In early May 2021, I conducted my 25th survey of the mortgage banking industry’s thinking, attitudes and expectations. This survey is the latest in a series dating back to May 2008 and conducted every 6 months since. In it, I polled 33 senior executives from 33 separate firms. The executives answered 72 questions on a wide variety of issues and topics important to lenders and the industry. Those surveyed included 17 banks and 16 IMBs of widely varying sizes; the smallest was $170M and the largest over $200B. The group mean production was $36.8B last year and the median was $10.3B. Among the firms surveyed were 19 of the 75 largest in 2020. This post focuses on what I view as the survey’s 5 most significant findings.
Finding I: 2020 was a record year for production and profits
The May 2021 survey provided a final affirmation that this past year, which started out on a positive note despite a growing pandemic, continued to gather additional strength into October 2020, and has subsequently proven in retrospect to be the best year ever for production and profitability for the vast majority of surveyed firms.
- Was 2020 the best year ever for profits and production at your firm? Y-28 / N-5
- By how much did your firm exceed last year’s budgeted production goal? Mean-77% / Median-40%
So, 85% of the 33 firms surveyed had their best year ever for business in 2020, and on average, the group collectively exceeded its 2020 production goal by 77%. That can’t be a bad thing.
Finding II: Future operations and organization are coming into view
Although decisions on staffing and remote operations are still being worked out across the industry, responses to several questions suggest the outline of tomorrow’s organizational chart is taking shape. Most firms are embracing remote work for many, often on a permanent basis; the idea of weekly rotations for most employees is popular; senior managers will likely work chiefly from the office; firms have found comfort in recruiting employees remotely; and technology can be credited for helping organizations cross the finish line in record fashion.
- What percentage of your firm’s staff is still working from home? Mean-77% / Median-85%
- What percentage of your staff is expected to work remotely permanently? 40%
- What percentage of your staff will rotate in and out of the office through at least year end? Mean-38% / Median-40%
- Will rotations into the office be weekly, monthly or less frequently? W-25 / M-4 / LF-0
- Will most senior-level employees operate remotely or be in the office 3+ days per week? R-3/ O-28
- Is your firm comfortable recruiting remote workers? Y-30 / N-3
My October 2021 survey will sharpen the focus on staffing and organizational plans, but for now most firms’ employees are still working from home, many permanently; future rotations into the office will be on a weekly basis; senior managers will pretty much be back in the office; and remote recruiting will continue as it has proven successful.
Finding III: New limits on lenders from the FHFA
In April 2021 the FHFA set new rules for lenders via Fannie Mae and Freddie Mac. First, limits were set on the amount of non-residential properties, namely second homes and investor properties, the GSEs could purchase from individual lenders. A cap of 7% was set. Limits were also set for mortgages with 2 layers of risk; for example, a high-LTV with a low FICO, or a high-DTI combined with a minimal down payment. Third, access to the agency cash windows was capped at $3B combined per annum.
So how will MBA lender members, as viewed through the executives surveyed, be affected by the FHFA’s PSPA? This is what was reported:
- Will the 7% cap on second homes and investor properties adversely affect your firm? Y-20 / N-13
- What percentage of 2020’s agency purchase volume consisted of loans with 2 layered risks? Mean-11% / Median-8%
- What percentage of this business will be lost if the GSEs are precluded from buying these loans? Mean-2.8% / Median-1.5%
- Will your firm be hurt if cash window sales to the GSEs are capped at a combined $3B? Y-9 / N-22
A solid majority of lenders indicate there will be some pain and some business lost through these limits on 2 non-primary residential products – riskier loans and cash window transactions. If mortgages with 2 risks account for about 11% of agency production as estimated, and if only 3 points of that is lost, most lenders appear confident they will find a home for the other 8%. Odds are that for many, the other home will be FHA loans. If these assumptions are valid, the pain from the layered risk cap will be modest. More surprising personally was that less than half the lenders surveyed felt their business was threatened by the cash window cap.
Finding IV: Bullish outlook lingers despite thinning margins
Nearly all of the 33 surveyed executives appear reasonably optimistic on the outlook for at least the remainder of the year: Bullish enough to add staff, to continue to invest in technology, to not fear a sharp jump in mortgage rates that deadens the purchase market, and to score a 7 of 10 to measure their sense of optimism for the residential market prospects in 2021.
- Do you expect to expand or contract your firm’s sales force this year? Exp-28 / Con-0 / Same-5
- Outside of sales, is expansion or contraction of staff expected this year? Exp-17 / Con-10 / Same 5
- Do you expect mortgage rates to remain largely under 4% this year? Y-33 / N -0
Curbing the enthusiasm near-term was softening origination activity – due mostly to the expected shrinkage in refinancing – and thinner margins thanks to keen competition for every mortgage. As for the outlook for the housing market, 10 executives scored the year to be an 8 or better with only one below average (5) score, at 4. If MBA’s economists are on target, 2021 will find a market only 15.1% smaller than last year at $3.3T, affirming the score of 7 the executives proffered.
- Scaled 1-10, how bullish are you on the outlook for the residential market in 2021? Mean-7 / Median-7
Finding V: Some signs of caution to monitor prospectively
Despite overall optimism, there are concerns, including high house prices, mounting federal budget deficits, expectations of higher inflation, and supply-side constraints now further aggravated by strong growth in the buy-to-rent sector. Stories of bidding wars, offers well above asking prices, and cash buyers are commonplace almost everywhere.
- By how much do you expect house prices to rise this year? Mean-9.8% / Median-10%
- Scaled 1-10, how concerned are you about the federal budget deficit? Mean-7.8 / Median-8
- Do you expect to see a significant increase in inflation by year end, say over 3%? Y-25 / N-8
- Are the large single-family rental firms a positive or a negative for mortgage lenders? P-2 / N-28
- Do you expect more nontraditional money to flow into single-family rentals this year and next? Y-30 / N-3
How challenging any of these concerns is remains unknown for now. However, we do know that rising house prices add to existing affordability problems. For example, year-over-year price increases of 10-15% both pare the ranks of would-be buyers and are unsustainable longer term. Meanwhile, budget deficit fears harken thoughts of higher interest rates and crowded-out markets. More inflation suggests reduced monetary ease and higher prices and interest rates. And, of course, less supply for lenders to finance means less business, less revenue and fewer profits.
There you have it, my take on some of what was learned by asking 72 questions of 33 senior mortgage banking executives. We know the mortgage banking industry experienced its best year in a decade, and did so without accumulating as much risk as in the mid-aught years. Originations set a post-Financial Crisis record at $3.8T in 2020 and profits made many mortgage banks an attractive investment. Answers to Q61 suggest it was also a most lucrative year for many busy LOs. Now, operating plans are beginning to gel, and the road ahead looks no cloudier than it did in January 2020. Congratulations, mortgage banking industry, for a record year!
The opinions and insights expressed in this blog are solely those of its interviewee, Tom LaMalfa, and do not necessarily represent the views of either Mortgage Guaranty Insurance Corporation or any of its parent, affiliates, or subsidiaries (collectively, “MGIC”). Neither MGIC nor any of its officers, directors, employees or agents makes any representations or warranties of any kind regarding the soundness, reliability, accuracy or completeness of any opinion, insight, recommendation, data, or other information contained in this blog, or its suitability for any intended purpose.