To survive, originators must make a switch, he suggests
Mortgage originators should build their business around purchase and pare costs down if they wish to survive in the current housing market, Phil Shoemaker, president of originations at wholesale lender Homepoint, has said.
Shoemaker, who has been responsible for the company’s growth and quality of the loan origination business vertical since January 2020, said that although he believed property sales would continue to rise, lenders heavily reliant on refinance loans would suffer.
He said: “It is going to materially impact the overall lending side of the business. There are a lot of companies that have built their business thinking that the refis that we’ve enjoyed over the last two years or so are going to persist.
“But the market is going to be less than it was last year.”
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The latest figures would appear to back Shoemaker’s claims. Applications to refinance a home loan decreased 1% last week from the previous week, with reports suggesting that the negative effect of high rates on the demand for refinance loans would be felt more acutely this week.
In any case, signs of a drop in refinance demand have been evident since at least Q1.
A recent market report by fintech firm Maxex suggested that refinance mortgages have declined steadily since the beginning of the year. Compared to February, refinance loans fell by 13% in March and by as much as 28% compared to September 2020, when they accounted for 66% of the total.
Shoemaker said: “We’ve seen the largest buildup of capacity in the history of mortgage banking and people are going to be using margin to try to fill the capacity they have and cover up the cost structure they have, and it’s going to be very, very painful.”
He said lenders would try to cover the cost structure they built until the industry shrunk, resulting in reduced capacity, a process that could take a “good year and-a-half to two years”, he said.
According to the latest data, there was a 1.1% drop in total mortgage application volume late last month, while the recent interest rate hike saw the 30-year fixed annual percentage rate (APR) edge past 3.10%.
Despite this, Shoemaker said there would be “a persistent robust purchase market” mostly due to the imbalance between supply and demand.
He said that as demand for refinance loans came to an end, the lending community would need to meet the challenge and readjust to new market conditions – a situation which would benefit mostly big lenders as they were better at absorbing rising costs.
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“It’s going to bias larger lenders because it’s a lot easier for them - larger lenders are more efficient from a cost structure standpoint. We have a lot of confidence at Homepoint, partly because of the scale we enjoy.
“Our model is going to be more effective at winning on service in the purchase environment because we’ll be more accommodating,” he said.
Data shows home sales are maintaining their momentum, even after the expected seasonal slowdown in September. Redfin’s Homebuyer Demand Index reported that “early homebuyer demand reached the highest point in at least three years during the week ending September 19”.
In August, signed contracts to buy existing homes also increased 8.1%, halting two consecutive months of declines, although signings were still down 8.3% compared with August 2020, according to the National Association of Realtors.
Property prices have continued to soar regardless, rising by almost 20% in July compared to the same period in 2020, according to the S&P Case-Shiller home price index.
Shoemaker concluded: “It’s going to be rough on all of us. Build your business around purchase and be smart around costs and you’re going to survive. If you don’t see that, good luck.”
