The Immediate Outlook: The Industry Will Turn on Rates and Jobs
By Paul MuoloAugust/September 2010:
Waiting for the mortgage and housing industry to return to solid growth may be a bit like waiting for Godot, but there is hope and it lies with low interest rates. The yield on the 10-year Treasury continues to hover at the 3% range, occasionally falling a little above or below that line. As any veteran mortgage banker knows, as interest rates go, so goes the mortgage industry. But there is one other key ingredient that feeds the prospects of this industry: the unemployment rate, which continues to hover at 9.5%. If more Americans don't get back to work — and start buying homes — the residential finance sector will suffer.
Perhaps what we stated in the above paragraph is obvious to readers of MortgageStats.com and its publisher, National Mortgage News. Perhaps, not. But jobs are the key to any sustained recovery in housing and mortgages and this fact is worth repeating — often. It's what this business is all about. Few can argue with that.
In that spirit, here's 10 mortgage-related things you need to know right now:
The Big Ten: Mortgage Things You Need to Focus on Now
1. Loan Volumes
Loan volumes: this is always a biggie. Predicting loan production is never easy but it's essential for planning purposes. In 1Q mortgage bankers originated $328 billion of loans followed by $450 billion in 2Q. The way things stand right now mortgage bankers, at best, will fund $1.4 trillion by the time 2010 ends, a 37% decline from 2009, which turned out to be a decent year thanks to refinancings — and despite the worst recession since the Great Depression. As for 2011, residential lenders can expect that loan production may be no worse but probably won't be a whole lot better. Until employment and wages increase residential finance will stagnate.
Residential Production in 2011 - 2003: The Product Mix
| Year | Total Prod | Prime Prod | B&C Vol | Alt-A Vol | IO Vol | Payment Opt. ARMs | FHA/VA |
|---|---|---|---|---|---|---|---|
| 2011(e) | $1,600 | $800 | $1 | $1 | $60 | $0 | $430 |
| 2010(e) | $1,400 | $900 | $0 | $1 | $50 | $0 | $440 |
| 2009 | $1,919 | $1,371 | $1 | $5 | $60 | $1 | $454 |
| 2008 | $1,614 | $1,091 | $6 | $16 | $105 | $25 | $200 |
| 2007 | $2,650 | $1,323 | $182 | $270 | $439 | $226 | $80 |
| 2006 | $3,267 | $1,338 | $665 | $612 | $700 | $348 | $75 |
| 2005 | $3,294 | $1,373 | $807 | $400 | $676 | $231 | $112 |
| 2004 | $2,790 | $1,341 | $608 | $192 | $282 | na | $140 |
| 2003 | $3,904 | $2,473 | $390 | na | na | na | $208 |
Notes: Each loan category isn't necessarily exclusive. In the IO category, for example, jumbo production is included. Also, subprime lending has dried up and has been replaced by 'hard money' lending whose volumes are very small. (e) Estimate.
Source: MortgageStats.com/National Mortgage News. Questions? Email: Paul.Muolo@SourceMedia.com
KEY FACT:
In the summer of 2010 refinancing applications accounted for 80% of all new home loan applications
It doesn't sound all that rosy, but neither is it bleak. With corporate earnings improving across a broad spectrum of the U.S. economy there's hope that hiring by companies large and small could pick up steam in the fall. Nonfinancial companies (depositories excluded) are sitting on $1.8 trillion in cash, roughly 25% more than at the beginning of the recession. As businesses continue to report decent earnings into the fall, even more money will continue to flow into the corporate coffers. Economists (as well as the White House) are praying that all that cash will be put to use through new investments which will lead to job creation. If that happens, home buying (and not just refinancings) will gain.
2. Mortgage Profits
Loan volumes are the bad news. The good news is that mortgage profits are still decent. (Knock on wood.) Lenders are enjoying a huge spread between their cost of funds and the loans they originate but profit margins are declining. According to a recent study done by the Mortgage Bankers Association, lenders saw their average profit per loan fall to $606 in the first quarter, a 40% drop from the same period last year. Compared to the fourth quarter, the average profit per loan originated fell by 32%. MBA blamed the fall-off on both declining origination volume and higher production expenses. The trade group said the "average" nonbank mortgage lender (or a subsidiary of a depository) funded $158 million of loans during 1Q compared to $217 million the previous quarter. (Figures compiled by National Mortgage News and the Quarterly Data Report found that the industry, as a whole, originated $328 billion of product in 1Q, a 21% decline.)
Production Market Share of the Top 5/10
2010 Compared to Prior Years
Residential Production in 2011 - 2003: The Product Mix
| Time Period | Top 5 Market Share | Top 10 Market Share |
|---|---|---|
| 2010(e) | 62.52% | 72.54% |
| 2009 | 58.74% | 70.10% |
| 2008 | 48.64% | 61.24% |
| 2007 | 46.10% | 62.66% |
| 2006 | 44.20% | 60.72% |
| 2005 | 42.49% | 56.96% |
| 2000 | 29.01% | 39.55% |
Notes: (e)Estimate based on 1Q10 origination volumes.
Source: MortgageStats.com/Quarterly Data Report
Production operating expenses rose to $5,147 per loan in the first quarter of 2010 compared to $4,402 per loan in 4Q, MBA says in its first quarter production survey. "It is extremely difficult for mortgage companies to effectively manage staffing levels," said Marina Walsh, MBA's associate vice president of industry analysis. "Either companies are stretching to meet the incredible demand, or they are carrying excess capacity which drives up per-loan personnel expense. She added that, "Despite this challenge as originations declined in the first quarter, the independents and bank subsidiaries still produced an average of thirty-two basis points of production profit, primarily resulting from higher secondary marketing gains."
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