The Refi Boomlet Now, But The Long Term For Mortgages?

We are nearing the end of a decades long decline in Mortgage Rates. What happens when refinancing truly dries up?

The following is a reprint of my story in MortgageMedia

In my conversations with lenders, I have been reminded of one truth about this great industry where I made my career; we  tend to be very short-sighted. My caution is that while recession concerns have helped drive bond rates to new lows, and with the understanding they may go lower, there will be an end to this run and once the floor is found, the industry will be significantly oversupplied with lenders and loan originators.

Honestly, there are very few who have not been on the receiving end of this almost uninterrupted run of declining rates that began following the peak in the early 1980’s. While there have been periodic upticks in rates along the way, refinance activity became a key driver to bloating the capacity in mortgage lending. So, here is my caution to our industry about what will likely happen with the only question being, when?

Little Room Left: In order to have a refinance market in the future, there has to be room for lower rates. And if you look at where rates stand today, there is little room left compared to those years looking back. Even if rates level and bump around the current range, loans in the money will burn out. The graph above says it all.

GSE ‘Reform”: The long-awaited Administration GSE paper is expected to be released in the first week or two after Labor Day. Regardless of how it approaches the questions about legislation versus administrative reform, there is an expectation that the FHFA will administratively text steps that will affect the footprint of the GSE’s. Whether increased capital costs which will translate into higher mortgage rates or explicit policy changes that may restrict certain types of transactions that are deemed to be out of scope, it seems likely that a more conservative outlook will, at best, marginally worsen the GSE’s execution form some loans compared to private capital or FHA .

QM: The CFPB has announced that they will end the QM patch. Some have suggested that the GSE’s might just continue what they are doing regardless of the rule changes. Whatever happens, I find it unlikely that investors and lenders will take on the assignee liability of moving some of the loan volume from Safe Harbor to Rebuttable Presumption in co-mingled TBA pools. Whether requiring separate pooling or simply higher pricing to offset the risks, the end of the patch creates uncertainty and real challenges in making up the gap. The MBA has proposed a workable solution, but it  is rare that a regulator adopts a trade groups policy recommendation in full.

Recession: It is highly likely that we are headed to recession. Even if mild the cost burden on servicers with advances and personnel expense combined with other operational costs for any marginal increases in defaults will come on top of these other market and policy conditions that lay before us. 

What To Do?: In watching market corrections over past years I often find lenders in trouble trying to sell at the worst time based on some EBITDA multiple from previous boom years. In the end, these transactions often end up as a purchase for cash on hand and an earn out as smart acquisition experts know not to pay forward for past performance when conditions shift. Frankly, for some, it may be best to look at monetizing at the peak. 

For others with the capital and liquidity commitment and access to a dependable balance sheet, as I wrote in a recent Housing Wire blog, servicing may be one consideration for forward looking plans to weather the final slowdown. There are risks involved and I encourage any lender looking at this option to read my blog on the subject and consult an expert.

Bottom Line: A great friend in the industry who ran an IMB out of Birmingham, Alabama once told me that the key to success was to make hay while the sun shines and save enough to survive the downturns. Sage advice for sure, but this environment is different today. The industry has grown so large in size with more aggressive competition that, given the less likely refinance opportunity after this last gasp, it will be the best business models who focus on purchase transactions that survive long term. Discipline and forward thinking will be critical at a time like this. Let’s not get consumed with this temporary reprieve.

The Insanity Of The Markets

Global debt is at $246 billion dollars, roughly three times global output. There are over $15 trillion in negative yielding bonds globally and even Germany has joined the party with their 30 year bond below zero for the first time.

US Consumers add to the wild ride of this global economy posting over $14 trillion in debt, above the levels seen prior and during the Great Recession.

The Financial Times published a story recently highlighting the steep rise of Baby Boomers, now also seniors, filing bankruptcy in the US at a pace far exceeding their contribution to the total population stating, “The culprits are vanishing pensions, soaring healthcare costs and tens of thousands of dollars in unpaid student loans for themselves, their children and even their grandchildren.”

