2022 "probably going to be one of the worst years in mortgage banking"

“You’ve never had it so good” is what British Prime Minister Harold Macmillan once told the country at a political rally in 1957.

He had reason to brag. With the horrors of the Second World War and food rationing becoming a distant memory, the country was basking in a post-war economic boom. Industrial output, investment and earnings were all soaring, fully justifying the PM’s outward confidence.

But everyone knew that Macmillan was also gently prodding the country to show wage restraint, fearing ballooning inflation could quickly get out of hand. 

It may seem inappropriate to compare that situation with the US mortgage industry, but there are some interesting parallels.

Despite record home appreciation, 2021 proved to be the strongest year in sales since 2006, with more than 6.1 million homes sold - an increase of 8.5% from 2020, according to the latest figures from the National Association of Realtors (NAR).

Read more: What brokers should do, now the refi party is over

This helped bolster the US economy, and record refi loan volume, fueled by all-time low interest rates, kept brokers so busy they didn’t even have to try too hard to find business.

But if a week is a long time in politics, imagine how the US mortgage industry now views those figures. According to NAR, sales of previously owned homes fell by 4.6% last month. They were also down 7.1% year over year.

More to the point, 2022 started with a worryingly high inflation rate – 7%, the highest in almost 40 years, and up from last month’s 6.8%.

To rein in inflationary pressures, the Federal Reserve now contemplates increasing interest rates by up to four times during the course of the year.

And with companies facing a more competitive market, the expectation is there’ll be lower profit margins and ‘industry consolidation’, a nice sounding euphemism used by industry when the economic outlook is uncertain and companies run into difficulties.

However, Phil Shoemaker (pictured), the president of originations at Homepoint, one of the largest wholesale lenders in the US, is under no illusions and did not pull any punches in an interview with MPA last week.

“It’s generally our collective belief at Homepoint that this is probably going to be one of the worst years, if not the worst, in mortgage banking.

“It will be extremely hard because of excess capacity, and you’re going to see a culling of the herd. Companies will go away, they’ll break up, so they’ll consolidate. They’ll do what always happens during these cycles.”

Read more: What do mortgage professionals think will happen in 2022?

The comments are striking, given that 2021 proved to be a good year for Homepoint, even though the company’s Q4 results have yet to be released.

The lender recorded $77.2 billion in loan volume at the end of the Q3 – beating the 2020 yearly total of $62 billion, which had been a company record.

According to a company spokesperson, Homepoint also grew 103% year-over-year at the Q3 mark. But the trend started in 2018, when it went from doing $200 million a month in wholesale to more than $9 billion during the same period a year-and-a-half later.

Shoemaker reckoned Homepoint was better placed to ride the storm because it had effectively ‘done its homework’. “I’m optimistic in that we are well positioned for what’s coming. We were pretty proactive at reducing headcount and reducing our costs last year, so wholesale has already kind of taken a lot of the margin compression,” he said.

By contrast, large retail lenders, handicapped by bloated staffing levels and unwilling to adapt, would suffer, leading to higher prices for the consumer, he claimed.

“Retail is where you’re going to see the pain. The disparity between retail and wholesale in terms of pricing that the consumer gets is pretty large.

“In the case of retail, you end up spending the majority of your time trying to manage 80% of your cost structure. I think larger retail originators are going to see the most margin compression and you’re going to see a migration of originators that work for large retail lenders into smaller companies that are predominantly wholesale centric.”

Companies exposed to excess capacity will have to take aggressive action to survive, including shedding jobs, he said.

“They have to because there’s less loans, there’s less demand for loans and in turn this is going to create excess capacity, which in turn creates margin compression that only gets rationalized when you remove that capacity. That is the way the industry works.”

Despite the gloom, Shoemaker did not believe there would be a recession, thanks to the abundance of wealth created through real estate. “You’re going to see a really healthy resurgence of non-agency products, and we will be participating in that,” he said.

As a footnote, Macmillan’s government went on to face a continuous struggle with the economy, including price rises and a record balance of payments deficit.

All the while, the country watched how other countries – no prizes for guessing which - grew richer, faster.