, at least theoretically.
When Rates Tick Up
Overall, there is still more than $1.5 trillion in existing home mortgages yet to be refinanced. There are about $800 billion of mortgage loans with coupons above 9% and another, $700 billion between 8% and 9%. So, as long as fixed mortgage rates don't move up more than 100 basis points, we think refinancing volumes should remain strong to good.
When rates tick up, there will likely be a surge of refis from those who waited, perhaps a tick too long, for the lowest possible rates. The same anxiety will motivate those who procrastinated and realize they're about to lose their chance to lock in a better rate.
There is also a large segment of homes whose value has deteriorated to the point where there isn't sufficient equity to qualify under standard secondary-market guidelines. Several large originators, including Countrywide, are introducing products specifically tailored for this market. And congressional legislation was just introduced to create a new FHA program to help borrowers refinance mortgages with loan-to-value ratios above 100%.
I disagree with the doomsdaying coming from some parts of our industry. I am optimistic about our industry's future, from both a marketplace and a product standpoint. And I think that concentrating on what's left of the boom - instead of ducking and covering - allows us to maximize the time, opportunities, and revenues to fund our future strategies.
Some of the strategic and environmental trends I think will shape the future of mortgage banking in the near term are as follows:
* The growth of purchase business and of service portfolios will largely offset the decline in refinancings.
* Selective geographic expansion will be pursued by both wholesale and retail lenders to diversify geographic risk and to match regional economies.
* Relationships with new and traditional business partners will be more interactive and cooperative.
*Innovative technology will be used to calibrate the low-cost, high-service equation to enable flexible pricing and win market share.
* The mortgage banking industry will continue to consolidate, but corporate appetites for the mortgage business will continue to vary widely.