The Wall Street Journal very recently published a story about the inverted yield curve, a concern being echoed by economists and finance leaders globally stating, “Shorter-term bond yields have climbed above longer-term ones, a phe­nomenon known as an in­verted yield curve. That tends to hap­pen ahead of re­ces­sions.”

Finally there is the burden of debt for the US making it’s ability to intervene in a slowing economy with stimulus even more costly looking forward. As reported by The Balance, “On February 11, 2019, the U.S. debt exceeded $22 trillion. That puts the U.S. debt-to-GDP ratio at 108 percent.”

The issue of debt and political complexity is critical and is best summarized by this, “The problem is in cutting it. Each program has a constituency that lobbies Congress. Eliminating these benefits loses voters and contributors. Congress will agree to cut spending in someone else’s district, but not in their own.”

The article continues with this point;

“Any president must cut into the biggest programs to make an impact on the debt. More than two-thirds of government spending goes to mandatory obligations made by previous Acts of Congress. For FY 2020, Social Security benefits cost $1 trillion a year, Medicare costs $679 billion, and Medicaid costs $418 billion. The interest on the debt is $479 billion. To lower the debt, military spending must also be cut. The most Obama spent was $855 billion in FY 2011. The most Bush spent was $666 billion in FY 2008. Instead of cutting, Trump is breaking all those records. Military spending rose to $989 billion in FY 2020.”

In recent weeks I have heard enthusiasm from those who benefit from what results in a scenario like this. As global investors pursue a flight to quality in US Treasuries and other high rated investments, borrowing costs decline. This can lower rates on everything from Mortgages to Autos. And an inverted yield curve is especially helpful to long term rates leading to cheers from mortgage lenders who now have the opportunity to refinance the mortgages of millions of Americans.

But for retirees with fixed income from investments and deposits as well as any investor needing yield, the implications are concerning. A return to a normalized yield curve is a far more healthy condition for the long term.

But let’s be clear, this is all news that should strike us with concern about this slowing economy. Unlike the last Great Recession, one that brought us closest to a national depression more than any other economic period since the 1930’s, this time the ability to intervene will be limited by the already low interest rate environment and an even more leveraged balance sheet both domestically and abroad. The ability to execute a stimulus plan in recession is better supported when there is a wider spread above zero.

As reported by Fortune Magazine, in a recent survey of economists 60% believe the US will be in recession before the election in 2020. While there is debate between those with the most bearish views and others who look at a more temperate downturn, there should be a heightened awareness about this economic burden for a nation whose wealth gap is only increasing, where housing affordability has become far more urgent to an ever increasing percent of the nation, with concern about health care costs, and where wage disparities for lower and middle class families are widening.”

Piling on with global political extremism, protectionist trade polices, the increasing costs of global weather conditions, and more only increase the concern for leaders, true leaders, to lay aside petty issues and focus on the long term viability of the ever increasing burden being laid upon this citizenship and future generations.

But whatever lies ahead, we should look at this latest rally in the long term bond markets as concerning to the economy versus a positive for its short term benificiaries.

What happens next? My advocacy here is for an active and engaged electorate. The passivity of this nation is something that should be abhorred. Eligible voters need to vote. In 2016 only 61.4% of Americans voted, down from 2014.

Awareness is step one, engagement is step two, activism is step three. We need to demand more as citizens and mute some of the incredible power of special interests in policy setting. Whatever one’s view, it simply won’t matter if we all don’t actively participate.

What Will The Experts Be Watching In 2019

Please note: The following is reprinted from my article for MortgageMedia. I encourage all those in the real estate finance sector to sign up for it HERE

Harry and Meghan will gift us with a royal baby, 3D printers will go mainstream, and the FIFA Women’s World Cup takes place this summer in France with Team USA as the defending champs. This new year even marks the 50th anniversary of the Apollo 11 mission, a great reminder as to how old this writer is.

Yes, 2019 will be an exciting year with expectations of changes ahead. But what changes might impact your business?

