According to Forbes magazine contributor Kevin Hawkins, “There is blood in the streets” for those in the mortgage business. Despite a May 23, 2018 reform bill passage in Congress to remove stiff banking regulations and boost the economy, Hawkins reports four crucial factors within real estate that have taken mortgage lenders and reduced them to carnage. Why? Because the mortgage industry has failed to keep up with the times. Here’s what Hawkins means.
1. Interest Rates
One thing is certain in any booming economy: Interest rates rise. This has happened in the U.S., and mortgage lenders are helpless to mitigate the damage. A few years ago, it was hard enough to get the most powerful purchasing demographic, millennial, to buy a home. Now, potential homebuyers are faced with the highest rates in four years. Freddie Mac confirmed interest rates of 4.5 percent, which are expected to go even higher, are tops in the market since 2014. What does this mean for mortgage lenders? Only a 37-percent refinance rate in 2017, which is the lowest since 1995. In 2012, 72 percent of mortgage loans were refinances, which demonstrates how devastating higher interest is to the industry.
2. Inventory Lag
Another crippling effect of a booming real estate industry is a record low inventory of homes for sale, according to Hawkins. Business Insider reports low housing inventory has reached “crisis levels,” which pushes home prices up but leaves mortgage lenders with less funding opportunities. Although millennial homebuyers are increasing in numbers, the primary homeowner demographic, baby boomers, has no intention of selling or buying. Boomers hold over 75 percent of the ownership share in the country, and 85 percent of them are not interested in a move. When homes do become available, real estate investors snatch them up to provide rental properties to an increasing rental market demand.
3. Combine the Above and Add Age
When you couple rising interest rates and a slow seller market, you already have less mortgage lending opportunities. Add to that an aging population that is freakishly healthy compared to their ancestors and you have people living in their homes much longer than they used to. Plus, renters might want to get out of their vicious leasing cycles, but can they afford to? Not with housing prices and interest rates going up instead of down. All of these factors make life quite miserable for mortgage lenders, who haven’t found a way to reinvent themselves just yet in this changing market. That is, unless they fund commercial real estate ventures, such as those purchased by Peter Foyo and other investors.
4. Streamlined Electronic Lending Practices
People do everything online these days, including shop for a home. They don’t want to bother with the mounds of paperwork involved in a traditional real estate transaction. They want to find their home and finance it online. Quicken Loans predicted this and set up a successful electronic lending model, Rocket Mortgage, that single-handedly annihilated the traditional mortgage lending industry. If mortgage financers don’t catch up, they’ll be left in Quicken Loans’ dust permanently. The Mortgage Bankers Association reports traditional lending model costs eat away at profits more than ever, so something has to change, and the logical adjustment would be to find a balance between the old and new models.
Is the sky falling on the mortgage industry? Somewhat, but people will always buy homes. Lenders who cannot catch up with times may find themselves out of business, but those who can morph will stay afloat. Benjamin Franklin said only two things were certain, death and taxes, but you could argue the instability of the mortgage industry is a third certainty. As long as the economy ebbs and flows, the mortgage industry will, too, which brings Darwin into the mix: Only the strong will survive.