Market shifts, fintech and stiff competition all conspiring to reduce profit margins
2020 was probably the best year in the history of the mortgage industry, with a record number of originations, thanks largely to plummeting mortgage rates and a surge in buyer demand.
The figures say as much. A total of $4.3 trillion in mortgage originations, with $2.8 trillion in refinances and $1.5 trillion in purchase loans resulted in the largest annual volume since 2005.
However, this year, because of falling origination volumes and an excess in the market share, more than half of mortgage lenders expect to see smaller profit margins in the short term.
Find out more: Lenders feel squeezed by competition and margin compression – now what?
According to a February report from Fannie Mae, spreads compressed to 55 basis points, well below the prior decade’s average of approximately 170 basis points after peaking in April 2020.
According to lenders, the primary reason for compressed profit margins has been stiffer competition, caused by a large drop in originations, coupled with a market shift from refinance to purchase and new fintech entrants.
To add to the mix, experts are forecasting a rate rise by next year of up to 4.4% for 30-year fixed mortgages as well as a 40% contraction in the mortgage market.
Moreover, the purchase side of the mortgage loan market will expand from this year’s 41% to 77% in 2022, with the total number of homes sold rising from the current 6.49 million to 7.45 million by next year.
Meanwhile, the smaller challenger banks and lenders are moving in to seize a share of the market. Mortgage fintech has reported a boom year so far, setting records in the first quarter, with 57 companies raising $100 million or more and accounting for 69% of total funding, according to CB Insights data - all of which will add pressure on lenders from late 2021 onwards.
Read more: Total Expert plans to accelerate banking, lending marketing innovation
Targeting the Big Three: Borrowers, Realtor, and LOs
Experienced mortgage lenders understand that the market is cyclical and that companies with the lion’s share of the sector will benefit when margins normalize.
But to thrive and build towards long-term growth, lenders will need to focus on three realtor/homebuilder tactics to insulate themselves against market pressures.
Tactics related to realtor and home builder relationships, such as owning the referral, retaining pre-approvals, and nurturing strategic partnerships will once again take center stage.
For loan officers to ultimately succeed, they must be closely aligned with the realtor serving the homebuyer throughout the entire buying process.
While realtors want referrals from lenders and need partners that can support them in growing their business through co-marketing, strict realtor-lender joint marketing regulations can make this difficult.
But with as many as 584,000 loan officers competing for just over five million financed home sales into next year, aggressive co-marketing will be critical to succeed in 2021.
If you wish to meet these challenges head-on, we recommend you read Total Expert’s new eBook “3 Ways Mortgage Leaders Can Thrive During Huge 2021 Market Shifts” to find out more.