I reached out to superstars in our industry to ask their views. Here is the list of experts to whom I asked this question: “What are the 2-3 things you will be watching in 2019?”

Our All Star Lineup:

  1. Mark Zandi – Chief Economist at Moodys
  2. Frank Nothaft – Chief Economist as CoreLogic
  3. Jim Parrott – Former senior advisor on housing policy to President Obama, Nonresident Fellow at the Urban Institute, and owner of Falling Creek Advisors
  4. Barry Zigas – Director of Housing Policy at the Consumer Federation of America
  5. Gary Acosta – Co-Founder and CEO of NAHREP
  6. Susan Stewart – CEO of SWBC Mortgage and Vice Chairman of the MBA
  7. Bill Cosgrove – President and CEO of Union Home Mortgage and former MBA Chairman
  8. Barry Habib – Founder and CEO of MBS Highway
  9. David Lykken – Founder, Owner, & Managing Partner of TMS Advisors
  10. Byron Boston – President and CEO of Dynex Capital, Inc
  11. Andrew Rippert – CEO Global Mortgage Group, Arch Capital Group Ltd.
  12. Toni Moss – CEO and Founder of Americatalyst and Eurocatalyst
  13. Carol Galante – Donald Terner Distinguished Professor in Affordable Housing and Urban Policy, Faculty Director Terner School for Housing Innovation, University of California Berkeley. Former FHA Commissioner

Not surprisingly, there are many common elements to the perspectives of these renowned leaders in housing. Whether running mortgage, MI, or REIT companies, forecasting economic ramifications going forward, or leading in policy and strategic advisory roles, many of the views point to change and uncertainty in this dynamic environment. Let’s review some of the perspectives of this stellar group:

On GSEs:

Leadership changes at the GSEs, FHFA:

  • “In housing policy, leadership at FHFA is the biggest issue hanging over 2019 by a long shot,” stated Jim Parrott.
  • “In the past quarter-century, 2019 will mark the first time that FHFA, Fannie Mae and Freddie Mac will all have new leadership at the helm,” observed Frank Nothaft.

Many are wondering what will happen to the GSEs under new leadership:

  • When will Mark Calabria be confirmed? And once confirmed, how will he balance his previously-professed desire to shrink the GSE footprint, versus attempting to maintain momentum in the economy for Trumps 2020 bid for re-election?” asked Andrew Rippert.
  • “IMBs played a significant role during the housing crisis, responsibly delivering to the GSE’s as the playing field became more level,” stated Susan Stewart. “A reduction in products offered immediately limits access to credit for borrowers and is a direct hit to the IMB.”
  • “Like most, I do expect efforts to constrict the GSE footprint through loan limits, restrictions on cash-out refinances, higher capital requirements leading to higher g-fees and tighter restrictions on pilots that could expand access,” said Barry Zigas.
  • “At Dynex we believe government policy will drive returns. Hence we await changes given the changes at FHFA,” added Byron Boston
  • “On FHFA and the GSEs, how does the Trump Administration policy affect the slowing housing market?” asked Bill Cosgrove.
  • And on a related note, Jim Parrott observed: “The wildcard is personnel. Who’s running the show on these issues at Treasury and HUD in a year? This would be a bit uncertain in any administration, but it’s especially so in this one.”

On Rates, Volumes, and Margins:

What will rates do next year affects … everything?

  • Frank Nothaft: “The Fed is expected to raise its federal funds rate 50-75 bps higher by the end of 2019. That means short-term rates will go up, affecting ARMs and HELOCs. Long-term rates will rise too, but not as much. It’s important to see how much higher rates go and their effect on originations.”
  • Mark Zandi: “The key to the health of mortgage banking in 2019 is mortgage rates. If the 30-year fixed is much over 5 percent, it will be a tough year. Under 4.5 percent should be a good year assuming rates aren’t falling because we are headed into a recession. The mortgage banking industry should buckle in, if it hasn’t already.”
  • Byron Boston: “I am watching the impact of larger macro factors on the US housing market. Will there be a larger global credit correction that ripples through multiple global markets from stocks, currencies, real estate, etc. On the one hand interest rates could stay lower but on the other hand credit may once again become an issue. This does not have to be a 2008 scenario. It can simply be a nasty correction that slows activity in the housing market.”
  • Toni Moss expressed this concern: “The Trump economy has not lifted the middle class and under middle class. Jobs are insecure and further layoffs should be anticipated. Servicers should hope for the best but prepare for the worst.”

And what about margins?

  • From Susan Stewarts view: “And lastly, margin compression. We keep watching as the industry continues to create new business models including various M&A options. For carefully managed companies, 2019 should be a year of growth opportunities.”
  • David Lykken is looking to see this: “There is a very real potential for an unusually large number of IMB’s being forced to close their doors for three primary reasons. Continued margin compression due to failure to address the elephant in the room, MLO compensation. Failure to focus on reducing operating costs due to outdated and inefficient business processes. And finally an intensely competitive landscape where those that take care of 1&2 above will do better than those that haven’t.”
  • Bill Cosgrove states it simply: “Rate compression, where do we go from here?”

There was a lot on the growth of Mortgage Brokers and MLO Strategies for success.

  • As Gary Acosta asked: “Will Mortgage Brokers gain substantial market share?”
  • David Lykken: “I believe there is solid evidence that there will be a significant resurgence of the wholesale/broker channel that could grow to eclipse previous highs.” He adds, “We are already seeing evidence of the beginning of a migration of top MLO’s who are being told that their compensation is too high, leaving where they can go out on their own. Many believe they will be better on their own than having their future tied to a losing IMB operation.” David adds that he has been “advising his clients to start a wholesale origination operation so that MLO’s who leave will at least have the option to broker back to them.”
  • Barry Habib suggested: “The originator needs to transition from a salesperson to a consultant.” He suggests more time be spent on understanding the total borrowers profile. “a deeper look at the examination of their overall debt picture” will help identify other ways to the use the mortgage as a financial planning tool. He adds, “loans should be looked at two at a time, not just the current loan but how does it fit into the next loan they will need.”

Finally, varied thoughts in technology, FHA, and opportunity to innovate:

On Technology:

  • “We are focused on maximizing our investment in technology. The current cost to originate is not sustainable and the effective use of technology to reduce cost without sacrificing quality appears to be our best hope. Ultimately providing an easier process for the borrower should create a great upside for lenders,” said Susan Stewart
  • Bill Cosgrove stated a similar view: “Technology and the level of consumer acquisition – seeing beyond the horizon. What does the next generation look like and how do you compete and win?”


  • Jim Parrott: “Another area to keep on eye on is whether the FHA cleans up its false claims act mess because the ripple effect could be significant either way. If it does, look for some larger lenders to ease their way back in”. He adds a note of caution, “And if it doesn’t look for FHA and Ginnie to become increasingly anxious about their counterparty risk as the market tightens.”
  • Barry Zigas added: “Whether and how far FHA will be able to reverse its decades long decline in infrastructure capacity, finalize its taxonomy and loan level certification, and diversify its lender base to include more regulated and deeply capitalized lenders to serve first time and low wealth borrowers.”
  • Carol Galante agreed, adding: “Will policy makers finally give FHA the funding needed for a modern infrastructure to support its essential functions and while at it make reforms to ensure its ability to serve all those who depend on them.”

Clearly these leaders had a lot more to say which we hope to cover in more in depth discussions with many of them in the weeks ahead. But questions ranged from the New Democratic leadership in the House of Representatives and potentials for bipartisan GSE reform, new programs for borrowers such as shared appreciation and more to help todays buyer connect with housing, pressure on rental housing, and critical points about adjusting to increased risk of major storm implications to coastal areas. We share a wonderful industry, but one that changes and presents all of those involved with challenges … and opportunities. The key point I take away from this thoughtful input is the need to see the future and adapt. Here’s to a successful 2019 for all of you!